Equity 101 — What You Actually Got

When a startup offers you equity, they're handing you a piece of paper with a lot of asterisks on it. Unlike a salary — which shows up in your bank account every two weeks — equity is a promise with conditions, timelines, and a tax code that seems designed to confuse you.

Let's fix that. Here's what you actually got.

The Three Types of Startup Equity

Stock Options give you the right to buy shares at a fixed price — called the strike price or exercise price — at some point in the future. You don't own anything today. You own the *option* to buy at a predetermined price. The bet: by the time you can buy, the shares are worth significantly more than what you'll pay.

There are two kinds of stock options:

- ISOs (Incentive Stock Options): Only available to employees. The key advantage is favorable tax treatment — you don't pay ordinary income tax when you exercise, and if you hold long enough, gains are taxed at the lower capital gains rate. But ISOs trigger AMT (more on that in Chapter 5), so it's complicated. - NSOs (Non-Qualified Stock Options): Can be granted to employees, advisors, contractors, or anyone else. When you exercise NSOs, the "spread" (difference between strike price and fair market value) is immediately taxable as ordinary income. Less favorable than ISOs, but simpler.

RSUs (Restricted Stock Units) are a promise of actual shares, delivered when vesting conditions are met. You don't buy RSUs — they're granted to you. When they vest, you own real shares (and owe income tax on their value at that point). RSUs have become common at later-stage startups and public tech companies because they're simpler to understand and the value is more predictable.

Restricted Stock is shares you own *right now*, but subject to forfeiture if you leave before vesting. This is most common for founders and very early employees. The advantage: you can file an 83(b) election immediately, starting the long-term capital gains clock on day one.

The Strike Price

If you have options, your strike price is the price per share you'll pay when you exercise. It's set at the time of your grant, based on a 409A valuation (an independent appraisal of the company's common stock value).

The math is simple: if your strike price is $1/share and the shares are worth $10/share when you want to sell, you make $9/share (minus taxes). If the shares are worth less than your strike price, your options are "underwater" — exercising would cost more than they're worth.

Early-stage startups have low 409A valuations, which means low strike prices. This is why getting in early matters: an employee at a Series A company might have a $0.50 strike price. By Series C, the same role might come with a $10 strike price. If the company exits at $20/share, the early employee makes 40x more per option.

Vesting: How You Actually Earn It

Almost no company gives you equity upfront. You earn it over time through a vesting schedule. The most common structure:

- 4-year vest with a 1-year cliff: You earn nothing for the first 12 months. At your one-year anniversary, you receive 25% of your grant all at once (the "cliff"). After that, you vest monthly for 3 more years until you've earned 100%.

If you leave before the cliff, you walk away with nothing. This protects the company from hiring mistakes and rewards people who stick around.

Some companies offer accelerated vesting — provisions that speed up your vest if the company is acquired ("single trigger") or if you're laid off post-acquisition ("double trigger"). Always ask about this.

What Your Percentage Actually Means

Your offer letter might say you're getting 0.5% of the company. That sounds meaningful. But there are a few things that erode that number:

Dilution is coming. Every time the company raises money, new shares are created and your percentage shrinks. 0.5% pre-Series A might be 0.2% post-Series C. The dollar value might still increase (if the company's valuation grows faster than dilution), but the percentage will shrink.

Option pool shuffle. Investors often require the company to set aside a fresh option pool *before* closing a financing round — which dilutes existing shareholders before the new investors even show up. Your 0.5% is calculated against the post-pool, pre-money capitalization.

Liquidation preferences. Preferred shareholders (investors) typically get paid first in an acquisition. In a mediocre exit, there might be nothing left for common stockholders (you) after investors take their preferred returns. A 1x liquidation preference is standard. 2x or participating preferred is a red flag.

The Mental Model

Think of startup equity as a lottery ticket with better odds — but still a lottery. The strike price is what you'd pay to play. The vesting schedule is how long you have to stay to collect your ticket. The cap table, dilution, and liquidation preferences determine what happens if the lottery pays out.

Most equity doesn't pay off. But when it does, it can be life-changing — and understanding what you have is the difference between making smart decisions and being caught off guard.

The next chapter breaks down how to read your actual offer letter and which numbers to zero in on.