Salary & Negotiations

What to actually ask about equity before you sign

Most people accept equity grants without understanding what they have. The numbers on the offer letter look good until you learn which questions you should have asked.

Options and RSUs are different. Stock options give you the right to buy shares at a fixed price (the strike price) sometime in the future. RSUs are shares that vest to you directly, usually on a schedule. Options require you to pay the strike price and are worth nothing if the current share price is below it. RSUs have value as long as the company has any value. For private companies, this difference matters a lot.

Vesting schedule. Most equity vests over four years with a one-year cliff, meaning you receive nothing if you leave before 12 months, then 25% at month 12, and the rest monthly or quarterly over years two through four. Ask specifically what your cliff is and what the full schedule looks like.

The strike price versus current valuation. For options, the difference between your strike price and the company's current fair market value (the 409A valuation) determines your paper gain if the company succeeds. Ask for both numbers. A high strike price relative to the 409A means your options are worth less today.

How many total shares are outstanding. Your percentage ownership matters, not just the number of shares. "50,000 options" sounds like a lot. If there are 500 million shares outstanding, that's 0.01%. Ask what percentage your grant represents.

What most people don't know

Most option grants expire 90 days after you leave the company. If you've vested options and you leave, you have 90 days to exercise them or lose them. For early-stage companies, exercising options can cost real money and the shares aren't liquid. Some companies have extended exercise windows of 1 to 10 years, which is worth asking about before you join.

Dilution is real. Every future funding round may dilute your percentage unless you have anti-dilution rights (you almost certainly don't as an employee). A large option grant at a Series A company can become a much smaller percentage by the time a Series D closes.

What you can do

Ask your HR contact for the company's latest 409A valuation and total shares outstanding. Ask specifically about the exercise window after departure. If they won't answer these questions, that's information too.

Quick reference

Key question 1: How many total shares (or units) are outstanding after my grant?
Key question 2: What is the current 409A fair market value per share?
Key question 3: What is the post-termination exercise window?
Key question 4: What is the vesting cliff and full schedule?
Deep reference: The Holloway Guide to Equity Compensation (free online)