Do private companies have stock options?

Do private companies have stock options?

Yes — many private companies grant stock options and other equity awards as part of compensation packages. This article answers "do private companies have stock options" clearly and in practical detail: it explains the common grant types (ISOs, NSOs, RSUs, SARs and alternatives), how private-company grants are documented and valued, tax and 83(b) election issues, liquidity and monetization paths, cap-table and dilution effects, and what employees and employers should consider when negotiating or designing plans. Read on to learn how private-company equity works and what to watch for when equity forms part of a job offer.

Overview — stock options and other equity compensation in private companies

A stock option is a contractual right to buy a company share at a fixed price (the exercise or strike price) for a limited time. In private companies, options are commonly used alongside other equity vehicles. Typical private-company equity types include:

• Incentive Stock Options (ISOs): employee-only options with special tax treatment when rules are met.
• Non‑qualified Stock Options (NSOs / NQSOs): broadly usable options taxed at exercise as ordinary income on the spread.
• Restricted Stock and Restricted Stock Units (RSUs): grants of shares or share units that vest over time.
• Stock Appreciation Rights (SARs) and Phantom Stock: cash- or share‑settled awards that track the value increase of a share without issuing immediate equity.
• Profit interests or membership units for LLCs: equity-like interests used where corporate stock is not available.

Private companies use equity to attract and retain talent, conserve cash, and align employee incentives with company growth. Because private-company shares are illiquid and harder to value than public shares, plan design, valuation, and documentation require careful attention.

Types of grants commonly used by private companies

Incentive Stock Options (ISOs)

ISOs are statutory options that, when granted and exercised under strict rules, can offer favorable tax results to employees. Key ISO features:

• Eligibility: ISOs can only be granted to employees (not to contractors or advisors).
• Tax benefit: If holding-period requirements are met (generally more than two years from grant and more than one year from exercise), gains on sale can qualify for long-term capital gains treatment rather than ordinary income.
• AMT exposure: Exercising ISOs creates a preference item for the Alternative Minimum Tax (AMT), which may trigger tax in the year of exercise even if shares are unsold.
• $100,000 rule: ISOs with a combined fair-market-value exercisable amount in any calendar year over $100,000 are treated in part as NSOs for tax purposes; companies must track the value by grant date.

ISOs are popular in startups aiming to give employees a potential tax-advantaged path on future upside, but the AMT and liquidity constraints in private firms make timing and planning important.

Non‑qualified Stock Options (NSOs / NQSOs)

NSOs are more flexible than ISOs and are used for employees, contractors, advisors, and service providers. Main NSO characteristics:

• Broad eligibility: NSOs can be granted to whomever the board chooses, including non-employees.
• Taxation: At exercise, the difference between the fair market value (FMV) and the strike price (the spread) is taxed as ordinary income and is typically subject to employer payroll tax withholding and reporting.
• Simpler rules: NSOs are not subject to ISO-specific holding-period requirements or the $100,000 limit, but they do create immediate tax consequences on exercise in private-company settings where there may be no liquidity.

Because NSOs create ordinary income at exercise, employees should plan for potential tax bills when no public market exists to monetize the shares.

Restricted Stock and Restricted Stock Units (RSUs)

Restricted stock is actual equity issued subject to vesting and forfeiture conditions. RSUs are promises to issue shares or cash in the future, typically upon vesting.

• Restricted stock: The recipient becomes a shareholder on grant subject to repurchase or forfeiture until vesting conditions lapse. An 83(b) election is available for restricted stock to accelerate tax into the grant date.
• RSUs: Common in later-stage private companies and public companies. RSUs do not usually allow 83(b) elections because no shares are issued at grant; taxation occurs on vesting.

Early-stage private firms may prefer options over RSUs because options dilute only when exercised, while restricted stock issues shares immediately and can complicate cap-table management.

Stock Appreciation Rights (SARs), Phantom Stock, and Profit Interests

SARs and phantom stock provide upside tied to equity value without immediate share issuance. They are useful in private companies or LLCs where share issuance is impractical.

• SARs: Pay the appreciation in cash or shares between grant date and exercise date. They can be structured to settle in cash or stock.
• Phantom stock: Awards that track a share’s value and pay out in cash or stock upon vesting or other events.
• Profit interests (LLCs): A mechanism to grant future profit-sharing and equity-like upside to service providers in LLC structures without granting present taxable value.

These alternatives can reduce dilution and avoid some legal complications around issuing new stock in tightly held private companies.

Mechanics of private-company option grants

Grant documents and plan terms

A formal equity incentive plan and individual grant agreements govern private-company awards. Key components include:

• Plan document: Authorizes the pool (option pool size), outlines eligibility, adjustment rules, and board/committee authority.
• Grant agreement: Captures the grant date, number of shares/options, strike price, vesting schedule, exercise period, and any repurchase rights.
• Vesting schedules: Typical schedules use a one-year cliff followed by monthly or quarterly vesting over three to four years; alternative schedules (performance or milestone-based) may apply.
• Exercise period and expiration: Many plans set a 10-year maximum life for options, but post‑termination exercise windows are often shorter (e.g., 90 days for vested options after leaving as an employee, though firms increasingly extend windows or offer alternative mechanisms).
• Repurchase/buyback rights: Companies may have rights to repurchase shares on termination or to buy back unvested shares at cost.
• Transfer restrictions: Most private-company plans restrict transfers, require company or board approval for sales, and give the company or investors rights of first refusal.

Clear documentation is essential: ambiguity about vesting, repurchase formulas, or transferability causes disputes and can delay liquidity events.

Strike/exercise price and 409A/valuation issues

In private companies, the strike price must generally be set at or above fair market value (FMV) to avoid issuing discounted options that create taxable income. Typical practices:

• 409A valuations: U.S. private companies commonly obtain a Section 409A valuation performed by a qualified independent valuation firm to set the FMV for option grants and avoid adverse tax consequences.
• Board-determined FMV: Early-stage companies sometimes rely on a board-certified valuation until a formal 409A valuation is practical, but proper documentation and conservatism are important.
• Timing: Companies typically set the strike price at the FMV on the grant date. Updated 409A valuations are often obtained annually or when a material event (financing round, major contract) changes value materially.

Discounted options (options with strike below FMV) create immediate taxable income for recipients and can trigger penalties; compliance with 409A practice reduces risk.

Early exercise and repurchase/forfeiture provisions

Early exercise lets employees exercise unvested options and acquire shares subject to repurchase or forfeiture until vesting. Considerations:

• Purpose: Early exercise can enable filing an 83(b) election to lock in low taxable value when FMV is low, potentially achieving favorable tax outcomes if the company appreciates.
• Company rights: The company usually retains repurchase rights on unvested early‑exercised shares at the original exercise price.
• Risk: If the company fails, early exercise losses are real and unrecoverable; if the employee leaves, unvested shares are often repurchased by the company.

Companies also commonly include right-of-first-refusal (ROFR) provisions and transfer restrictions to control ownership and preserve corporate governance.

Liquidity and monetization in private companies

Private-company shares are illiquid by nature. Typical liquidity events or paths to monetize include:

• Initial public offering (IPO): Public listing creates a market for shares but often includes lock‑ups, transfer restrictions, and trading volatility on the first days.
• Acquisition or sale: A company sale may convert private equity into cash or public stock, but the terms (cash vs. stock, price per share, waterfall treatment) determine holder outcomes.
• Company-sponsored secondary tender offers: Companies occasionally arrange buybacks or tender offers to provide limited liquidity to employees.
• Secondary markets and private transactions: Institutional or accredited investors sometimes buy shares in negotiated secondaries; however, sales often require company and investor approvals.

Important caveats for private holders:

• Transfer restrictions: Agreements and bylaws commonly limit when and to whom shares may be sold and may impose rights of first refusal, co‑sale rights, or board approval.
• Lock-ups and escrow: Even after IPO or acquisition, lock-ups and earn-outs can delay full monetization.
• Valuation uncertainty: Without a public market, FMV estimates are model-based and subject to revision at financing rounds or 409A updates.

A relevant public-company example underscores the value of liquidity and listing compliance. As of January 16, 2026, according to news reports, Canaan Inc. received a Nasdaq notice for non-compliance after its ADSs traded below $1.00 and faces a 180-calendar-day compliance period (until July 13, 2026) to regain the minimum bid price. The company’s ADSs were trading around $0.78 at the report date. If delisted, shares could move to over‑the‑counter markets, reducing liquidity and visibility—an illustration of the liquidity risks public companies face that private-company holders must also consider. This example highlights why private-company optionholders should evaluate the realistic prospects for a liquidity event when weighing the value of equity compensation.

Taxation and elections relevant to private-company options

Taxation is a core concern for private-company optionholders because exercises can trigger tax bills when no public market exists to sell shares.

Tax treatment of ISOs vs NSOs

• NSOs: On exercise, the spread (FMV at exercise minus strike price) is taxed as ordinary income, reported on the recipient’s W-2 for employees and may be subject to payroll withholding. When the underlying shares are later sold, capital gains or losses are computed relative to the basis established at exercise.
• ISOs: If ISO holding-period rules are met (sale more than two years after grant and more than one year after exercise), the gain on sale can be long-term capital gains. If rules are not met (a disqualifying disposition), the spread at exercise is treated as ordinary income. ISOs can create AMT exposure at exercise because the spread is an AMT preference item.

Planning choices and timing differ substantially depending on whether awards are ISOs or NSOs.

Alternative Minimum Tax (AMT) considerations

Exercising ISOs can increase AMT liability because the ISO spread is added to AMT income in the year of exercise even if shares are unsold. For private-company employees, AMT can create a cash-tax problem: paying tax on phantom gains when no market exists to sell.

Common strategies to manage AMT risk include staggered exercises across years, partial exercises, or considering conversions (where legally available). Always consult a tax professional before exercising large blocks of ISOs.

Section 83(b) election

An 83(b) election lets the taxpayer elect to include the fair market value of restricted property (commonly early‑exercised shares) in income at the time of transfer rather than when vesting occurs. Key points:

• Timing: An 83(b) election must be filed with the IRS within 30 days of the taxable transfer (a strict deadline).
• When useful: If FMV at early exercise is low, filing 83(b) can lock in a low tax basis and convert future appreciation to capital gains treatment, potentially saving tax if the company increases in value.
• Risk: If the company fails or the equity is forfeited, the employee cannot recover taxes paid due to the 83(b) election.

Because of the tight deadline and potential downside, an 83(b) election is a high‑priority topic to discuss with tax counsel and the company’s HR or equity-administration team.

Withholding, employer reporting, and tax planning

Employers must handle payroll withholding and reporting correctly for NSOs and ordinary income recognition events. Important employer responsibilities:

• Withhold taxes on NSO exercises where required and report income on W-2s for employees.
• Provide clear statements to optionholders showing exercise dates, strike prices, and FMV used for tax reporting.
• Coordinate with valuation advisors to ensure exercise pricing aligns with 409A and reduces audit risk.

Employees should plan for tax bills at exercise and consider financing options or company programs (cashless exercise, loans, buybacks) that may help manage cash needs, if available.

Valuation, cap table, and dilution considerations

Equity grants and option pools are central to cap-table dynamics. Key considerations:

• Option pool: Investors often require a reserved option pool size prior to financing rounds to ensure talent incentives. The pool dilutes existing shareholders when options are granted and exercised.
• Dilution mechanics: When options are exercised, the number of outstanding shares increases, diluting existing ownership percentages unless anti-dilution protections apply.
• Cap table management: Accurate cap-table modeling is crucial to understand how grants, exercises, financings, and liquidation preferences affect ownership and proceeds upon liquidity.
• Investor rights: Preferred stock terms (liquidation preferences, anti-dilution, conversion rights) can materially affect common shareholders and optionholders in exit scenarios.

Employees evaluating an offer with options should request or ask about the current cap table, fully diluted share count, option pool size, and outstanding convertible securities to estimate potential value and ownership dilution.

Practical considerations for optionholders (employees, contractors, advisors)

When you receive private-company options, ask and evaluate these items:

• Strike price vs FMV: Confirm the strike price, the FMV used (and date), and whether a recent 409A valuation exists.
• Vesting schedule and acceleration: Understand cliffs, standard vesting cadence, and any acceleration triggers (e.g., single- or double-trigger acceleration on a sale).
• Exercise costs and windows: Know how long you can exercise after leaving, and whether you can exercise early.
• Tax consequences: Learn whether options are ISOs or NSOs and the likely tax implications for exercise and sale; consider AMT and 83(b) election choices.
• Liquidity prospects: Gauge realistic timing and likelihood of an IPO, acquisition, or secondary sale.
• Financing exercises/taxes: Explore financing or company programs for funding exercise costs or tax withholding (if offered).

Common exercise strategies include:

• Waiting to exercise until liquidity is near or until vesting completes (avoiding early AMT or exercise taxes), though this risks higher exercise prices later and loss of potential gains.
• Early exercise plus timely 83(b) election when FMV is very low to minimize future tax on appreciation.
• Partial, staged exercises across years to smooth tax exposures.

Always consult a tax professional before exercising large option blocks or making 83(b) elections.

Considerations for employers designing private-company equity plans

When companies design equity plans, they must balance talent needs, dilution concerns, tax compliance, and administrative complexity. Typical employer decisions:

• Plan type and option pool size: Set a pool large enough to attract talent without excessive dilution; investors typically negotiate pool sizing during financings.
• Vesting schedules and exercise windows: Choose industry-competitive vesting (commonly four years with a one-year cliff) and consider extended post-termination exercise windows to be employee-friendly.
• 409A valuations and compliance: Obtain regular 409A valuations and document board minutes to support FMV determinations for grants.
• Board approvals and governance: Ensure proper approvals for grants and clear communication around plan terms and potential future dilution.
• Administration platforms: Use equity-management software to track grant documents, vesting, and exercises and to provide clarity to employees.
• Investor expectations: Understand investor protections (preferred stock terms) and how they affect common shareholders and optionholder proceeds.

Thoughtful plan design reduces disputes, facilitates recruiting, and eases later financings.

How outcomes differ after IPO, acquisition, or other liquidity events

Private-company options are affected differently by liquidity events:

• IPO: Options often convert into options to purchase public company shares or are cashed out; vesting may continue or accelerate depending on plan terms. Lock-up agreements may restrict selling shares for a set period after the IPO.
• Acquisition: Options can be cashed out, converted into acquirer equity, or assumed by the acquirer; buyers may negotiate acceleration for unvested awards.
• Dissolution: If the company winds down, options often become worthless unless specific waterfall terms provide proceeds to common holders.
• Expiration: Unexercised options expire as provided by grant agreements; old options with short post-termination windows are frequently lost by departing employees.

Understanding the terms that govern acceleration, conversion, or buyouts in transaction scenarios is crucial to assessing option value.

Risks and disadvantages of private-company stock options

Key downsides to holding private-company options include:

• Illiquidity: No public market may exist to sell shares when taxes are due or when employees want to realize gains.
• Tax risk: Exercising can trigger tax liabilities (ordinary income on NSOs; AMT from ISOs) without a ready way to monetize shares.
• Company failure or dilution: The risk of total loss exists if the company fails, and subsequent financings dilute early holders.
• Complexity: Valuation, 409A, plan terms, and investor preferences complicate equity value and outcomes.
• Exercise-cost burden: Funding exercise prices and taxes can be prohibitive for many employees.

Awareness of these risks helps optionholders plan and negotiate appropriately.

Frequently asked questions (brief answers)

Q: Can non‑employees receive ISOs?

A: No — ISOs are limited by law to employees. Non-employees typically receive NSOs, RSUs, or other equity awards.

Q: What happens to options when you leave the company?

A: It depends on the plan: many companies require vested options to be exercised within a short window (commonly 90 days) after termination, though some plans offer extended exercise windows. Unvested options are usually forfeited.

Q: Can a company repurchase vested shares?

A: Yes — if the plan or stock purchase agreement includes repurchase rights or buyback provisions, companies can repurchase shares under the agreed terms.

Q: How long after grant can you exercise?

A: Grant agreements set the exercise period. Many grants have a maximum 10-year term from grant, but post‑termination exercise windows are frequently much shorter.

Q: Should I file an 83(b) election for early exercise?

A: It depends on the FMV at early exercise and your risk tolerance. An 83(b) can be beneficial when FMV is low, but it carries the risk of paying tax for shares that may become worthless. Consult tax counsel before filing.

Legal, regulatory and compliance issues

Private-company equity programs must navigate securities law, tax rules, and employment regulations:

• Securities-law constraints: Transfers and secondary sales must comply with securities laws and commonly rely on private-placement exemptions. Companies usually implement transfer restrictions and require representations from buyers.
• Section 409A: Exercise prices and deferred compensation arrangements must comply with 409A valuation rules to avoid penalties and unfavorable tax treatment.
• ERISA: Most equity plans exclude employee benefit plans covered by ERISA, but companies must be mindful of any plan elements that could trigger ERISA coverage.
• Tax reporting and withholding: Employers must withhold and report income for NSO exercises and other taxable events.

Careful legal counsel and documented processes reduce regulatory risk for both companies and recipients.

Practical resources and further reading

For deeper study, consult authoritative guides and practitioner resources on ISOs/NSOs, 409A valuation guidance, 83(b) election instructions, and equity-plan administration. Equity-administration firms, tax advisories, and corporate lawyers regularly publish how-to materials and checklists. For companies and employees managing wallets related to tokenized equity or crypto-related assets, consider using secure wallet solutions such as Bitget Wallet for custody and transaction needs.

References

This article synthesizes public industry guidance and practitioner materials on private-company stock options, equity compensation rules, IRS tax guidance (ISOs/NSOs and 83(b)), 409A valuation practice, and plan administration best practices. As of January 16, 2026, according to news reports, Canaan Inc. received a Nasdaq notice for non-compliance after its ADSs traded below $1.00, illustrating liquidity and listing risks for public companies that private-company stakeholders should consider when assessing exit prospects.

Further authoritative sources include government tax guidance (IRS publications), recognized equity-administration firms, corporate legal advisories, and securities-regulation materials. Seek professional legal and tax advice tailored to your situation.

Next steps: If you received an equity offer, ask for the grant agreement, the company’s equity plan, the current cap table on a fully diluted basis, the latest 409A valuation, and guidance on exercise mechanics and employee programs. For secure crypto or tokenized asset custody, explore Bitget Wallet and Bitget services to support asset management post-liquidity.

Want practical tools and secure custody for tokenized assets or proceeds from equity events? Explore Bitget Wallet for secure storage, and check Bitget resources to learn more about managing digital assets and transitions from private equity to public or tokenized outcomes.