Startup Equity

An umbrella term for ownership stakes in a private company — spanning founder/investor instruments like SAFEs and convertible notes as well as employee equity compensation like options and RSUs.

Startup equity is a broad umbrella covering the various ways ownership in a private company gets allocated and represented — from the instruments investors use to fund the company (SAFE notes, convertible notes, preferred stock) to the instruments employees receive as compensation (stock options, RSUs, phantom equity). All of these ultimately reference the same underlying pool of company ownership, tracked on the cap table, but they carry very different rights, risk profiles, and payout mechanics.

For employees evaluating an offer, understanding where you sit in this structure matters more than the headline number of shares or percentage you're offered. Investors typically hold preferred stock with liquidation preferences — meaning they get paid back before common stockholders (including employees) in an acquisition or wind-down. A company can sell for a number that sounds like a win on paper and still leave employee equity worth very little, because preferred investors are paid out first. Asking about the liquidation stack, not just your share count, is the more useful question.

Startup equity value is also inherently illiquid and uncertain until an exit event (acquisition, IPO, or a secondary sale) actually happens. Unlike a public company's RSUs, which convert to tradeable stock on a known schedule, private company equity is a bet on a future event that may never occur, may occur at a lower valuation than hoped, or may be diluted significantly by future funding rounds before it does. Evaluating a startup offer means weighing this uncertainty against the (often lower) cash compensation being offered in its place.

The Startup Equity Stack, Simplified

  • SAFE / convertible note: an early-stage instrument that converts into equity at a future funding round, rather than being priced immediately.
  • Preferred stock: what most investors hold — comes with a liquidation preference and other protective rights common stock doesn't have.
  • Common stock: what founders and, via options/RSUs, employees typically end up holding — lowest priority in a payout, but also the largest share of the company by count.
  • Cap table: the master ledger of who owns what, across all of the above — the single source of truth for how a payout would actually be distributed.

Questions Worth Asking Before Valuing Your Equity

  • How much total capital has been raised, and on what liquidation preference terms?
  • What is the fully diluted share count — is my percentage calculated before or after upcoming dilution (like an option pool expansion)?
  • When was the last 409A valuation, and how does it compare to the last preferred round price?
  • What's the vesting schedule, and is there a cliff?

Example

A candidate is offered 0.15% equity at a startup that just raised a Series B at a $200M valuation, alongside a below-market base salary. Before accepting, she asks how much total preferred capital has been raised (roughly $35M), what liquidation preference terms apply (1x non-participating, standard), and how many shares are fully diluted. This lets her roughly model that the company would need to sell for meaningfully more than the total raised before her common shares are worth anything beyond a token amount — informing how much weight to put on the equity number versus negotiating harder on cash.