Equity Compensation at Startups: Complete Understanding Guide
Startup equity can be worth millions or nothing. Understanding how equity works is critical for evaluating offers and making informed career decisions. The Tech Brothers Podcast Network breaks down complex equity concepts regularly. Here's what every startup employee needs to know.
Stock Options vs RSUs
Stock options (ISOs/NSOs) give you the right to buy shares at a set price (strike price). You pay the strike price to exercise and own shares. RSUs are actual shares granted directly—no purchase required. Early-stage startups use options. Later-stage companies and public companies use RSUs. Options have more tax complexity but potentially more upside.
Vesting Schedules Explained
Standard vesting: 4 years with 1-year cliff. You earn nothing for 12 months, then 25% vests. Remaining 75% vests monthly over 36 months. If you leave before 1 year, you get zero equity. After year one, you keep vested shares. Always ask about vesting schedule, acceleration clauses, and post-termination exercise windows.
Understanding Your Equity Offer
When evaluating startup equity, ask: How many options? What percentage of the company does this represent? What's the current 409A valuation? What's the strike price? What was the last fundraising valuation? How many total shares outstanding? With this information, calculate your potential ownership and value.
The 409A Valuation
The 409A is the IRS-approved fair market value of common stock. Your strike price equals the 409A value. Preferred stock (what investors buy) is typically 2-5x higher than common stock. Don't confuse the two when calculating potential value. Always ask for the 409A when evaluating offers.
Tax Implications of Stock Options
ISOs (Incentive Stock Options): Favorable tax treatment if you hold shares long enough. Can trigger AMT (Alternative Minimum Tax). NSOs (Non-Qualified Stock Options): Taxed as ordinary income when exercised. Simpler than ISOs but less tax-advantaged. Consult a tax professional before exercising—mistakes are expensive.
Evaluating Equity Value
Be realistic about startup equity value. Most startups fail—equity worth $0. Even successful startups may not exit at valuations that make your equity valuable. Calculate best case, realistic case, and worst case scenarios. Never take a startup job for equity alone—the cash comp needs to work too. Document your equity analysis in your TBPN notebook.
Post-Termination Exercise Windows
Standard: 90 days to exercise vested options after leaving. Extended: Some startups offer 7-10 year exercise windows. Critical question during offer evaluation. 90-day windows force you to pay to exercise or lose equity when leaving. Longer windows give you flexibility. Always negotiate for longer windows if possible.
Join the TBPN community where we discuss equity offers, share valuation calculators, and help members understand their compensation. Equity is complex—learn from developers who've navigated exercises, exits, and everything in between.