The basic concept behind options is that you're provided
the option to buy a certain number of shares of stock in your
company at a set price. The goal is to have the price set
very low, in the hope that the execution price (the price
at which the stock is trading publicly when you exercise your
options) will be high, providing you with a nice profit.
Example: You receive 100 shares of stock at an option price
of $5. You will accrue (or vest) these options on a 3-year
schedule, one-third on each anniversary of employment. On
your third anniversary, the stock is trading publicly at $20
per share. You can take your 100 shares, exercise them (buy
the stock at your promised option price of $5), and then immediately
sell them at $20 each--netting a profit of $1500 (less taxes
If your company is not publicly traded (or "pre-IPO"),
options are essentially worthless until the company actually
has stock to trade.
All options are a gamble of sorts. Before you accept them
as a substantial portion of your compensation, make sure the
company's stock is performing well, the option price is low,
the vesting schedule is reasonable, and that you expect to
stay at the company long enough to profit from your options.