What questions should I ask about stock option grants?

What are the right questions to ask when someone is providing stock options as a form of partnership?

1. What class of stock are you being offered? If there is more than one class (e.g. Common and Preferred Shares), the rights, the value and the opportunity to cash out may vary significantly.
2. What percentage of the company does this represent? This is clearly a main driver in how much this offer could be worth.
3. If this stock is being issued from a pool, how large is that pool, how is it designated and how much is not yet allocated? It's likely that future partners will also be offered this or similar incentives. You should weigh up how well this has been thought out - and whether (for instance) there is a mechanism in place where you may benefit from additional allocations in future.
4. What is the strike price, and how has it been determined? An option is a right to purchase - it has a cost that may be an appreciable part of, or even exceed, its value. And in a startup, valuation is a notoriously slippery concept! But there's a world of difference between knowing there's a regular, formal valuation process involving a third party, and you are being offered a price at a discount to that figure, or having just a price with no strong and visible means of support.
5. How does it vest? Your right to exercise that option may begin after a specified period, it may accrue on a given date in full or in steps over time, and there may be other conditions attached (typically, at least that you are still employed at that time, but there may be other factors within or beyond your control).

These are specific to your question. In addition, you should be asking many of the questions you would want to explore if you were being wooed as an angel investor. How deep this is going to go depends on the circumstances - how many people are already on board, how pivotal is your role and so on.

It might seem obvious, but don't forget to ask what percentage of the company the option represents. Sure, you might get diluted over time, but at the end of the day the number that really matters is the % you own (through exercising the option) times the price the company is sold for or acquired for. If you're just told the # number of underlying shares without knowing how much of the company that represents, you won't know how big the grant really is.

"Are you joking?".

Simple like that.

Bad enough to get stocks, but options are cheap. Basically understand that you buy risk on risk and make a significant bet, and that most companies fail. My normal answer is "ok, so yuo are willing to give me options. THat is naturally ON TOP OF MY NORMAL FULLY CASH PAID RATE, right?".

Most options expire worthless. Most startups never strike it rich.

Well that's probably not all of it but at least:
- Strike Price: the price at which you will get the stock when you exercise the option
- The Vesting period and schedule: Starting when can you exercise the option and how much. For example it's common to have a cliff at 1 year, where you get 25% of your stock-options, and then you get the rest every month for the following 3 years.
- How is the price of the option calculated? basically how do they determine the Strike price?

Remember one thing: with stock options you only gain on the difference between your strike price and your sell price, not the entire value of the stock. If the stock is lower than your strike price when you can exercise the option, you will make no money at all. Prefer RSU (Restricted Stock Unit), which are real stocks..

Let me know if I'm unclear anywhere.

If you're getting less than 1%, I wouldn't bother asking any questions. Few startups
succeed at creating twenty million dollar or more exits. Of those that do, some will
fire early stage employees to prevent options from vesting. Even if the company is
relatively successfull and all your options become fully vested, typically that still
is almost never enough to say pay off a morgtage in Silicon Valley after liquidation
preferences, dilution, and taxes. In short, if you get less than 1%, you should treat
your options like a lottery ticket.

If you're getting at least 1%, the company probably considers you valuable and you might
have some room for negotiation. In this case, I would hire an attorney to at least review
the contract and not get information from internet forums.