Startup Equity 101
58 comments
·June 5, 2025TuringNYC
Eridrus
I think the main takeaway from any startup stock advice is what this article starts with: you need to pick a good startup.
The details all matter, but they all matter far less than that fact.
People shouldn't lump all startups together and should have a long think about whether they actually believe in the startup they're joining.
SkyPuncher
Correct, the 409a is only going to show you the maximum possible value.
Realistically, investors get their money back first, so 50% (picking an arbiter number) of that valuation value won’t ever been seen by employees. Then it gets even worse with multipliers and preferences.
TuringNYC
>> Then it gets even worse with multipliers and preferences.
Yeah, and most companies wont share the cap table with you, so you do not know the multipliers and preferences. Its like you get $(409a/X) in value, but you dont know what X is and they wont tell you -- but you still have to buy in or lose everything (you typically have to exercise all options upon departure, or lose it!)
Then, once you exercise, you wait for 5yrs to 10yrs for a liquidity event, if the company even survives that long. My annual discount rate would be like 10% or higher.
FreakLegion
It's the preference and its multiplier that gives investors their money back first. These aren't different things, they're one thing, and generally only matter if the company exits for less than the valuation the investors invested at. The exception to this is if any investors have a liquidation preference > 1x (you should avoid companies where this is the case).
Preferences also don't stack with the rest of a liquidity event. E.g. say an investor puts in $100m at a post-money of $1b with a 1x liquidation preference. If the shares go for $900m, the investor gets back their $100m, and that's all. They don't lose money, but they don't make money either. If the shares go at a $1.1b valuation, the investor converts their preferred shares to common shares like everyone else has. The investor doesn't get their money back first and sell more shares on top of that. It's either/or.
t0mas88
Whether it's and vs either/or is the difference between a liquidation preference or a participating liquidation preference. And indeed the more than 1x cases are also problematic for common stock holders.
But I do assume the 409A for the fair marker value of the common stock takes these into account? Not a US tax expert :-)
null
CPLX
> the 409a is only going to show you the maximum possible value
While the points about uncertainty of options are quite accurate, this detail isn’t really true.
For the most part a 409a is the lowest reasonable valuation the company could talk the auditors into accepting. The lower it is the less tax paid and everyone knows that.
bcyn
You're correct about valuation, but the parent post was meant to address "how much liquid dollars should you expect to receive vs. 409a." You are likely to receive less in most cases (read: unless there are wildly successful public liquidity events) due to liquidation preferences.
fragmede
> spending today-dollars and exercising options for the right to sell stock 5 or 10yrs into the future almost never works out
There are places that will, no recourse, loan you the money to exercise and pay the tax, in exchange for some percentage of the profit, provided it's for a company they like. Meaning, they lend you the money, but if there's no IPO/liquidity event, you don't owe them any money. 70% (say) of a big number may not be as big as 100% of a big number, but 100% of zero is $0. Which isn't financial advice, just a bit of math.
ipaddr
If you find a company they accept you should keep your shares if possible. Most companies will not be accepted for good reason.
TuringNYC
>> There are places that will, no recourse, loan you the money to exercise and pay the tax, in exchange for some percentage of the profit, provided it's for a company they like.
Yes they do this, but only for select companies. They wont touch most startup equity.
vrosas
One thing I've learned working for startups is if you're working for a founder who's already had a previous successful startup exit(s), two things are true:
1. the founder already has generational wealth and this current company means practically nothing to them.
2. they've already learned every trick in the book to keep the company's value in their own pocket and out of the hands of their employees.
throwawaythekey
The first time founders I had couldn't keep 100% of the equity out of the VCs pockets, so YMMV.
bravesoul2
A special case of early stage share options aren't worth shit.
dakiol
Unless you work in SV, I think the advice for the rest of us is: take equity/stocks/options as a lottery ticket. Very unlikely that you’ll cash something, therefore base compensation is king.
ptero
It's the same thing in the SV. Unless the company is doing liquidity events the early, but post-founder equity is unlikely to pan out for employees.
And it can motivate employees to stay at the company way beyond what's good for them, as leaving the company means either abandoning your equity or exercising your options and paying real money for a very risky and illiquid asset. My 2c.
ipaddr
The problem becomes they (the company) talks/treats it as money paid and expects a lower salary (or additional passion like being happy to wake up at 4am to deal with an issue randomly) in exchange. They also want people who buy into the lie.
ghaff
If you work for a moderately large company, it probably won't go to zero (though it could so you may want to hedge your bets). Not sure what SV specifically has to to do with it. I agree in general about focusing on cash on the barrel.
PopAlongKid
>AMT is a pretty complicated calculation
Actually, it is not. It only seems complicated because it is backed into after calculating the regular tax when you use the IRS tax forms. In other words, first you calculate ordinary tax, then you make plus/minus adjustments for the things that are different under AMT.
If there was a Form 1040-AMT which simply calculated the AMT the same way we calculate regular tax, you would see that it is actually simpler than ordinary tax. (depreciation is simpler, itemized deductions are simpler, personal exemptions for kids go away, the standard deduction is much higher, and so on).
If we did it the other way around - calculate AMT first, then make adjustments to back into ordinary tax, then you'd say ordinary tax is complicated.
Most people don't understand that under the TCJA temporary provisions enacted in 2017 and expiring in 2025, most of the changes just involved moving AMT provisions into the ordinary tax calculation.
hn_throwaway_99
I agree AMT itself is not a particularly complicated calculation. But I don't think that was really the point of that quoted statement. The complicated part is figuring out if and when AMT applies to you, and, essentially, for how long it can raise your taxes.
As you said, the tax code requires you to calculate your taxes twice - once using the "normal" rules, and another time using the AMT rules, and you pay whichever is higher. So, depending on your individual circumstances, it's non-trivial to know if AMT will apply to you when making particular money movements during the year. Also, if you have to pay AMT in year one, but then in year two the calculated AMT is below your normal tax calculation, you get a credit for the excess amount (i.e. amount over the normal tax from year 1) up to the delta between the normal tax and the AMT amount. In other words, AMT can often times just cause tax to be paid earlier, but the total amount of money (over years), ends up being the same. Of course, the time value of money comes into play - paying a tax earlier is losing money.
So, point being, there are complicated considerations to take into account.
takklz
Just something I’ve seen lately at all of the startups I’ve worked at…
The founders, early investors, etc., will cash out way before you do and you will not have the same ability to sell as they did. I’ve seen it tear companies apart. YMMV
fluorinerocket
Yes in my experience they made out like bandits while employees were locked out for a while after IPO.
strangelove026
At a startup where I've exercised 75% of my options because the company seems to be going to a direction where maybe it's public in a little while (and I've got some other investments which prevent me from being over-invested here). I also want to dump all of the shares as soon as they go public and I'm able (employee sale window-wise) as I anticipate that there'll be a pop followed by a drop. This is all anecdotal given what I've observed over the years. As a result of exercising everything early (back into the S&P) on I'll be able to get long-term capital gains which is a motivator.
So that all said I agree with the author's take of "maybe" exercising before an IPO is worth it. This is my first time in a role where I've actually got pre-IPO Options. My last role I joined right before the company went public. The agreement there was that I'll get x$ worth of shares where the quantity is determined by the price 3 months or so after the IPO. They went from >$100 per share to like $30 a share which coincided with when I was assigned my shares lol. Oh well.
dmitrygr
> I anticipate that there'll be a pop followed by a drop
You'll miss both. A 6-month lockup is typical. Sorry, do not pass go, do not collect on the "pop"
fluorinerocket
I've concluded that options are a scam after owning them in many companies. It's never amounted to anything
duped
We still get paid obscene salaries fucking around with the bonus of a shot to make even more obscene money.
For all the complaining about options there's little acknowledgement of how little startup work contributes to society relative to the money we rake in from people willing to fund it.
ipaddr
Startup positions vs regular positions often pay much lower. Obscene salaries and startups (which are mostly bootstrapped) don't go hand in hand.
Startup founder who raises gets to play with obscene money.
If you come across obscene money startup jobs share them. Tons of unemployed developers lurking who would take % of obscene.
bravesoul2
Obscene salary is almost an oxymoron.
Maybe CEOs get that. Most people who get obscene money get it from some kind of investment.
bravesoul2
Sometimes they are not. I think for post startup companies it is somewhat possible to put a value on ESOP then risk adjust for you losing the job, leaving etc. I have been paid out but think bonus cash for a holiday money not life changing. I kept it in post IPO and got more but then anyone could have done that post IPO.
lotsofpulp
Options at non publicly traded companies are worth zero. Or should be valued the same as a lottery ticket.
hamburglar
What you should understand is that they are a longshot. Like, worse than 10 to 1. I’ve gotten lucky and made a truckload of money on them, and know many people who have done the same. I’ve also had them be an utter waste of money. It’s very much a gamble and it’s unlikely to pay off. This doesn’t make it a scam.
fluorinerocket
A lottery ticket is legal but expected value is negative. Same with casino games. Sure it's legal and sometimes people win but in my book it's a scam, even if not technically one.
What I particularly resent is the pretence from companies that a lower salary can be compensated by options. Such BS
bravesoul2
No need to resent. Just don't take the job. There are jobs that pay the low salary and no magic beans either!
Oarch
I wonder how much longer this logic can hold. I have equity in the startup I'm at. It's a very complex platform and in a niche / emerging market.
Yet could AI feasibly generate a similar (or better) app in a few years? It used to be unthinkable. Now, I'm not so sure.
The development cost of software could feasibly drop to negligible levels. It no longer seems like sci-fi, more and more it seems like the inevitable direction of travel.
What happens to my equity? Welp. Might not be great news.
Aurornis
There’s more to a successful business than masking an app.
A lot of acquisitions are made by companies that could re-build the acquired product themselves. They’re buying the business, brand, and customer base, not the app.
ldjkfkdsjnv
This isnt true, nobody knows what will happen when you can very cheaply replicate software. The sales etc are valuable, but when the cost of producing the product goes to zero, weird things will happen.
lurk2
This is magical thinking. If you could clone Facebook tomorrow your platform wouldn’t be worth anything without established business processes, network effects, and goodwill.
henry2023
Who says the cost of producing software is going to zero?
haxton
Always treat startup equity as 0 until you've sold it.
edoceo
Correct. The motivation for equity comp should be more of "I want to change the world" than the "I want big money". The odds are very against it.
Here's some older stats (2017) https://berkonomics.com/?p=2899
But searching, you'll find loads more studies on startup/angel/seed.
It's like, optimistically, 1/20
Oarch
Good advice! Thankfully I do want to change the world (for the better I hasten to add) and so far so good.
ldjkfkdsjnv
One thing no one told me:
When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60.
If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing
Its all about control.
If you are an employee, either go for a company thats a few years from IPO, a generational startup, or consider the equity worth 0.
sdfasdfas134
This is true. Once you lose control, the VCs will start to appoint their buddies in Atherton in as CEOs, VPs, SVPs, Chiefs of Staff, etc. Eventually you get pushed out. You wont even know what half the people do.
Or you get impossible performance plans placed on you (that their buddies wont get) which will mean you either achieve the impossible or you lose your founder stock.
If you are giving up voting control, ensure to get a secondary sale to sell some of your stock (5-10mil) so you're set for life. Then you can let the VCs burn the company down...if you really want.
leonhard
what’s a generational startup?
shishy
They probably meant a "once in a generation" startup like a unicorn
ldjkfkdsjnv
cursor
ipaddr
Things are moving fast. Not sure how solid they will be next year. Bigger players want that marketspace.
bradlys
> If you join an early stage company and you have a decent amount of excess capital, early exercise everything and file an 83(b) election. The reasons for doing this: starting the QSBS clock, starting the long term capital gains clock, not needing to worry about your options expiring.
I don't think this is ever worth the risk. If you're even thinking of doing this for QSBS purposes... the amount of tax you'd incur is way too much. Even if you have "excess" capital, you may as well put the $50k+ into a shitcoin and you'd see a much quicker return (or lack thereof). For most people where $50-100k+ in tax is a trivial amount to worry about, why are you joining as an employee? Clearly you've made a lot of money in the past... Just be a founder instead. You're taking on just as much risk.
> If you join an early stage company and you don’t have much capital, don’t do anything just yet. Try to negotiate for an extended post termination exercise window.
For 99%+ of people joining startups as regular employees, this is what you should be doing. If you leave the company before it becomes liquid, exercising the shares can be super risky. We've been waiting on several very well known companies to go public for a long time now. Who knows when they'll go public. At that point, you've spent possibly hundreds of thousands to exercise your shares, hundreds of thousands more in taxes... and they might be worthless and you can maybe deduct $3,000/yr for who knows how long.
> If you can get liquidity at some point, and you think liquidity would improve your life, you probably should.
It is unlikely though.
IMO, until tax law (and especially market conditions) changes - I do not believe in joining any private company unless you are convinced they will IPO within the year. This is assuming you care about compensation significantly.
>> So what is your equity really worth?... >> ... >> The difference between the most recent FMV (409A) valuation and your exercise >> price. ... >> The difference between the Preferred Price and your exercise price....
The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.)
If you dont have that, the price is purely theoretical. Further, if you cannot see the cap table and the preference overhang -- and most startups wont let you see it -- then you have no idea what the real price is regardeless of a theoretical 409A value.
Even if you can see the cap table, spending today-dollars and exercising options for the right to sell stock 5 or 10yrs into the future almost never works out -- the cone of uncertainty across 5 or 10yrs is far too great. The better move would probably to be to use that money to purchase long-dated LEAP call options on the Nasdaq Composite