Evaluating an equity offer

Translate the offer into a model. You need numbers HR sometimes hesitates to give — ask anyway.

Inputs to demand: options (or RSUs) granted; total fully diluted shares; strike / 409A; last preferred price and post-money; preference terms at a high level (1× non-participating is common); runway; PTE window and early-exercise policy.

The big idea

ownership = grant_shares / fully_diluted_shares

Then multiply by (1 − d) per expected round, or assume 30–50% combined dilution from a Series A hire to exit for early employees — better if you sketch the rounds.

Exit proceeds for common come after debt and liquidation preferences are paid. Your payout is roughly:

your_shares / common_shares_participating_in_residual × residual_value

Or, with one preferred class that is 1× non-participating: preferred takes min(preference, as-converted share of proceeds), then common shares the rest.

Walking through startup vs big-tech

Startup: $160k salary + 50,000 options. FD shares = 25,000,000 → ownership = 50,000 / 25,000,000 = 0.20%. Strike $1.50. Assume you vest fully, dilute to 0.12% by exit.

Exercise cost = 50,000 × $1.50 = $75,000.

At low exits, preferences may zero common entirely — the $50M row can be $0 even before strike. Always run a preference case.

Big tech: $180k salary + $400k RSUs over 4 years (~$100k/year), liquid, taxed as they vest. Four-year equity ≈ $400k with high confidence.

The startup offer wins on paper only in the fat-tail outcomes, and only if you actually vest, the company does not recap you away, and you can fund exercise and taxes. Match that against risk tolerance, runway and role quality.

Another offer: 80,000 options, 40,000,000 FD shares, strike $2.00, last preferred $8.00, 1× non-participating preferred owning 40% of FD, two more rounds selling 15% each without your pro-rata.

Ownership now = 80,000 / 40,000,000 = 0.20%
After two rounds ≈ 0.20% × 0.85 × 0.85 = 0.1445%
Exercise cost = 80,000 × $2 = $160,000

At a $500M exit, preferred takes its 1× preference dollars first (you need the invested-capital stack — suppose $80M prefs outstanding). Rebuild the waterfall from the liquidation-preferences page for an offer you care about. The habit is % → dilution → cost to exercise → waterfall → tax.

When the offer is real, skim the grant notice and plan for grant date, exercise price, vest schedule, ISO vs NSO, termination, change-of-control and early exercise. If the paper contradicts the recruiter's email, the paper wins.

Common mistakes

• Quoting outstanding-only %. Always ask for fully diluted.
• Ignoring preferences. A $50M "exit" can pay common nothing.
• Comparing peak paper value to four years of liquid RSUs as if they had the same risk.
• Skipping the 90-day exercise window in the comparison.

Check yourself

50,000 options, 25,000,000 FD shares. What is ownership today?

50,000 / 25,000,000 = 0.20%.

You dilute from 0.20% to 0.12% and the common residual is $200M. Rough gross before exercise and tax?

0.12% × $200M = $240,000.

Key takeaways

• Evaluate offers as shares / FD, diluted %, and payouts under multiple exits after preferences.
• Exercise cost is real cash; at low exits you can be underwater or zeroed by prefs.
• Compare expected value and risk to liquid RSU packages — not to the fantasy headline.
• The grant paperwork beats the email.

Further learning

The Holloway Guide to Equity CompensationStock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for both employees and managers.Holloway

Index Ventures OptionPlanEntrepreneurs know how important stock options are for hiring and retaining the best talent.Index Ventures

For negotiation framing, see offers and negotiation.