January 2020

An employee stock option is a contract between a company and its employee that gives the employee the right to purchase a specified number of shares of stock in the company at specified strike price by a specific date. The employee is under no obligation to purchase all or part of the number of shares granted in the option. Typically, but not always, the number of shares granted vest over time.

In 2015 congress passed legislation, which can put millions of dollars into the hands of anyone who owns qualifying stock in technology and biotechnology companies upon an exit. It presents a tax planning opportunity for founders, investors and shareholder-employees in technology and biotechnology companies.

In a prior article, we discussed the benefits of issuing stock options as part of an employee compensation package and outlined common pitfalls for entrepreneurs to avoid when implementing a stock option plan. A stock option plan is a valuable...