Equity in a private startup is a lottery ticket priced like a salary cut. Roughly three of four venture-backed startups return nothing to common shareholders, and the options you are handed expire, dilute, and trigger taxes whether or not the company ever pays off. The job of an early employee is to get paid fairly for that risk, keep the cost of holding the ticket as low as legally possible, and avoid the handful of mistakes that convert a paper fortune into a cash loss.
Read the offer, not the headline. A grant of “50,000 options” means nothing on its own. Before you weigh the offer, get answers in writing to the questions that determine whether the equity is worth anything:
Your stake is your shares divided by the fully diluted share count — all shares, options, warrants, and the unallocated option pool — not the founders’ casual “we have about a million shares.” Without the denominator you cannot compute a percentage, and the percentage is the only number that matters.
The strike price is set to the most recent IRC §409A appraisal. Compare it to the price preferred investors paid in the last round: the gap is the markup already baked in, and the preferred price is a rough ceiling on what your common is worth today.
Investors hold preferred stock with liquidation preferences that get paid before your common (section “Stock Options: Mechanics, Valuation, and Dilution”). A company sold for $100 million with $120 million of stacked preferences returns zero to common holders — your options included. Ask for the total preference and whether it is participating.
These set your tax treatment (section “Taxation: ISOs, NSOs, and the AMT”), your timeline, and your deadline. A ten-year expiration is standard; anything shorter is a flag.
Negotiate the terms that actually move the needle. Founders expect equity negotiation; most candidates never try. Beyond the share count itself, two non-cash terms are worth more than they look:
The default 90-day post-termination window (section “What-If Scenarios and Financing”) forces you to fund the exercise and any tax bill within three months of leaving or forfeit everything you vested. Negotiating an extended window (seven to ten years, increasingly common) is the single highest-value non-cash ask, because it lets you defer the exercise decision until there is actually liquidity.
The right to exercise unvested options lets you buy the shares and file an IRC §83(b) election (section “The Section 83(b) Election”) while the spread is near zero, starting the long-term capital-gains and IRC §1202 QSBS clocks at the lowest possible tax cost.
Also pin down change-of-control acceleration — double-trigger (you vest only if you are terminated after an acquisition) is standard and reasonable to request; single-trigger is rare. And get every grant board-approved and in writing: oral equity promises are unenforceable (section “What-If Scenarios and Financing”).
Keep the holding cost survivable. The fastest way to lose money on equity is to exercise into an illiquid private stock with cash you cannot afford to lose, then watch the company fold while you hold the AMT bill (section “Taxation: ISOs, NSOs, and the AMT”). Three rules keep the downside bounded:
Diversify the moment you can. A successful exit creates the opposite problem: a single illiquid position becomes most of your net worth. Once shares are liquid, sell enough to bank the win and diversify rather than riding a concentrated bet on your former employer. At an IPO, expect a lockup of 90 to 180 days (section “Liquidity Events: IPOs and Acquisitions”), and consider a pre-arranged sales plan to liquidate methodically as it lifts rather than guessing at the top.