Back to Basics: How to Grant a Stock Option

• 10.6.2025
• Kimberly Wethly, Ciara Baker

As we’ve previously said, equity compensation in general—and stock options in particular—is a critical component of any startup company’s ability to recruit and retain talent. But there is perhaps nothing quite as disincentivizing (and in some cases, as expensive to fix) as an option grant gone wrong.

This high-level checklist (drafted for US companies that wish to grant options under an equity incentive plan (a “plan”) that is already in place) is intended to help you ensure that your options are properly granted, that your workforce is properly incentivized and that you can get on with the work of building your business. Of course, each company and workforce is different: For any particular option questions you may have, reach out to a WilmerHale compensation and benefits attorney for help.

Preparing to Make the Option Grant—Ask the Following Questions 

• Was the plan properly adopted and approved by the company’s board of directors? Confirm that the plan, which should contain a limit on the number of shares that may be granted as incentive stock options, was properly adopted by the company’s board of directors and duly approved, within 12 months of board adoption, by the company’s stockholders. The corporate formalities must be followed—even where the same individual serves as both the sole board member and the sole stockholder. Failure to have proper adoption and approval could prevent you from being able to grant incentive stock options under the plan to your employees and may cause securities law issues in some states.
• Are enough shares authorized and available for grant of the options under the plan? The plan specifies a number of shares available for the grant of awards. If there aren’t sufficient shares available under the plan to grant the proposed option(s)—that is, because the shares have already been issued or are subject to outstanding awards—contact outside counsel to understand what will be required (e.g., a plan amendment, potentially an increase to the company’s authorized shares under its charter, applicable board and stockholder approvals) to increase the share pool.
• Is the proposed recipient eligible to receive an option grant under the plan? For tax and securities law purposes, awards should be made only to active service providers (and not to someone who previously was a service provider or is expected to become a service provider at a future date). In addition, stock incentive plans and securities laws often only permit awards to be made to individuals (and not entities).
• Are the terms of the proposed option grant final? If the terms of the proposed grant (e.g., number of shares, vesting schedule) are the subject of negotiation, the terms should be finalized before they are presented to the board of directors for approval.
• Where is the proposed option recipient located? In addition to having to qualify for an exemption from registration of securities at the US federal level (which is often satisfied by relying on Rule 701 under the Securities Act of 1933) to make an option grant, state securities laws and non-US laws may be implicated depending on where the recipient of the proposed grant is based. For example, Washington DC’s local securities laws require that a filing be made at least 20 days before the company’s first option grant is made to a resident of Washington DC (and the filing must be renewed annually). California’s securities laws require that a filing be made with the state no later than 30 days after the company’s first option grant is made in California. Reach out to counsel to discuss.
• Does the company have a valid Section 409A valuation? In order to avoid adverse tax consequences under Section 409A of the US tax code (“Section 409A”), options should be granted with an exercise price that is at least equal to the fair market value of a share of the company’s common stock on the date of grant. For the company’s determination of the fair market value of a share of common stock to be presumed to be reasonable, the company should have a valuation from an independent third-party valuation expert. The valuation should appropriately reflect the value of the company’s common stock as of a day that is less than 12 months before the effective date of grant of the option, and the facts and circumstances of the company should be such that the valuation can still reasonably be relied on as of the date of grant. Reach out to counsel to discuss any concerns about the validity of a Section 409A valuation.
• Is stockholder approval required for the grant of options under the plan? Confirm that investor rights or similar agreements do not require that stockholder approval be obtained for a grant made under the plan or because of the particular terms of the proposed grant.

Making the Option Grant—Obtain Approval From the Company’s Board of Directors (and Stockholders, if Necessary)

• The board of directors must approve all option grants at a duly called board meeting or by unanimous written consent. Again, the corporate formalities must be followed—even if there is only one member of the board. Failure to do so may result in a defective option grant.
• The board of directors should establish what the fair market value of a share of the company’s common stock is on the date of grant. In establishing the fair market value of the company’s common stock on the date of grant, the board would typically consider its Section 409A valuation and include in its resolutions a determination that based on all of the facts and circumstances as of the date of grant (including that no material events have occurred since the “as of” date of the Section 409A valuation that would render it unreasonable to rely on the valuation), the value reflected in the Section 409A valuation is at least equal to the current fair market value of an underlying share.
• The resolutions approving the option grant must contain all of the relevant information: (i) type of option, (ii) full name of the award recipient, (iii) number of shares subject to the option, (iv) the exercise price per share, (v) vesting schedule (including vesting commencement date) and terms of acceleration, if any, (vi) the term of the option, and (vii) the award recipient’s state or country of residence. Failure to include any of this information could render the option grant defective. 

After the Option Grant Has Been Approved—Follow Through

• Promptly communicate the material terms of the option to the recipient. For both tax and accounting purposes, an unreasonable delay in communicating the material terms of the option to the recipient can result in the grant date of the option being deemed to be a later date than the date of grant approved by the board of directors.
• Paper the option grant and update the stock ledger/capitalization table. If managed on an electronic equity administration platform, this documentation of the option grant may be completed in a single step.