Curated by: Rubric Advisors
Equity Compensation
Understanding Startup Offers
This guide explains how startup equity compensation works, covering stock option types, tax implications, and key factors to evaluate when assessing startup job offers.
Understanding Startup Offers
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Understanding Startup Stock Options
- Stock option gives right to purchase company shares at predetermined strike price
- Options vest over time following schedule outlined in stock option agreement
- Pre-tax value equals difference between company share price and strike price
- Value only realized through IPO, acquisition, or company-facilitated liquidity event
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Understanding Startup Stock Options
- Stock option gives right to purchase company shares at predetermined strike price
- Options vest over time following schedule outlined in stock option agreement
- Pre-tax value equals difference between company share price and strike price
- Value only realized through IPO, acquisition, or company-facilitated liquidity event
Common Equity Types
- ISOs available only to employees, may trigger Alternative Minimum Tax
- NSOs granted to employees, directors, consultants; taxed as ordinary income
- RSUs becoming more common for private companies as compensation
- Early exercise may reduce tax exposure if done when bargain element low
Tax Implications Overview
- NSOs taxed at ordinary income rates when exercised or liquidity occurs
- ISOs may trigger AMT at exercise, qualified for capital gains treatment
- Long-term capital gains rates apply if holding periods are met
- Consult tax advisor before exercising due to complexity of calculations
Exercise Timing Considerations
- Early exercise reduces tax exposure but requires upfront capital investment
- Options expire ten years from grant date per tax rules
- Traditional post-employment exercise window only ninety days after termination
- ISOs convert to NSOs after ninety days post-employment regardless
Evaluating Your Offer
- Ask for option type, quantity, vesting terms, and strike price details
- Request latest 409a valuation, preferred price, and fully diluted share count
- Inquire about exercise window, early exercise rights, and secondary market sales
- Consider company revenue status, runway, and liquidation preference structures
Key Takeaways
- Request complete equity information before accepting startup offer to make informed decision
- Understand tax implications of different option types and exercise timing strategies
- Consider early exercise if optimistic about company to minimize tax exposure
- Consult tax advisor for personalized strategy given complexity of equity compensation
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