Questions to Ask About Equity
Questions to ask before accepting an equity grant at a private company: how many shares and out of how many, what exercising will cost you, what tax it triggers, and what happens to your stake in an acquisition. Written for candidates and early employees, not for investors.
The questions
Open any question for the note
What type of equity is this: incentive options, non-qualified options, or RSUs?
Why ask it
Each is taxed at a different moment and under different rules, so the label decides most of the rest of the conversation. If nobody at the company can say which you are getting, the plan documents probably have not been looked at in a while.
How many shares is the grant, and how many shares are outstanding fully diluted?
Why ask it
A share count on its own means nothing. Fully diluted includes the option pool, warrants, and convertible notes, and companies sometimes quote a smaller denominator that makes your slice look bigger than it is.
What percentage of the company does that work out to?
Why ask it
Asking makes someone do the division out loud. A refusal is common and still informative: if the denominator is confidential, you cannot value the grant, and the offer should be judged on salary.
What is the strike price, and when was the last 409A valuation?
Why ask it
The strike should reflect fair market value at the most recent 409A. A valuation more than a year old, or one that predates a funding round, means a new price is likely coming and your economics may shift.
What was the price per share in the most recent funding round?
Why ask it
Preferred price and 409A price are different numbers, often by a wide margin, and the gap is where impressive-sounding valuations come from. Holding both figures side by side tells you what the option is worth today.
What is the vesting schedule, and is there a cliff?
Why ask it
Four years with a one-year cliff is common but far from universal. Watch for back-weighted schedules that push most vesting into years three and four, and for cliffs longer than twelve months.
If I leave, how long do I have to exercise what has vested?
Why ask it
Ninety days is the default and often means abandoning options you cannot afford to buy. Companies with extended windows of several years usually volunteer it, so ask directly if they have not.
What would it cost me in cash to exercise everything once I am fully vested?
Why ask it
Shares multiplied by strike price is a real bill you may face on short notice. People regularly discover the cost exceeds their savings and forfeit options they spent four years earning.
Would exercising create a tax bill before I can sell anything?
Why ask it
With non-qualified options, and with incentive options through the alternative minimum tax, the paper gain can be taxable while the stock stays illiquid. This is the most common way employees lose actual money on startup equity.
Can I exercise early, and would you support an 83(b) election?
Why ask it
Early exercise with a timely 83(b) filing starts the capital gains clock while the spread is still small. The answer also shows whether the company has thought about employee outcomes or only its own paperwork.
How much has been raised in total, and what is the liquidation preference?
Why ask it
Invested capital is roughly what gets repaid before common stock receives anything. Compare it with the exit price you are quietly imagining, because a respectable acquisition can still return nothing to employees.
Do any investors have participating preferred, or a multiple on their preference?
Why ask it
Participating preferred means investors take their money back and then share the remainder as well. A 2x or 3x preference has a similar effect, and neither appears anywhere in your offer letter.
How big is the unallocated option pool, and how much dilution do you expect in the next round?
Why ask it
Granting from the pool dilutes existing holders, and new rounds usually require topping it up again. Anyone who tracks the cap table can answer this quickly, which tells you something in itself.
Does any of my equity accelerate if the company is acquired?
Why ask it
Single trigger, double trigger, or nothing. With no acceleration, an acquirer can end your role soon after closing and the unvested portion simply disappears.
What would I receive if the company sold for less than investors are owed?
Why ask it
This separates the informed from the hopeful. Below the preference stack, common shareholders can receive nothing at all while the deal is still announced as a good outcome.
Has the company ever repriced options or run a secondary sale?
Why ask it
Both leave a trail and both are revealing. A repricing means the shares fell below people's strike prices, while a secondary shows a real price an outside buyer actually paid.
Is there any route for employees to sell shares before an exit, and has anyone done it?
Why ask it
Some companies run periodic tender offers, others forbid transfers outright. Whether a colleague has actually sold matters far more than whether the policy permits it in principle.
What information will I get as a shareholder after I leave?
Why ask it
Former employees are often startled by the silence. You may have to make an expensive exercise decision years later with no current financials, so establish now what you are entitled to see.
Can I read the stock plan and my grant agreement before I accept?
Why ask it
The transfer restrictions, repurchase rights, and exercise window live in those documents, not in the summary you were emailed. Reluctance to share them before you sign is worth taking seriously.
If this equity turned out to be worth nothing, would I still want this job at this salary?
Why ask it
A question for yourself rather than the company. If the answer is no, you are accepting a pay cut in exchange for a lottery ticket, which is a fine trade to make deliberately and a poor one to make by accident.
How to use these questions
Practical guidance for the conversation itself
Handling the conversation
Ask in writing, once
Send the numeric questions as a short email rather than raising them live. You get considered answers, a written record, and you avoid the recruiter's habit of quoting a share count with no denominator.
Value the offer twice
Once with the equity at zero and once at the last round price. If the first number is not acceptable on its own, you are relying on an outcome you do not control.
Negotiate the terms, not just the amount
An extended post-termination exercise window, early exercise rights, or double-trigger acceleration can be worth more than extra shares, and they are often easier to grant than a bigger number.
Pay a professional before you exercise
An hour with an accountant who handles equity compensation costs less than the alternative minimum tax surprise that follows a large exercise. Do it in the year you plan to exercise, not the following April.
What tends to go wrong
Comparing offers by share count
Ten thousand shares at one company and a hundred thousand at another are not comparable without the fully diluted totals. Convert both to percentages before you compare anything.
Believing the headline valuation
A valuation quoted from a preferred round assumes the terms attached to that round. Common shares sit behind those terms, which is exactly why the 409A price is lower.
Forgetting refreshers exist
Your initial grant stops vesting after four years. Ask when refresh grants are considered and on what basis, because a company without a refresh practice quietly cuts your pay in year five.
Letting the window close
The exercise deadline after leaving is short and unforgiving. Put the date in a calendar the week you resign, along with the cash the exercise would require.
A short version if you only get one exchange
Four questions that carry most of the value
- 1How many shares, out of how many fully diluted?
- 2What is the strike price and the date of the last 409A?
- 3How much has been raised, and what is the liquidation preference?
- 4How long do I have to exercise after leaving?