Equity 101

Key takeaways

  • Not all equity is equal — there are many factors that will determine its value to you over time. Some you can negotiate, and some you cannot.

  • Evaluate the overall profile of the startup company — domain, growth potential, and leadership — as these are vital to the success of your equity.

It's more than just the number of options

Getting a startup job offer with 10,000 or even 25,000 cheap stock options sounds exciting, but that’s not all there is to it. Below are 5 things you need to know to really kick the tires on your prospective equity offer with a new job. 

👉 Vested’s Equity Fairness Calculator can help you compare your job offer to similar roles at similar companies. 

1. Your options type

Do you own incentive stock options (ISOs) or non-qualified stock options (NSOs)? They have very different tax treatments when it comes time to exercise. With options, you’ll have to pay to exercise them and likely pay a form of income tax when you do. ISOs are typically offered to full-time employees and are more tax-efficient; NSOs are typically given to contractors and other service providers.

👉 Hint: Don’t confuse stock options with actual shares in a company, which might come in the form of RSUs, and also have a vesting schedule. 

2. Your strike price

This is the price you’ll pay per option when you exercise. Your strike price is equal to the fair market value per share on the day you are granted your stock options. This amount could be pennies on the dollar for a seed-stage company or it could be quite high for a mature company. This is non-negotiable in most cases. You can estimate how much it will cost you to exercise your options (but likely not the associated tax bill) after you have met your one-year cliff.

👉 Hint: If you start at an early seed-stage company and the strike price is very, very low, it may make sense to exercise early. Otherwise, consider starting a sidecar savings account to save up for your exercise or make a plan to use option funding.

3. Your vesting schedule

Until your equity has vested, it's not really yours yet. Vesting means the release of the company's take-back right and the start of your ownership of the option. It’s typical to vest monthly over four years with a one-year cliff (a minimum amount of time you need to work to earn your equity). If you receive additional stock option grants, you could have overlapping vesting schedules. Negotiating for an accelerated vesting schedule might be tough (e.g. reducing the cliff to six months) as this structure is designed for employee incentives and talent retention. However, if there is an imminent liquidity event on the horizon that could be one important reason to ask for a faster timeline.

👉 Hint: We typically recommend waiting to exercise when it makes sense to do so, rather than progressively exercising as you vest (e.g. exercising your shares monthly after your cliff.) 

4. Your exercise window

Technically called a post-termination exercise window (“PTE window”) this is how much time you have to exercise your options when you leave your company. It could range from 30 days to 10 years. Make sure you read the fine print in your stock option agreement to be clear on what that window of time is so you’re not scrambling for the cash when it comes time to exercise down the road. You may be able to negotiate for a longer exercise window. If not, you can always use option funding to cover the costs without risking cash out of your pocket.

👉 Hint: Many newer companies have extended exercise windows of up to 10 years. Here’s a list of some of those companies with employee-friendly terms.

5. Your percentage

You only own options for a tiny slice of the overall company’s shares. As your company raises money from investors, those shares may represent a smaller and smaller slice. Raising money allows the company to grow, but it also reduces the ownership of existing shareholders ("dilution") because the new investors get some equity in exchange for their investment.

👉 Hint: If you are at a very early company, try to negotiate for more shares instead of money, as the total number of outstanding shares will face “dilution” as the company fundraises.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for investment, tax, legal, accounting, or other professional advice. Vested does not provide investment, tax, legal, accounting, or other professional advice. You should consult your own investment, tax, legal, accounting, or other professional advisors before engaging in any transaction or equity decision.

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Vested, Inc. is a technology company as well as an adviser regulated by the U.S. Securities and Exchange Commission as an exempt reporting adviser. Vested, Inc. also provides free tools to help startup employees understand and make the most of their equity compensation. This includes the Equity Dashboard, Outcome Simulator, Fairness Calculator and AMT Calculator. All company data, including but not limited to valuation, projections and common share price, are estimates derived using public data sets, without any endorsement or influence from the company, and should be used only for informational and educational purposes. These data should not be used as investment advice. The Equity Dashboard allows you to enter your option grant and monitor your equity. The Outcome Simulator allows you to create hypothetical exit scenarios with your own inputs such as exit date and valuation. The Fairness Calculator helps you to see how your option grant compares to those received by other startup employees with similar roles at similar companies. The AMT Calculator helps you understand the possible impact of exercising options on possible Alternative Minimum Tax scenarios. All these tools are for illustrative purposes only and do not constitute tax, investment, financial or any other actionable advice.

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