1. About the plan 2. Asset type 3. Best for 4. Employee rights 5. Cap table effects 6. Payout 7. Taxation 8. Implementation steps 9. Pros & cons
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About the plan
The US stock options plan is a tax-efficient share option scheme used primarily by companies headquartered in the US. This plan gives employees the right to buy company shares at a predetermined price after a specified period.
Stock options give their owners a right to buy company shares in the future for a fixed price (called exercise or strike price). The right to exercise options is typically subject to a vesting period. Once the employee exercises their options, they become the company’s shareholder.
In the US, there are two types of stock options: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). Unlike NSOs, ISOs can qualify for special tax treatment if employees keep them for at least 1 year after exercise and 2 years after grant.
The US plan also typically gives companies the option to grant the so-called RSUs (Restricted Stock Units). RSUs give employees interest in the company's equity but have no tangible value until they’re vested.
The US stock options plan is designed for US-based companies with a substantial number of US-based employees.
Stock options holders don’t have any shareholder rights (like voting power or right to dividends) until exercise. After exercise, the options holder becomes the company’s common stock shareholder.
Cap table effects
When options are granted, they don't immediately affect the cap table. But you should always include the options in the so-called fully diluted cap table, which assumes the exercise of all options and conversion of all convertible instruments into equity. You’ll need the fully diluted cap table for communication with investors and during the investment due diligence process.
After exercise, the employees become company shareholders. As a result, the total number of outstanding shares rises and the existing shareholders are diluted.
Stock options aren't liquid assets. Liquidity comes into play when options are exercised and the shares are sold, usually during the company's exit, on a secondary market (typically during Series B or later rounds) or in an IPO.
For employees, the difference between the stock's market value at exercise and the exercise price can be taxable. The specific tax treatment varies based on the type of options.
Incentive stock options (ISOs) are only available to US tax residents. ISO owners receive preferential tax treatment because the IRS (Internal Revenue Services) treats ISO income as long-term capital gain.
Non-qualified stock options (NSOs) can be granted to non-US tax residents. NSOs are taxed based on the tax rules in the recipient’s country of residence.
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