Before you accept a startup offer, find out:
- what type of equity it is
- how many shares you’ll get, out of how many fully diluted shares
- the price
- the vesting schedule
- how long you’ll have to exercise if you leave
Ask for a share count, not just a percentage.
The company’s lawyers represent the company, not you. If the equity is a meaningful part of your pay, it’s worth having your own lawyer review the offer. If you’d like us to review yours, contact us.
What type of equity am I getting?
Most early-stage startups grant either restricted stock or stock options.
- Restricted stock (RSAs): you own the shares from the start, subject to vesting.
- Stock options: the right to buy shares later at a fixed exercise price. Options are either ISOs or NSOs, which are taxed differently.
- RSUs: a promise to deliver shares once they vest. RSUs are more common at later-stage companies.
- SARs and phantom stock: both are rare.
See RSAs vs RSUs and Stock Options.
What should I ask about the offer?
- How many shares am I getting?
- How many fully diluted shares does the company have? That means issued shares, plus the full option pool, plus warrants.
- What is my exercise price or purchase price, and what was the latest 409A value?
- What did investors pay per share in the last round, and how much has the company raised in total?
- What is the vesting schedule, and when does vesting start?
- Is there acceleration if the company is acquired?
- How long will I have to exercise vested options if I leave?
- Can I exercise early?
How does fundraising affect my equity?
Each funding round affects your equity in two ways.
- Value: a round resets what the company is worth. Ideally that goes up each round, and the value of your shares goes up with it. A down round can hurt common stockholders, especially if investors have anti-dilution protection.
- Dilution: each round issues new shares, so your percentage goes down. That’s normal. What matters is whether your shares are worth more afterward.
Crunchbase and PitchBook show a company’s funding history if you want the full picture. See Down Round, Anti-Dilution and Equity Dilution.
How does vesting work?
Most startup equity vests over four years, starting on a vesting commencement date. That date is often your start date, even if the grant is approved later. There’s usually a one-year cliff:
- Nothing vests in the first year.
- A quarter of your shares vest on your one-year anniversary.
- The rest vest monthly, at 1/48 of the total each month.
See Vesting Schedule.
What is acceleration?
Acceleration speeds up vesting when the company is sold.
- Single trigger: vesting accelerates on the sale alone. This is rare.
- Double trigger: vesting accelerates only if the company is sold and you are also let go without cause.
How is the price of my shares set?
- At incorporation: shares are issued at a nominal price. Westaway sets par value at $0.00001 per share.
- Later: once a company raises a priced round, or roughly a year in, it gets a 409A valuation from an independent firm. Section 409A doesn’t itself require a valuation, but it penalizes options granted below fair market value. An independent 409A gives the company a safe harbor.
- Compared with investors: common stock is usually valued well below the price investors paid for preferred stock.
As an employee, you want a low price when you get your equity, and a high one when you sell. See 409A Valuation.
What is an 83(b) election?
If you get restricted stock, or exercise options early, you can elect to be taxed on the shares’ value when you receive them instead of as they vest.
- How: file Form 15620 with the IRS, online or by mail, within 30 days.
- Whose job: it’s your filing, not the company’s, and the deadline can’t be extended.
Talk to a tax advisor about whether it makes sense for you. See 83(b) Election.
