Negotiate Equity In A Startup Job Offer is a key focus of this guide. Startup equity is one of the most misunderstood and most negotiated components of a tech job offer. It can be worth tens of millions of dollars or it can be worth zero, depending on factors largely outside your control. Understanding how to evaluate equity intelligently and negotiate it professionally can make a significant difference in your long-term wealth. Here is what you need to know.
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How startup equity works
Most startup employees receive equity in the form of stock options or restricted stock units. Options give you the right to buy shares at a set price (the strike price or exercise price) in the future. RSUs are grants of actual shares that vest over time. Both have very different tax and value implications.
Vesting schedules determine when you actually own your equity. The most common schedule is four years with a one-year cliff: you receive nothing if you leave in the first year, 25% after one year, and the remaining 75% vests monthly or quarterly over the following three years.
The value of your equity depends on the company’s ultimate valuation at exit, the total number of shares outstanding (which determines your percentage ownership), and the terms of any preferred stock that sits above common stock in the liquidation stack. Understanding these factors is essential to evaluating whether equity is meaningful.
What questions to ask about equity
Ask for the total number of shares outstanding (or fully diluted share count). This is the number you divide your grant by to understand your ownership percentage. A grant of 50,000 shares means very different things if the company has 1 million shares outstanding versus 100 million shares outstanding.
Ask about the company’s most recent 409A valuation (for options) or the preferred price per share if you are trying to understand current estimated value. Ask whether preferred shares have liquidation preferences that would reduce your payout in a moderate exit scenario.
Ask what percentage of the company your grant represents. Companies are sometimes reluctant to share this, but it is a reasonable question. If they will not tell you the percentage, you can calculate it yourself if they share the fully diluted share count.
How to evaluate whether the equity is meaningful
Start with a sanity check: the company’s current valuation times your ownership percentage gives you the current paper value of your equity. But that number assumes the company exits at its current valuation, which is not guaranteed.
Apply realistic outcome scenarios. What if the company exits at 2x, 5x, or 10x its current valuation? What if it exits at less than its current valuation? What if it does not exit at all? Modeling a range of scenarios helps you understand the distribution of outcomes rather than anchoring to a single optimistic number.
Also consider the liquidation preferences of preferred investors. Many startup term sheets give preferred investors 1x or 2x their money back before common stockholders (employees) see anything. In moderate exits, this can significantly reduce or eliminate the value of employee equity.
How to negotiate equity
Equity is negotiable, but the negotiation dynamics differ from salary. Companies have more flexibility on equity than on cash, particularly early-stage startups that are preserving cash. At the same time, equity pools are finite and there are limits to what any individual can receive.
The strongest leverage in equity negotiation is competing offers with better equity packages. If you have another offer with a more attractive grant, sharing the specifics gives the company something concrete to respond to.
If you cannot negotiate more shares, consider negotiating the strike price (lower is better for options), the vesting schedule (requesting acceleration of vesting upon acquisition is common), or the exercise window (the amount of time you have to exercise options after leaving, 90 days is standard but extending it to two or three years is increasingly accepted at better companies).
Red flags in equity negotiations
A company that refuses to provide any information about shares outstanding, liquidation preferences, or current valuation is a red flag. Legitimate companies understand that you need this information to make an informed decision.
Vesting with no cliff is unusual and worth understanding. A cliff is actually protective: it prevents you from vesting immediately but also protects the company from providing full equity to someone who leaves in the first month. No cliff can mean the terms are designed in ways that benefit one party more than the other.
Watch out for heavily preferred investor structures. If the company has raised multiple rounds at increasing prices with liquidation preferences, even a successful exit at a multiple of the last round valuation might produce very little for employees. Ask specifically about the waterfall at exit.
When equity does not matter
Not every startup equity grant is worth extensive negotiation. If the company is at a very early stage with high failure probability, if the terms are highly unfavorable, or if the cash compensation difference between offers is significant, spending extensive energy on equity optimization may not be the best use of your negotiation capital.
Focus your equity negotiation energy on situations where the equity has a realistic chance of being meaningful. Well-funded companies in growth stages, companies with strong investors and a clear path to exit, and companies where your grant would be a significant percentage of your total compensation are the situations where equity negotiation pays off most.
Also consider the tax implications of different equity structures before you accept. Options taxed at ordinary income rates upon exercise versus RSUs taxed at ordinary income upon vesting versus early exercise options that may qualify for long-term capital gains treatment are meaningfully different outcomes. A conversation with a tax advisor before accepting a complex equity package is worth the investment.
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Read next
- How to Use a Job Offer to Negotiate a Raise at Your Current Job
- How to Negotiate Equity as Part of a Job Offer
- How to Negotiate Salary at a Startup: Cash and Equity
Frequently Asked Questions
How do I find out if a startup’s equity is worth anything?
Ask for the fully diluted share count, the 409A valuation, and the preferred stock terms. Research the investors and recent funding rounds. Apply realistic exit scenario modeling rather than assuming the best case.
Should I take a lower salary for more equity?
Only if you have done your homework on the company’s potential and you genuinely believe the equity upside justifies the salary sacrifice. Be honest about the probability of failure, which is high for most startups regardless of how compelling they seem.
What is a 409A valuation?
A 409A is an independent valuation of a private company’s common stock, required by the IRS. It sets the strike price for stock options. A higher 409A means your options are more expensive to exercise. It is also an indicator of the company’s current estimated value.
What happens to my equity if the company is acquired?
Depends on the terms. Unvested equity may accelerate (vest immediately) under single or double trigger provisions, or it may be converted to the acquirer’s equity on different terms. Review your equity documents carefully for acquisition language.