I signed the offer. Four years later, the company was acquired. My equity was worth $11,000 after taxes. I had mentally valued it at $200,000. The gap between those two numbers — between what I thought equity meant and what it actually meant — is the gap this article exists to close.

Startup equity is the single most misunderstood component of compensation in tech. It's deliberately complex, wrapped in legal jargon, and presented in a way that makes it hard to compare across offers. Companies benefit from this confusion. You don't.

The basics: what you're actually getting

When a startup offers you equity, they're giving you the right to own a small piece of the company. But "the right to own" is doing a lot of work in that sentence. There are several forms this can take:

Stock options (ISOs and NSOs) are the most common at startups. An option gives you the right to buy shares at a fixed price (the "strike price" or "exercise price"). You don't own anything yet — you own the right to purchase. The strike price is set by a 409A valuation, which is an independent appraisal of the company's current fair market value. If the company is worth $100M and has 10 million shares, each share might have a strike price of $1. If the company later sells for $500M, each share is worth $5, and your profit is $4 per share.

RSUs (Restricted Stock Units) are more common at later-stage startups and public companies. RSUs are actual shares given to you — no purchase required. They vest over time, and when they vest, you own them. The tax treatment is simpler: you pay income tax on the value when they vest. At startups, RSUs are sometimes called "double-trigger RSUs," meaning they only become taxable when both (a) they vest and (b) there's a liquidity event (IPO or acquisition).

The difference matters. Options require you to spend money to exercise them. RSUs don't. Options have favorable tax treatment if they're ISOs and you hold them long enough. RSUs are taxed as ordinary income. At an early-stage startup, you'll almost certainly get options. At a Series D or later, you might get RSUs.

Vesting: the schedule that controls everything

Almost all startup equity vests over four years with a one-year cliff. Here's what that means in plain English:

Four-year vesting means your equity is released to you gradually over four years. If you have 10,000 options, you get access to 2,500 per year (or more precisely, ~208 per month after the cliff).

One-year cliff means you get nothing for the first 12 months. If you leave before your one-year anniversary, you walk away with zero equity. On your first anniversary, 25% of your total grant vests at once. After that, the remaining 75% vests monthly.

The cliff exists to protect the company from short-tenure employees diluting the cap table. It also creates a psychological lock-in: once you've hit your cliff, leaving feels expensive because you're "leaving money on the table." This is by design.

What nobody tells you about vesting: the first year is the worst deal. You're working for equity you can't access. Years 2-4 are progressively better deals because you're earning equity monthly while also becoming more senior (and thus more valuable to the company). Many people leave right after their cliff vests — and that's often the worst time to leave, because you're walking away from three years of monthly vesting.

The numbers game: what your percentage actually means

Your offer letter might say "40,000 stock options" or "0.05% of the company." These are very different ways of expressing the same thing, and the percentage is the only one that matters.

Here's why: 40,000 options sounds like a lot. But if the company has 100 million shares outstanding, you own 0.04%. If the company sells for $500M, your pre-tax value is $200,000. If it sells for $100M, it's $40,000. If it sells for $50M (which is a successful outcome for many startups), it's $20,000 — before you subtract your exercise cost and taxes.

The dilution problem. Your percentage shrinks over time. Every time the company raises a new funding round, new shares are created, and your slice of the pie gets smaller. A 0.1% grant at Series A might be 0.06% by Series C. This is normal and expected, but it means the percentage on your offer letter is the maximum you'll ever own, not a fixed number.

A rough framework for evaluating equity:

At a seed-stage startup (pre-revenue, <20 employees), early engineers might get 0.25-1.0%. At Series A (some revenue, 20-50 employees), 0.05-0.25%. At Series B (growing, 50-150 employees), 0.01-0.1%. At Series C and beyond, 0.005-0.05%.

These ranges vary enormously by role, seniority, and how desperate the company is to hire you. But they give you a baseline for whether an offer is in the right ballpark.

The exercise window trap

This is the single most important thing most people don't understand about stock options: when you leave a company, you typically have 90 days to exercise your vested options. After 90 days, they expire. Gone.

Exercising means paying the strike price for every share. If you have 10,000 vested options at a $2 strike price, exercising costs $20,000. Out of pocket. For shares in a private company that you can't sell.

And it gets worse. If you have ISOs and the current 409A valuation is higher than your strike price, exercising can trigger Alternative Minimum Tax (AMT). I've seen people owe $50,000+ in taxes for exercising options in a company that hadn't gone public yet. They paid real money for theoretical gains.

Some companies have extended exercise windows — 5 years, 7 years, or even 10 years after departure. This is a genuinely employee-friendly policy and worth asking about during negotiation. If a company offers a 90-day window, that's standard but not great. If they offer an extended window, it's a signal that they care about employee outcomes.

How to actually evaluate an equity offer

Here's the framework I wish someone had given me:

Step 1: Get the numbers. Ask for: number of options, strike price, total shares outstanding (fully diluted), latest 409A valuation, and latest preferred share price. Any company that won't share these numbers is a red flag.

Step 2: Calculate your ownership percentage. Divide your options by total shares outstanding. This is your stake.

Step 3: Run scenarios. What is your equity worth if the company sells for $100M? $500M? $1B? Subtract the exercise cost and estimate taxes (roughly 30-40% for a back-of-envelope calculation). If the $500M scenario doesn't excite you, the equity isn't meaningful compensation — it's a lottery ticket.

Step 4: Discount aggressively. Most startups fail. Of those that don't fail, most have modest exits. The expected value of startup equity is much lower than the best-case value. A reasonable heuristic: value your equity at 10-20% of the best-case scenario. If the best case is $500K, mentally value it at $50K-$100K.

Step 5: Compare to cash. If a startup offers $180K base + equity theoretically worth $200K, and a big company offers $250K base + $100K RSUs (liquid), the big company offer is almost certainly better in expected value. The startup offer is only better if you believe in the company's upside AND you can afford the lower base salary.

The question to ask in every negotiation

"What is the exercise window if I leave the company?"

This single question tells you more about how a company treats employees than anything else in the offer letter. A 90-day window means they're following the default. A 10-year window means they've actively chosen to be generous. And if the recruiter doesn't know the answer, that tells you something too.

Equity is not a bonus. It's not free money. It's a bet — on the company, on the market, and on your own ability to stay long enough for it to matter. Understanding the mechanics won't make the bet less risky, but it will help you make it with your eyes open.