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 $25. 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 $100 per share. You can take your 100 shares, exercise them (buy the stock at your promised option price of $25), and then immediately sell them at $100 each–netting a profit of $7,500 (less taxes and fees).
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.