Understanding startup equity

An equity grant is usually stock options: the right to buy a fixed number of shares at a fixed price (the strike price), not a cash amount or a guaranteed payout. The strike price is typically set at the current 409A valuation — the company's independently assessed value per share, which is usually lower than what investors pay in a funding round.

The standard schedule is four years, with a one-year cliff: if you leave before your first anniversary, you typically vest nothing. After the cliff, the first 25% vests at once, and the remainder vests monthly or quarterly for the following three years. This is worth confirming explicitly — some companies vary it.

Say you're granted 20,000 options with a $1.40 strike price. Exercising all of them costs 20,000 × $1.40 = $28,000. If the company's shares are later valued at, say, $14.60 (a later round or an exit), the gross value before that cost and before tax would be 20,000 × $14.60 = $292,000 — with the $28,000 exercise cost and any applicable tax subtracted from that. The number on your offer letter is the gross figure, not what lands in your account.

Every time the company raises a new funding round, it issues new shares to investors — which increases the total share count and reduces everyone's percentage ownership, including yours, even though your own share count is unchanged. This is normal and not a red flag on its own; it's simply why your equity's real value depends heavily on how many future rounds the company raises and at what valuation.