What is Equity?
A Startup Employee's Guide
Equity means ownership in a company. But startup equity comes in many forms — each with different tax treatment, voting rights, and liquidation priority. Here is everything you need to know.
What is equity?
Equity is ownership in a company. When a startup gives you equity, it is giving you a slice of ownership that may be worth money if the company grows and has a liquidity event.
Unlike a salary, equity is not guaranteed — its value depends entirely on how the company performs. Early-stage startup equity can be worth millions, or zero.
Equity is structured differently depending on who holds it — founders, employees, and investors all receive different types, with different rights and tax treatment.
Key equity concepts
- Shares: units of ownership in the company
- Percentage: your ownership relative to all issued shares
- Strike price / exercise price: what you pay to buy options
- Fair market value (FMV): what the shares are worth today
- Vesting: earning your equity over time
- Dilution: your percentage decreasing as new shares are issued
- Liquidation preference: who gets paid first in an exit
- Fully diluted shares: all shares including unexercised options
Types of startup equity
Each equity type has different tax treatment, voting rights, and risk profile.
| Type | Who holds it | Voting |
|---|---|---|
| Common Stock | Founders, employees | Yes (usually) |
| Preferred Stock | Investors (VCs, angels) | Yes (sometimes) |
| ISOs (Incentive Stock Options) | Employees only | No (until exercised) |
| NSOs (Non-Qualified Stock Options) | Employees, contractors, advisors | No (until exercised) |
| RSAs (Restricted Stock Awards) | Founders, early employees | Yes (from day one) |
| RSUs (Restricted Stock Units) | Later-stage employees | No (until vested) |
How startup equity works
Grant
The company grants you options or shares. You receive a grant agreement specifying the type, quantity, strike price, and vesting schedule.
Vest
Equity vests over time — typically 4 years with a 1-year cliff. You earn ownership gradually through continued employment.
Exercise (options only)
For options, vesting does not give you shares — it gives you the right to buy them. You must exercise your options by paying the strike price.
Hold
After exercising, you hold private company stock. It has no immediate market value — you cannot sell it until a liquidity event.
Liquidity event
An IPO or acquisition creates a market for your shares. This is when equity may convert to real cash value.
Payout
In an exit, preferred shareholders are paid first (liquidation preference), then common stockholders receive what remains.
Dilution explained
Dilution happens when a company issues new shares. Your percentage ownership decreases — but the absolute value of your shares may still increase if the new round assigns a higher company valuation.
For example: you own 1% of a company worth $10M (your equity = $100K). The company raises a Series A at a $50M valuation, issuing new shares. You now own 0.8%, but the company is worth more — your equity may now be worth $400K even though your percentage is lower.
Anti-dilution provisions in preferred stock can protect investors. Employees typically do not have anti-dilution protection unless they negotiate for it.
Dilution example
| Stage | Your % | Co. value | Your value |
|---|---|---|---|
| Seed | 1.0% | $5M | $50K |
| Series A | 0.8% | $30M | $240K |
| Series B | 0.65% | $100M | $650K |
| Exit | 0.55% | $500M | $2.75M |
Illustrative example only. Assumes 1x liquidation preference and no preference stack.
Related equity guides
Vesting Guide
How vesting schedules work, cliffs, and acceleration clauses.
ISO Stock Options
ISO vs NSO, tax treatment, and exercise strategies.
RSA vs RSU
Restricted stock awards vs restricted stock units compared.
SAFE Notes
How SAFEs work and how they convert to equity.
409A Valuation
Why your startup needs a 409A and how to get one for $999.
How to Incorporate
Delaware C-Corp formation guide for startups.
Startup equity — frequently asked questions
What does equity mean at a startup?
Equity at a startup means ownership — a percentage of the company. It typically comes as common stock, stock options (ISOs or NSOs), restricted stock awards (RSAs), or restricted stock units (RSUs). The value depends on the company growing and eventually having a liquidity event like an IPO or acquisition.
What is the difference between common stock and preferred stock?
Common stock is held by founders and employees. Preferred stock is held by investors. Preferred stockholders usually have liquidation preferences — they get paid first in an exit. Common stockholders receive what remains after preferred holders are paid.
What is dilution in startup equity?
Dilution occurs when a company issues new shares, reducing the percentage ownership of existing shareholders. Your percentage can decrease even if your total shares stay the same. Whether dilution hurts you depends on whether the new round valued the company at a higher price.
How do I value my startup equity?
To value startup equity: (1) Find your percentage ownership or share count. (2) Get the current 409A valuation. (3) Estimate future exit value. (4) Account for liquidation preferences and future dilution. Most startup equity is worth zero — value it conservatively.
See Your Equity on OpenCap
Track your vesting schedule, model dilution scenarios, and understand the real value of your startup equity — free to start.