Evaluate equity by identifying the award, converting its share count into a percentage of the company, and checking the price, vesting, liquidity, and tax terms that determine whether it could become money you can use. A grant count or headline company valuation is not enough to establish what an award is worth. This guide focuses on U.S. employee equity; your plan documents, grant agreement, and circumstances determine the terms and tax treatment that apply to you.
Start by identifying what the company is offering
“Equity” can mean different things. Ask for the exact instrument, because an option to buy shares is not the same as receiving shares or a promise to deliver shares later.
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- Stock options: A right to buy shares at a set exercise, or strike, price, subject to the option terms. Options may be incentive stock options (ISOs) or nonstatutory/nonqualified stock options (NSOs).
- Restricted stock: Shares granted subject to conditions, commonly including vesting. The timing of ownership and tax choices differs from options.
- Restricted stock units (RSUs): A promise to deliver shares or their value when specified conditions are met. RSUs are not the same as owning shares on the grant date.
- Other arrangements: An employee stock purchase plan or another instrument has its own rules; do not assume it works like an option grant.
Request the equity plan and your proposed or issued grant agreement, along with any offer-letter language describing the award. Ask whether the grant has been approved, when approval is expected, and what date will determine the strike price. A promise in an offer letter and an approved grant may be separate steps.
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A number of options or shares has little meaning without the share-count denominator. Ask for the company’s fully diluted share count used to calculate your grant percentage, and calculate the percentage on that same basis:
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Grant percentage = your options or shares ÷ the stated fully diluted share count × 100
For example, 20,000 options divided by a hypothetical 10 million fully diluted shares equals 0.2%. That is an arithmetic illustration, not a valuation or prediction of what those options will be worth.
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Ask what the denominator includes: issued shares, outstanding options, shares reserved in the option pool, and convertible securities such as SAFEs or notes. Also ask whether a planned financing or increase to the option pool would change it. A post-money SAFE’s relationship to an existing or newly increased option pool can affect capitalization calculations; the company’s calculation should specify how those items are treated.
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For options, get the strike price and the date of the latest 409A valuation of common stock. Also ask for the latest preferred financing price and its date. These figures can differ: preferred shares sold to investors may carry rights that common shares do not, so a preferred-share price is not a guaranteed value or sale price for employee common shares.
To estimate the cash needed to exercise vested options, multiply the number of vested options you plan to exercise by the strike price. This is an exercise outlay before taxes or fees, not the grant’s market value. Exercising also turns an option into shares and can expose you to additional financial and tax risks; get advice about the specific award before acting.
Read the vesting and departure terms
Vesting determines when an award is earned under its terms. Confirm the vesting start date, any cliff, the schedule after the cliff, and what happens to unvested awards if your employment ends. Do not rely on a customary schedule or exercise window when the grant documents can set different terms.
For options, ask how long you have to exercise vested options after leaving. Also ask whether the ISO tax classification could change after employment ends. If relevant to the award, confirm whether early exercise before vesting is permitted. Review any acceleration terms that might apply on an acquisition or termination, and check the exact conditions for them in the documents.
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Check how the award could become liquid
A private-company equity grant is not cash compensation. A potential sale generally depends on the award vesting and, for options, being exercised as applicable; a liquidity event must occur, and you must be permitted to sell. An IPO, acquisition, tender offer, or other secondary transaction could provide a route to liquidity, but none is assured.
Ask whether employees have previously been allowed to sell in a tender offer or secondary transaction, whether the company has communicated a potential liquidity path, and what restrictions would apply. For public-company awards, confirm trading restrictions and when shares are delivered or settled. A paper valuation or the last preferred financing price does not itself mean you can sell common shares at that price.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Compare offers on the same terms
Keep guaranteed cash separate from contingent equity. Compare each offer using the same information, and do not describe a headline valuation or estimated grant value as cash compensation.
| Compare | What to record | Why it matters |
|---|---|---|
| Cash certainty | Base salary, bonus terms, and sign-on pay | Separates contractual cash terms from equity whose value and liquidity are uncertain. |
| Instrument and ownership | Award type, grant count, fully diluted share count, and percentage | Shows what the award is and provides a denominator for interpreting its scale. |
| Price and outlay | Strike price, common-stock 409A value and date, preferred financing price and date, and estimated exercise cost | Identifies the option purchase price and the potential upfront cash requirement. |
| Vesting and retention | Vesting start, cliff, cadence, acceleration terms, termination treatment, and option exercise window | Shows when the award is earned and what may happen if employment ends. |
| Capital structure | Share class, preferred rights, convertible securities, option pool, and potential dilution | Financing and share-class terms can affect ownership and what common shareholders receive. |
| Liquidity and tax | Possible sale route and restrictions, award tax treatment, and withholding expectations | Separates paper value from a possible sale and flags tax consequences to investigate. |
If you build scenarios, make the assumptions visible: ownership percentage, future dilution, exit value, liquidation preferences and other share rights, taxes, strike cost, vesting, and whether a sale is possible. There is no universal probability-of-success or discount factor that can establish the value of a particular offer from these inputs alone.
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U.S. federal tax treatment varies by award and circumstances; state taxes and the specific plan can matter as well. The IRS distinguishes statutory options, including ISOs and employee stock purchase plan options, from nonstatutory options. IRS Topic No. 427 says statutory options generally do not create gross income at grant or exercise, but exercising an ISO may create alternative minimum tax exposure: “You may be subject to alternative minimum tax in the year you exercise an ISO.”
RSUs generally produce ordinary income when shares are delivered or settled, or at vesting depending on the terms. Restricted stock may make an 83(b) election relevant; the election is generally due no later than 30 days after the stock is acquired, and eligibility and consequences depend on the award and tax rules. Before exercising or filing an election, ask a tax professional to review the actual documents and your situation.
Quick Recap
Questions to send the employer
- What instrument is being offered, and is the grant approved or still proposed?
- How many shares or options are included, and what fully diluted share count and ownership percentage does the company use?
- What are the strike price and date of the latest common-stock 409A valuation? What was the latest preferred financing price, and when did it occur?
- What are the vesting start date, cliff, schedule, and acceleration terms?
- If employment ends, when does vesting stop, and how long do I have to exercise vested options?
- Which financing instruments or planned option-pool changes could affect the fully diluted share count?
- What share-class preferences would rank ahead of common shareholders in a sale?
- Have employees previously had a liquidity opportunity, and what restrictions would apply to a tender offer or secondary transaction?
- Which tax forms and withholding should I expect for this specific award?
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