Equity Compensation
Non-cash compensation in the form of company ownership interests, including stock options, RSUs, and restricted stock, used to attract and retain talent.
FAQs
What is the difference between stock options and RSUs?
Stock options give the right to buy shares at a fixed price (strike price). If the company's value grows, the difference between market price and strike price is profit. RSUs are grants of actual shares (or the right to receive shares) — they have value as long as the stock has any value. RSUs are simpler and less risky; options offer more upside leverage but expire worthless if the strike price exceeds market price.
What is a 409A valuation and why do startups need one?
A 409A valuation is an independent appraisal of a private company's common stock fair market value, required by IRS Section 409A before issuing stock options. Setting strike prices below FMV creates immediate taxable income and penalties for employees. 409A valuations must be updated at least annually and after significant funding events.
How much equity should an early employee expect?
There are no rigid rules, but common benchmarks for pre-seed/seed stage: VP/C-suite joins: 0.5–2%; senior engineer or department head: 0.1–0.5%; mid-level hire: 0.01–0.1%. Equity should reflect risk taken (earlier = more equity), seniority, and market comp foregone. Total option pool at formation is typically 10–20% of fully diluted shares.
Related Terms
Vesting Schedule
The timeline over which an employee earns the right to exercise stock options or receive equity grants, typically over four years.
Cliff Vesting
A vesting provision where no equity vests until a minimum service period (the cliff) is completed, protecting against early departures.
Cap Table
A spreadsheet or software record showing all equity ownership in a company, including shares, options, warrants, and convertible instruments.
SAFE Note
A Simple Agreement for Future Equity — a startup financing instrument that converts to equity at a future priced round, without accruing interest or setting a maturity date.