[jbail]

Does this mean I have to buy into my own stock?

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.

[wlfsbrg]

This is great, thanks for the insight jbail. I want to clarify using an example (not using real numbers):

I am granted 100k options at exercise price of $0.10, so the total amount it would cost me would be $10k to purchase them. The company is sold with shares being valued at $10 each.

I spend $10,000 purchasing the shares, which then I would see a return of $990,000?

[acqq]

But AFAI understand before the IPO you can't buy anything, even if the shares are valued some value in some company to company transaction. AFAIK it's not about company being sold, it's only once it's on the market (and other conditions you have are met) that you can execute your options. Then you don't have to worry to even have the mentioned 10K USD, you'll be able to get the difference between the real price of that number of shares and the strike price of your options.

http://en.wikipedia.org/wiki/Strike_price

[kevinpet]

You can buy before the IPO, but you won't have anywhere to sell them. Buying before IPO is risky because you may face taxes on the difference between the strike price and fair market value, but not be able to turn any of the paper profit into actual cash to pay the taxes.

[arfrank]

Wouldn't a website like secondmarket.com allow you to unload stock before a liquidity event? That assumes that someone would want to buy the stock from you.

[seanc]

No, it's a private company, and part of the ownership contract will prevent you from selling your shares to people outside the company. You might even be precluded from selling them period. That's why most people don't buy until the company's exit.

See my mainline comment for more details

[elbrodeur]

If all your options are ISOs, yes.

[tptacek]

You'll very likely have to execute your options when you leave the company, or give up your exposure to the company's upside.