Startup Equity Explained: Value Your Offer Before You Sign

A startup offer can look generous because it names a large number of options. That number is not an ownership percentage, a cash value, or a promise that you can sell. This startup equity explained guide shows you how to translate an offer into terms you can compare before you sign.

This article is general information, not tax, legal, or investment advice. Check the official sources linked below and talk to a tax professional or lawyer before you exercise, sell, or make a tax election.

Start with the type of equity you are actually receiving

“Equity” is a catch-all word. Your offer should say what you receive, how many units you receive, and what must happen before you own or can sell anything. Ask for the grant agreement and the company’s equity plan, not just a recruiting email that says “$X in equity.”

A stock option grant normally identifies the option type, share count, strike price, vesting schedule, and expiration date. An RSU is a grant of shares the company agrees to issue at a later specified date, commonly after vesting conditions are met, rather than a right you pay to exercise as described by HubSpot for Startups.

Do not assume that the word “equity” means the same thing across offers. An early-stage startup may use options because the shares have little current cash value. A later-stage company may use RSUs. The paper, not the stage label, tells you what you are getting.

Get the terms that make a share count meaningful

Start with one rule: a raw share count is almost useless. You need a denominator, a price, and the contract terms around both.

Ask the company for the following before you compare its grant with another offer:

1. Your grant size and award type. Get the exact number of options or RSUs, whether the option is an ISO or NSO, and the grant date.
2. The fully diluted share count at grant. This is the number you need to turn your grant into a percentage.
3. The strike price and the latest 409A value. For options, the strike is your purchase price per share. A 409A valuation is an appraisal used to establish common-stock fair market value for U.S. option pricing; it can be lower than a preferred financing price because preferred shares can have added rights according to Carta.
4. The latest financing terms at a high level. Ask which share class employees hold and whether investors have liquidation preferences. You do not need every investor document to understand the risk.
5. Vesting, cliff, and post-termination exercise terms. Request the actual schedule and the number of days you have after leaving to exercise vested options.
6. What happens in an acquisition, IPO, layoff, or termination. Ask whether acceleration exists and whether any shares are subject to company repurchase or transfer limits.
7. Liquidity history and restrictions. Ask whether the company has run a tender offer or secondary sale, and whether the board can approve employee sales. A plan to go public is not a liquidity right.

This is a normal diligence request, not a hostile negotiation. If the company cannot share a cap-table detail, ask it to state your fully diluted percentage in writing instead. Then take that percentage, rather than the number of shares, into a conversation about the rest of the offer. Our guide to negotiating a startup job offer can help you make that conversation specific.

Calculate ownership on a fully diluted basis

Use this calculation:

Your fully diluted ownership percentage = your granted shares ÷ fully diluted shares at grant

The fully diluted share count is broader than outstanding common shares. It includes common shares, preferred shares on an as-converted basis, options, warrants, and unissued shares in the option pool in Carta’s definition. That is why “we have 10 million shares outstanding” may not be the denominator you need.

For example, 48,000 options divided by 12,000,000 fully diluted shares equals 0.40%. If the company raises money and adds 3,000,000 shares, the same 48,000 options represent 0.32% of 15,000,000 fully diluted shares. You still have 48,000 options. Your percentage fell because the denominator grew.

Dilution is not automatically bad. A new round can fund a product, hiring, and more time to build. It is still a cost you should see before you trade guaranteed salary for upside. Ask whether the figure already includes a planned option-pool increase or pending convertible securities. Do not try to reverse-engineer it from the startup’s authorized share count.

Also separate percentage ownership from payout order. Employees commonly receive common equity in Carta's explanation. The SEC explains that common holders are typically last in the liquidation order, while preferred holders may have liquidation preferences and other preferential rights in its small-business glossary. The last preferred-round price is therefore not a reliable price tag for your common options.

Model three exit scenarios before you call equity compensation

A model will not predict an exit. It will show which inputs drive the answer and stop you from treating a recruiter’s headline number as cash.

Hypothetical example, not a valuation: Suppose a startup offers you 48,000 options at a $0.75 strike price. The fully diluted count is 12,000,000 at grant, so your initial ownership is 0.40%. Before an exit, another financing adds 3,000,000 fully diluted shares. Your ownership becomes 0.32%, and exercising all 48,000 options would cost $36,000.

The table below assumes you are fully vested and able to sell. It also assumes, unrealistically, that every common share receives its simple pro-rata share of the headline exit value. It ignores debt, liquidation preferences, transaction costs, tax, and sale restrictions. Those omissions are the point: real payouts can be lower.

The model tells you two useful things. First, the strike price creates a real cash decision, even when the grant has upside. Second, headline enterprise value is not your payout. The SEC notes that securities of private companies are generally illiquid, meaning there may be few buyers and resale restrictions may apply in the same glossary.

Keep salary and equity in separate columns when you compare offers. Use salary to meet your needs this year. Treat the model as a range of outcomes, not a reason to accept less cash than you can afford.

Read vesting and leaving terms like a contract

Vesting is how you earn the grant over time. A cliff is the first period when nothing vests; after it, a portion may vest at once and the rest may vest monthly or quarterly. A four-year schedule with a one-year cliff is common, but your signed grant controls the schedule and cliff mechanics.

Make a small calendar from the agreement. Put in your start date, cliff date, monthly or quarterly vesting dates, and the final vest date. If you may leave before you are fully vested, calculate the vested shares at that departure point, not at the end of the schedule.

Then read the departure section twice. Unvested options usually end when you leave. Vested options may also expire after a limited post-termination period if you do not exercise them; the grant agreement specifies that deadline and Carta warns it can be short. For an ISO there is a second, tax deadline: to keep ISO treatment, you generally must exercise within three months after employment ends (one year after a disability). A longer contractual window can let you exercise later, but the option is then taxed as an NSO. That creates a three-part decision: pay the strike, estimate tax, and accept illiquidity with your own money.

Ask about acceleration, but do not assume it applies. A single-trigger clause can speed vesting after an acquisition. A double-trigger clause generally requires both an acquisition and a qualifying termination as Carta explains. Ask which trigger, what portion accelerates, and whether the language covers a layoff after a change in control.

The same care belongs in your startup diligence. Before accepting the risk, assess funding, runway, and the people who control the business with this startup evaluation checklist. Equity can magnify a good outcome. It cannot repair a company with no path to one.

Treat U.S. and Canadian taxes as a decision point, not a footnote

Tax treatment depends on where you live, where you work, your award, timing, and the company’s structure. The overview below is current as of November 2026, but it is not a filing instruction.

For U.S. federal purposes, the IRS classifies ISOs as statutory options. You generally do not include regular income when you receive or exercise a statutory option, but exercise of an ISO may create alternative minimum tax. An NSO without a readily determinable fair market value generally creates income at exercise equal to the share value then, minus what you paid under IRS Topic No. 427. That means a private-company exercise can produce a tax bill before you have cash from a sale.

An 83(b) election is not a universal option-holder checkbox. It applies when property is transferred for services and can matter for certain restricted-stock or early-exercise situations. If your tax adviser says it applies, the current regulation says the election must be filed no later than 30 days after the transfer in 26 CFR 1.83-2. Do not wait for year-end or for a company reminder.

In Canada, the CRA says an employee who acquires shares under a security option generally receives a taxable benefit. The year it counts depends on the employer: for a non-CCPC, the year you acquire the shares; for a Canadian-controlled private corporation (CCPC), which many Canadian startups are, the year you sell or otherwise dispose of them. The basic calculation is fair market value at acquisition less amounts paid for the shares and the rights to acquire them, with exceptions that can change timing or deductions in the CRA employer guide. Ask a Canadian tax professional how the employer type, the plan, your province, and cross-border work affect you before exercise.

If you are an international student or work across the U.S.-Canada border, get advice before moving, exercising, or changing employers. The employment paperwork and the tax residence facts can matter as much as the grant label. For the career trade-off beyond the tax issue, compare a startup and a big company job.

Ask the company questions that produce usable answers

Send this after the verbal offer and before you accept. It is direct enough for a founder or a lean people team.

Thanks again for the offer. I’m excited about the role and want to understand the equity grant alongside the cash compensation. Could you send the equity plan and grant agreement, or confirm: the award type and ISO/NSO status; the number of shares and my fully diluted ownership percentage at grant; the strike price and 409A valuation date; the vesting schedule and cliff; the post-termination exercise period; any early-exercise, repurchase, or change-of-control acceleration terms; and the share class and high-level liquidation-preference context from the most recent financing? I’m not asking for confidential investor documents. I want to evaluate the grant accurately before I sign.

The response gives you signal as well as numbers. A company may reasonably limit what it shares. It should still be able to explain the award type, ownership percentage, vesting, exercise period, and who can answer tax questions. If the explanation stays vague, do not fill the gaps with the latest funding valuation.

Take the same list to your final interview. These questions to ask in a startup interview can help you test the company’s operating health, not just the option math.

Next steps

1. Ask for the grant agreement, plan, strike price, fully diluted percentage, and post-termination exercise period this week.
2. Build a one-page model with your vested-share dates, exercise cash, dilution assumption, and three exit values.
3. Compare salary, benefits, and equity separately. Do not use a hypothetical exit to cover a cash shortfall.
4. Before you exercise or make an 83(b) election, book time with a tax professional who understands your country and cross-border situation.