Equity
EK-wih-tee
Ownership in a company represented by shares of stock, which entitle the holder to a proportional share of the company's value.
Equity is ownership. When you hold equity in a company, you own a percentage of it. If the company is sold for $100M and you own 1%, your equity is worth $1M (before liquidation preferences and other terms).
Startup equity comes in several forms. Founders receive common stock. Investors receive preferred stock (with extra rights like liquidation preference). Employees receive stock options or RSUs that convert to common stock.
Equity is how startups compensate people when they cannot pay full market salaries. An early employee might take a $30K pay cut in exchange for 0.5% equity. If the company exits at $500M, that 0.5% is worth $2.5M. If the company fails, the equity is worth nothing. It is a risk-reward trade-off. The vesting schedule determines when that equity becomes truly yours.
Examples
An early employee receives equity compensation.
The offer: $120K salary (below market rate of $160K) plus 0.25% equity in stock options. The options vest over 4 years with a 1-year cliff. If the company reaches $400M valuation, the equity is worth $1M before taxes.
A founder owns 30% equity after multiple rounds.
Started at 50%. Seed round: diluted to 40%. Option pool: diluted to 35%. Series A: diluted to 28%. Series B: diluted to 24%. The founder's percentage decreased, but the value of their equity grew from $500K (50% of a $1M company) to $48M (24% of a $200M company).
Preferred and common equity receive different treatment in an exit.
The company sells for $50M. Investors hold $20M in preferred stock with 1x liquidation preference. They get their $20M back first. The remaining $30M is split among all shareholders (including investors) by ownership percentage.
Frequently asked questions
How much equity should early employees get?
Ranges vary widely. First 5 employees: 0.5-2% each. Employees 6-20: 0.1-0.5%. VP-level hires: 0.5-1.5%. These are rough benchmarks. The amount depends on stage, role, seniority, and how much salary discount the employee takes.
Is startup equity worth anything?
Only if the company has a successful exit (IPO or acquisition). Most startups fail, making the equity worthless. Equity in a successful startup can be life-changing. Treat startup equity as a high-risk, high-reward lottery ticket, not a guaranteed payout.
Related terms
The right to purchase company shares at a fixed price (the strike price), typically granted to employees as part of compensation.
A company's promise to give an employee shares of stock after vesting conditions are met, with no purchase required.
The process by which an employee earns their equity over time, typically over four years with a one-year cliff.
A spreadsheet or tool that tracks who owns what percentage of a company, including founders, investors, and employees with stock options.
The reduction in ownership percentage that existing shareholders experience when new shares are issued in a funding round.
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