Equity Offer Red Flags: Six Stock Option Clauses to Check Before You Sign
This page is general information, not legal advice.
A startup equity offer can look like the biggest part of your pay, but its value depends on the fine print. That fine print is spread across the offer letter, the stock option agreement and the company's equity plan. The company's lawyers write all three, and the number of options in the offer is often the only part that clearly favors you. This page covers six clauses that often move risk onto the employee. For each one you get an illustrative example, why it matters, and wording you can propose. Some equity terms can be negotiated, especially before you accept. Tax treatment and employee protections vary a lot by jurisdiction.
The example clauses below are illustrative. They are not taken from any real company's agreement.
1. A vague grant that only promises "options, subject to approval"
A typical clause might read: "Subject to approval by the Board, you will be granted an option to purchase 20,000 shares of Common Stock on terms to be determined by the Board."
Why it works against you
A share count means little without the total number of shares outstanding, the strike price and the vesting start date. "Terms to be determined" lets the board set those later, after you've already started work. If approval is delayed, the strike price may go up and your vesting start date may slip. See offer letter red flags.
What to ask for instead
Sample wording to propose: "The Company will recommend that the Board grant the option at its next meeting. Vesting will begin on Employee's start date. The Company will tell Employee in writing the total number of fully diluted shares outstanding and the expected exercise price."
2. A long cliff with nothing if you leave early
A typical clause might read: "No portion of the option shall vest until the first anniversary of the Vesting Commencement Date. If Service terminates for any reason before that date, the option is forfeited in full."
Why it works against you
Under a cliff, nothing vests until a set date. If the company lets you go a week before it, even without cause, you walk away with nothing. "For any reason" puts a layoff on the same footing as quitting. Watch for wording that restarts the cliff if you change roles, go part-time or take a leave.
What to ask for instead
Sample wording to propose: "If the Company terminates Employee's Service without Cause before the cliff date, the option will vest pro rata for the months of Service completed. A change in role or approved leave will not reset the vesting schedule."
3. A short window to exercise after you leave
A typical clause might read: "Following termination of Service for any reason other than death or disability, the vested portion of the option may be exercised only within thirty (30) days, after which it shall expire."
Why it works against you
To keep your vested options, you usually have to pay the strike price, and maybe tax, before the window closes. A short window can force you to find a large sum of cash fast, often for shares you can't sell yet. If you can't pay in time, options you've already earned disappear. How exercising is taxed depends on the type of option and where you live, so get tax advice before you decide.
What to ask for instead
Sample wording to propose: "The vested portion of the option will remain exercisable for the longer of [X] months after termination or any longer period the Plan allows, but not beyond the option's original expiration date."
4. A company right to buy back your shares on its terms
A typical clause might read: "Upon termination of Service, the Company may repurchase any shares acquired under this option at the lower of the exercise price paid or Fair Market Value, as determined by the Board."
Why it works against you
Even after you pay to exercise, the company may be able to take the shares back. "The lower of" cost or fair value can mean you only get back what you paid. Because the board sets the value, it decides your price. A related right lets the company match any outside buyer before you can sell. See right of first refusal clauses explained.
What to ask for instead
Sample wording to propose: "The Company has no right to repurchase vested shares. Any repurchase of unvested shares will be at the greater of the price Employee paid or Fair Market Value as determined by an independent valuation."
5. Forfeiture for "cause" or breach of other agreements
A typical clause might read: "If Participant's Service is terminated for Cause, or Participant breaches any confidentiality, invention assignment or restrictive covenant agreement, all options, vested or unvested, shall be immediately forfeited."
Why it works against you
If "Cause" is defined loosely, or the company decides whether it applies, it can take vested equity you've already earned. Tying forfeiture to other agreements turns a minor dispute into a total loss. Check what those agreements say too. See IP assignment clauses explained and non-compete clauses explained.
What to ask for instead
Sample wording to propose: "Forfeiture applies only to unvested options. 'Cause' means a material breach that Employee fails to cure within 15 days of written notice describing it, as finally determined by a court or arbitrator."
6. No protection if the company is acquired
A typical clause might read: "In a Corporate Transaction, the Board may, in its sole discretion, cause outstanding options to be assumed, substituted, cashed out or cancelled, with or without consideration."
Why it works against you
An acquisition is often the moment equity pays off, but this clause lets the board cancel unvested options, possibly for nothing. If the buyer then lets you go, your unvested equity may be gone with no acceleration. "Sole discretion" leaves you no say.
What to ask for instead
Sample wording to propose: "If Employee's Service is terminated without Cause, or Employee resigns for Good Reason, within [X] months after a Corporate Transaction, all unvested options will vest immediately. Options will not be cancelled without fair consideration."
Also worth a look
Look for clauses that send disputes to private arbitration (see mandatory arbitration clauses explained). Also check whether the plan lets the board change your terms later, whether you get information rights, and how a later share split or funding round affects your grant. Weighing the full package? See job offer red flags. Leaving a startup? See severance agreement red flags to understand what happens to your options on the way out.
Scan your own equity offer free
Every equity grant is different, and one word like "sole discretion" can decide what your options are worth. Upload your offer letter or stock option agreement to the ScanMyTerms employment contract review as a PDF, DOCX, TXT or MD file, or just photograph it. In about a minute it lists clauses that work against you, with the risk level, the exact wording, why it hurts and how to change it. The free preview needs no sign-up and shows the risk count and the first two findings. The full report is $5. ScanMyTerms does not use your documents to train AI models, and reports are deleted after 7 days.
This page is general information, not legal advice. Equity, tax and employment rules vary by jurisdiction, so for decisions about a specific grant, talk to a qualified lawyer or tax adviser where you live.
Sources
- All clause examples on this page are illustrative and written for this guide. They are not quoted from any real company's agreement.
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