Equity Compensation

A small company loses the cash fight. When a large employer offers an engineer $60,000, a 45-person startup can put up $42,000. With no way to close that gap, the people a startup needs go wherever the number is higher.

The problem showed up most often the week after a final interview. A candidate the team had spent weeks convincing would write back that the offer was appreciated but the terms didn't work, and since there was nothing more to offer, the conversation ended there. The mirror-image problem existed too. Someone who joined early and built the product from nothing was earning roughly the same base salary as someone who arrived after the company was stable. Base salary is priced against the job someone is doing now, so it has no way to account for risk taken three years ago.

Equity compensation settled in as the answer to both at once. Instead of paying out of the cash a company has today, it pays in pieces of the company it might become. If the company's value grows tenfold, so does the piece, which means the people who came early and carried the risk get more, and the company hires today with money that isn't in the bank. What nobody can say is when that value arrives or how large it will be.

A contract states how many shares are promised, over what period, and under what conditions — and each time a condition is met, the promised shares become that person's.

The contract settles three things.

1. Quantity, written as a share count: 3,000 shares, 5,000 shares. Percentages are rare, because future funding rounds increase the total share count, so the same number of shares represents a smaller slice of the company over time.
2. Duration. The shares aren't handed over at once. Vesting releases them gradually as the person stays employed. Put 4,000 shares on a four-year schedule and about 83 shares become theirs each month; leave after two years and 2,000 shares go with them. A cliff usually sits on top of that. With a one-year cliff, someone who leaves at eleven months takes nothing, while someone who reaches twelve months has a full year's worth vest at that moment.
3. Form. Either the person gets the right to buy shares at a fixed price, or they get the shares themselves once conditions are met. The first is a stock option and the second is an RSU. The comparison table below covers the difference.

The moment the value becomes real is a separate thing entirely. Shares in a private company have no market to sell into, so vested shares still can't be turned into cash. That happens when the company lists its shares through an initial public offering (IPO), when it gets acquired, or when an investor opens a round to buy shares from existing holders. Five to ten years usually pass between joining and that moment, and if the company shuts down first the value is zero.

The most frequent setting is a hiring offer. Base salary, bonus, and equity go on one page, and the candidate compares the sum — the total rewards figure — against other offers. The equity line there is an assumption, not a settled number. Priced at the $6 per share set in the last funding round, 3,000 shares reads as $18,000; if the next round prices shares at $15, the same 3,000 shares reads as $45,000.

It's also used to keep people who already joined. With a four-year vesting schedule, someone in their second year hasn't received half of what was promised, and leaving now means leaving that half behind. Many companies grant a fresh block to people who finish the full four years.

On the company's side, every one of these promises accumulates on the capitalization table (cap table), the record of who owns how much. A portion is reserved there for employee grants and drawn down with each hire. Reserving a generous portion dilutes the founders and the investors by exactly that much, which is why the size of that reserve is negotiated alongside funding terms.

"Cash is a bit under the market midpoint, but we added 3,000 shares."

The offer covers a lower salary with equity.

"Four-year vesting with a one-year cliff."

Leave before the first year is out and the promised shares never existed.

"We can take the grants for these new hires out of the pool, right?"

Checking whether the reserved employee portion still has room in it.

Pagedeck, just after its Series A, decided to hire three engineers. The salary band Grace set came in more than $7,500 below what large employers pay, so she worked with Mia on a plan to cover the difference in shares. They set a baseline grant per level and sent candidates an option to take a larger grant in exchange for less cash.

Two of the three took the equity-heavy version and one took the cash. The person who took cash had a housing loan to service, which made this month's number matter more than a share of something five years out. Grace changed the offer template after hearing that. Instead of one line stating a dollar figure for equity, offers now show which share price the figure was calculated from and how much vests on what schedule.

The most common mistake is reading share count times share price as money already in hand. An offer says "$18,000 in equity" on one line, so it naturally gets added next to the salary. But that figure is just the price from the last funding round multiplied out, and that is a price the company has never actually sold at. Someone who takes $7,500 off their salary on the strength of that number simply loses the difference if the company never sells at that price.

Assuming a percentage stays fixed is the other one. A contract that says 0.5 percent reads like it will always be 0.5 percent. But each new funding round issues new shares, the total count rises, and a share count that stays the same becomes a smaller percentage. Going from 0.5 percent to 0.3 percent across two more rounds is unremarkable. Since the amount can still grow if the company's value rose faster than the dilution, reading a falling percentage as a loss leads to the wrong conclusion.