Decoder: Understanding Startup Equity Terms

No one—except for finance experts and MBAs—looks at their equity package and thinks, “Yep, makes sense.”

In this week's Decoder article, we've put together a short glossary of terms you're likely to see in your equity offer, along with literal—and more practical—definitions.

1. Vesting

You thought you were getting that 0.1% equity stake the moment you signed? Think again. You're going to receive it piecemeal, on a regular schedule referred to as a “vesting schedule.” Think of it as your company's layaway plan for paying out your equity grant. It can take anywhere between 2-years and 4 years for your equity to "fully vest".

Literal Definition: You will receive a fraction of your equity package each month, and if you're still working there in the number of years it takes for your equity to "fully vest", you will have your entire package.

Practical Definition: You're probably not going to earn that full equity package.

People change jobs frequently in tech—more than 50% of engineers, for example, plan to change jobs in the next year. Even if you don't change jobs, your company still has to survive the agree "full vest" period for you to earn that vest, and in the startup world, that is never a given.

2. Cliff

Companies can't just throw away 0.1% pieces of their equity pie. To protect against employees who are just signing up to collect a few months' worth of equity, companies use a “cliff,” which is a buffer at the beginning of an employee's tenure when vesting is suspended. This is typically one year.

Literal Definition: At the end of your first year, you will receive a portion of your equity offer.

Practical Definition: You're not getting anything unless you work out in this role.

If inside your first year it becomes clear that you're not a fit for the role—or if the company enters harsher financial times—you may be moving on to your next role without receiving any of your equity package.

4. Strike price

Part of an options contract is the “strike price,” which is a predetermined price you pay when you exercise your options. The gap between your strike price and the current valuation of your company's shares is called the “spread.”

Literal Definition: The price you agree to pay for your options.

Practical Definition: The lower the strike price, the more money you stand to make.

If your company's valuation increases by, say, 3x after you join, then when your equity vests, you'll still have the option of buying your shares at the strike price—even though they've become three times as valuable.

5. Liquidity event

Your equity offer will probably include the phrase “in the event of a liquidity event,” which loosely translates to “if our company is acquired or IPOs.” This is the moment when you get to cash in your equity and build your office dogs the home they deserve.

Literal Definition: When your company converts shares of ownership into cash—either via one big purchaser (as in an acquisition) or via a public market (as in an IPO).

Practical Definition: The moment your equity is actually worth something.

6. Accelerated vesting

Fun thought experiment: You're two years into a four-year vest, meaning you have about half of your equity grant. Then your company gets acquired. What happens to the rest of your grant?

A. You get the rest of your grant immediately. 

B. You work at the purchasing company, continuing on your vesting schedule. 

C. You forfeit your grant to the tech lords on the purchasing company's board.

The answer is, it depends. Your contract should explain what happens to your grant in a liquidity event, and if you're lucky, you'll have an accelerated vesting clause.

Literal Definition: A sped-up vesting period that allows the rest of your equity grant to vest in a shorter period.

Practical Definition: You get all of your options in time to turn them into money.

7. Preference stack

When your company is acquired, you might assume you get paid a flat percentage of the acquisition price—but you would be deeply mistaken.

Imagine that when a company is sold, every equity holder gets in a single-file line to receive their payouts. The people with “liquidation preference” line up at the front, where they receive whatever money they were guaranteed, forming the preference stack. The people toward the back (you) take their percentage of whatever is left.

Literal Definition: The amount of money guaranteed to investors and preferred shareholders.

Practical Definition: All the money that has to be paid out before you get anything.

This is a really important concept for valuing your equity. There have been companies in the past that have been purchased for good multiples, but because of a terrible preference stack, employees' equity grants have been rendered worthless.


Your goal in negotiating equity isn't to get a guaranteed fortune. It's to position yourself for the best shot at a massive bonus years from now.

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