Ask HN: How exactly do stock option grants work?

Yes, but most people don't exercise their options until a liquidity event (company gets sold, goes public, etc). When this happens, you hope the shares are worth more than your option price. If so, you can exercise your options and make profit between your option price and the current price. This is the zero risk way to do it.

Also it looks like it will take five years to vest, so what happens if the company is acquired/goes public between now and then?

You should have some sort of vesting schedule in your packet. I'm guessing that within 5 years all your options will be vested, but between now until then, your options vest as you work. This is because your startup doesn't want to just give out boatloads of options to people who are going to leave. They want you to stick around and earn them and the vesting schedule is how they accomplish that.

You basically have the "option" to purchase the stock for a set price (your strike price) for some period of time.

Yes, to exercise your options you would have to purchase the stock at the strike price, and then sell it at the current (higher) price. With few exceptions, you can't do any of this until/unless the company IPO's and is publicly traded.

Because you have not been granted anything of direct value (that would be a stock grant, not an options agreement), you have no tax liability, because, well you don't have anything :)

5 Years is a bit rough, a typical vesting schedule is 4 years, typically with a 1 year cliff (nothing vests until you reach 1 year of employment, then 25% (or in your case probably 20%) of the shares are vested, meaning you could exercise them. After this, a proportionate amount of additional shares vests each month until the 4 or 5 year mark).

If something happens to the company before the 5 year period, some combination of losing any/all shares (vested or not), getting new/additional shares, getting an entirely new allocation of shares, or having the strike price adjusted is likely to happen.

You don't actually own anything until you exercise (buy) the shares. And I HIGHLY recommend you don't purchase any of the vested shares until the company is public, and only then when you intend to exercise them immediately (which is generally a cashless transaction).

The hard facts are that until there is an IPO, common stock (what you have options to) is very likely to get whacked around a fair bit, and you stand to lose far more than you gain.

You've been given options, not actual stock. This should not concern you. The difference between options and stock is largely a tax matter. In both cases, you've received an instrument with a very low current price that will be lucrative to you if the price appreciates (in, for instance, a takeover).

When you leave the company, you'll be required to shell out some cash to keep your exposure to the company's upside; you didn't give numbers, but if you stay until you're mostly vested, expect it to cost a couple thousand dollars. You'll have to decide whether the company's prospects merit the investment.

If the company is sold before you leave, you won't have to exercise your options in advance (you'll still need to exercise them, but this will be a no-brainer since the stock value will have appreciated). The difference between leaving and staying with respect to your options is risk.

As with every company, your options vest, meaning they become available to you in waves on a vesting schedule. This should not concern you; even the founders in your company have a vesting schedule.

What happens when the company is purchased? It depends. If you're lucky, there is a company-wide change-of-control clause that gets you instant access to the upside of the sale. You're probably not that lucky. The most likely outcome is that you'll have a mostly locked-in upside, but that you'll have to work through the remainder of your vesting schedule to get it. There are lots of sticky details (such as what happens if you're terminated before you vest after a change of control), but it's a waste of time to worry about them now.

You didn't ask, but do know: as employee 50+N in a 100+K-person startup, you are extremely unlikely to get any concessions in the terms and conditions of your equity grant. The company's board reviewed and agreed on this plan; it is a big deal to change it for anyone.

The real question is the company valuation and its financing terms. You should have been informed as to what % of the common stock your grant works out to, so you can work out what an $Xmm acquisition means to you. You should also probably be able to find out what the liquidation terms are on the company's financing (how much of that X the company's investors take off the top before the common stock is valued). These are the numbers that differ most wildly from job to job, and the ones most likely to impact your personal upside.

Remember that as a line employee in a 100 person startup, your stock grant is not going to be a life-changing event unless the company is CNN-level spectacularly successful. If the company does quite well, it'll probably amount to the equivalent of a 5-figure bonus per year, paid in a lump sum when the company is bought.