Blog Posting Explaining Stock options and employee equity

http://buytaert.net/stock-options-and-employee-equity

To my surprise, a lot of people that I interview at Acquia
don’t understand stock options or have never heard of it. This blog
post explains what stock options are about. It is a very technical topic
but for the sake of this post, I am going to keep it really simple and
make some over-simplifications.

In essence, a stock option is a right given to an employee to purchase stock at some point in the future at a set price.

When a company is founded, the founders own 100% of the company. When
they raise money from investors, they give them a share of the
company's stock in exchange for money. In addition to that, most
institutional investors will require that you establish an "option pool"
which usually accounts for 10% of the company. So if you sold 30% of
your company to an investor for 2 million dollars, and you set aside 10%
for the option pool, the founders still own 60% of the stock and have 2
million dollars to work with.

Having an option pool is very common for a venture backed startup, and fairly uncommon for most small companies. At Acquia,
which is a venture backed company, we give our full-time employees
stock options on top of a competitive salary. These options come from
our option pool.

If you are an employee of a startup, stock options are a big deal as
you are going to receive stock options as part of your compensation. It
is a big deal because it means you have the option to be a shareholder
and to share in the gains. It's a big part of the startup culture, and
an important reason why top engineers prefer venture backed startups.

So what exactly does that mean for you as an employee?

When you join a startup as an employee, in addition to your salary,
you might be granted 10,000 stock options at a strike price of $1 per
share. Those options are taken from the stock option pool that is set
aside especially for employees. In our example above, all employees
together can own up to 10% of the company.

When the company is founded, the stock is basically worthless. The
founders, the employees and the investors will want to steadily increase
the value of the company, and by extension, the value of the company's
stock.

At the time of an exit, the stock is hopefully worth $100 per share
or more. So if you were granted 10,000 options at a strike price of $1
per share, you can...http://buytaert.net/stock-options-and-employee-equity