How to Issue Stock Options: From 409A Valuation to Board Consent

Use this sequence for each new hire or advisor:

1. Adopt the plan. The board approves an equity incentive plan and reserves a number of shares for it. Stockholder approval is generally needed for incentive stock options, so confirm this with your lawyer.
2. Get a 409A valuation. An independent appraisal supports the fair market value of common stock, which becomes the exercise price.
3. Choose the option type. Incentive stock options (ISOs) are for employees only. Non-qualified options (NSOs) can go to employees, contractors, advisors and directors.
4. Board approval. The board approves the grant, the number of shares, the exercise price, vesting terms and the vesting start date. The grant date is the approval date.
5. Issue the paperwork. Send a notice of grant and an option agreement with the plan attached.
6. Record it. Update the cap table and keep signed copies with the board consent.

Don't tell a candidate the exercise price until the board has approved and the valuation is current, because the price is fixed at the grant date.

Options granted below fair market value can create serious tax consequences for the person who receives them under Section 409A. An independent appraisal provides a defensible fair market value for common stock. A valuation is generally treated as reliable for up to 12 months, but a material event, such as a priced financing or a large change in revenue, can make it stale sooner.

Practical rule: check the valuation date before each round of grants, and pause granting after a financing until you have a new valuation. Ask your valuation provider to list the events that would make a valuation stale. If you're unsure whether your valuation is still valid, ask your valuation provider or attorney before issuing anything.

Start with the role, the market cash compensation and the pool you have available. For reference, the median annual wage for US software developers was $135,980 in May 2025¹. Equity is meant to bridge some of the gap between what you can pay and what the person could earn elsewhere, along with the upside you hope to share.

Then express the offer as a percentage of fully diluted shares as well as a number, and check it against the pool. Our option pool sizing guide covers how much to reserve. Keep a simple grant table by level so similar roles get consistent offers.

Confirm each of these in writing:

• Vesting: a common structure is four years with a one-year cliff, monthly vesting after that. Set the vesting start date, which may be the hire date.
• Exercise price and term: the price per share and the expiration, often ten years from grant, shorter if employment ends.
• Post-termination exercise window: how long a departing employee has to exercise. For ISOs, exercising more than three months after leaving generally means the option is treated as an NSO for tax purposes, so ask counsel before offering a longer window.
• ISO limit: ISOs are subject to a limit on the value first exercisable in a calendar year, and anything above it is treated as an NSO.
• Early exercise or acceleration: include them only if the board has agreed.

Tell your employee the grant is not a promise of value, and encourage them to consult their own tax adviser, especially about AMT and the timing of exercise.

Store the plan, board consents, option agreements, valuation reports and stockholder approvals in one place. Update the cap table on the day of the grant, then reconcile it quarterly with the number of shares reserved and remaining.

Watch for common errors: granting before the board acts, using a stale valuation, leaving the vesting start date blank, and forgetting that a departure changes what's exercisable and what returns to the pool. If you're moving from a spreadsheet to software, clean and reconcile the records first. For tax withholding on option exercises, see equity compensation tax withholding.