Your Startup Equity Offer Looks Better Than It Is

You get the startup equity offer. The number says 0.5%. You open a spreadsheet because you're an engineer and this feels like your moment. The last round valued the company at $200 million. You multiply. One million dollars. You do it twice because it's that satisfying. You accept.

This is not how it works.

That 0.5% is technically accurate and practically useless without three other numbers. Most engineers never ask for those numbers. Most founders are quietly relieved you didn't. By the time you find out what they mean, the offer letter is signed, filed, and cooling.

The Percentage Is the Wrong Starting Point

Your offer says 10,000 options. But options are shares, and shares only mean something as a fraction of the total. That total is probably not what you're imagining. Always ask: what is the fully diluted share count?

"Fully diluted" sounds like a term invented to make you nervous. It's not. It just means every share that could possibly exist: founder shares, investor shares, every option ever granted (including the ones sitting unexercised in the pool), warrants, convertible notes that will eventually become equity. If the company has 20 million fully diluted shares and you have 10,000 options, your 0.5% just became 0.05%. Nobody lied to you. They used a smaller denominator.

Companies sometimes quote ownership as a percentage of outstanding shares, which means only shares actually issued, not the ones that could exist. Outstanding is always a smaller number, which makes your percentage look bigger. Ask explicitly: "Is this percentage calculated on fully diluted shares?" If there's a pause before the answer, that pause contains useful information.

Then there's future dilution. Seed rounds typically dilute existing holders around 19 to 20 percent. Series A around 18 percent. Series B around 14 percent. A new option pool refresh often happens right before each round closes, and that pool gets carved from the pre-money cap table, meaning existing employees absorb the dilution before the new investment even arrives. This process has a name: the option pool shuffle. Whoever named it was being generous. Model a few future rounds and watch your 0.5% travel south.

The Only Number That Determines Whether Your Equity Is Worth Anything

Most offer letters leave out one piece of information entirely: how much money investors have put in, and what they're entitled to get back before you see a dollar.

Investors don't hold common stock. They hold preferred stock. When a company is acquired, preferred shareholders get paid first through something called a liquidation preference. The standard version is 1x non-participating: investors get their money back, then everything above that splits proportionally. That's the investor-friendly-but-not-predatory version.

The math is what determines whether this matters. Say investors have put $60 million into the company across three rounds. The company gets acquired for $80 million. Under a 1x non-participating preference, investors take their $60 million back. The remaining $20 million splits by ownership. You, with 0.5% fully diluted, get 0.5% of $20 million. That's $100,000. Not the million you were calculating.

Now change one number: the company sells for $55 million. Investors take their $60 million first. There is nothing left for common shareholders. Your options are worth zero. You spent three years there.

This isn't hypothetical. Get Satisfaction, a customer service platform, sold for around $50 million. Founder Lane Becker got nothing because the accumulated liquidation preferences exceeded the acquisition price. The company was called Get Satisfaction. Nobody involved got satisfaction. Fred Wilson at Union Square Ventures wrote about this in 2010 and called it liquidation overhang. That name did not go viral. The practice did.

The minimum exit price where your equity has any value equals the total accumulated liquidation preferences. Ask the CFO directly: "What is the total liquidation preference stack?" Then ask: "If the company were acquired at its last round valuation, what would a common shareholder at my stake actually receive?"

The worse version is participating preferred. Investors take their liquidation amount and then also participate in the remaining proceeds alongside common shareholders. Here's what that looks like.

Investors have $40 million in participating 1x preferred and own 60% of the company. You own 0.5%. Company sells for $100 million. Under non-participating: investors choose between their $40M guarantee or 60% of $100M. They take $60M. You get 0.5% of $100M: $500,000. Under participating: investors take $40M first, then get 60% of the remaining $60M, another $36M. The leftover $24M splits among common shareholders. You get 0.5% of $24M: $120,000. Same company. Same exit. Same equity percentage. Four times the difference.

Liquidation preference waterfall diagram showing non-participating vs participating preferred stock payouts on a $100M exit The same $100M exit, two very different answers to "what do I get?"

The Runway Question Founders Hedge On

Runway is how many months the company can operate at current burn before it runs out of cash. Healthy post-raise is 18 to 24 months. Under 12 means the company is already fundraising whether it admits it or not. Under 6 means you're taking on employment risk that didn't get a mention in the equity section.

Ask: "How much cash is in the bank right now, and what is the current monthly burn rate?" If the answer comes back vague, or expressed as projected runway with optimistic assumptions embedded, ask for the actual cash balance and the last three months of actual burn. Projections are a story. Bank balance and burn rate are facts.

Also ask what burn looks like six months out. A company that hired aggressively before it had revenue to justify it may have a problem that isn't visible in today's numbers.

One question reveals more than any other: "What milestones do you need to hit to raise your next round?" A founder who can answer this clearly and specifically is operating in reality. A founder who gives a vision speech in response to that question is not. File accordingly.

The 90-Day Trap Nobody Mentions Until You're Already Leaving

When you leave a startup, you typically have 90 days to exercise your vested options. After that window closes, they expire. You lose everything you earned. This is the default for most grants because the IRS requires exercise within 90 days to maintain ISO status.

The catch: exercising costs money. You pay the strike price times your share count, plus taxes on the spread between your strike price and the current 409A fair market value. If your options are deep in the money, this bill can land at five or six figures. Most people can't write that check on 90 days' notice after leaving a job. Especially people who are leaving precisely because things weren't going well.

Some companies have moved to extended post-termination exercise windows of 5 or 10 years. Before you sign, ask: "What is the post-termination exercise period for these options?" Standard is 90 days. Extended is a real benefit that changes the practical value of everything you'll earn there.

If you're joining an early-stage company, ask about early exercise combined with an 83(b) election. If the company allows it, you can exercise unvested options at grant, pay taxes on the current low 409A value (often near zero at seed stage), and start the capital gains clock immediately. The 83(b) form must be filed with the IRS within 30 days of exercise. Miss that window and you'll owe income tax on the full spread as each option vests. Done right, most of your gain ends up taxed as long-term capital gains instead of ordinary income. Done wrong, you find out about it at tax time in a way that is not fun.

Questions to Ask Before You Sign

These are blunt. Ask them anyway. A founder who won't answer is answering.

How many fully diluted shares are outstanding, including the entire option pool? (Your actual ownership percentage, not the flattering version)
What is the current 409A fair market value per share? (Sets your strike price and tells you what exercise will cost)
How much total capital has the company raised, and what are the liquidation preferences on the preferred stock? (The minimum exit price before your equity has value)
Do any investors have participating preferred rights? (Multiplies the damage from the preference stack)
How much cash is in the bank and what is the current monthly burn? (Actual runway, not projected runway)
What milestones are required for the next fundraise? (Tests whether the runway number is real or aspirational)
What is the post-termination exercise window? (Whether your options are practically exercisable when you eventually leave)
Is early exercise permitted, and what does the repurchase policy look like if I leave before vesting is complete? (Only relevant at early-stage companies with low 409A values)
What would my shares be worth if the company were acquired at the last round's valuation? At half? At 2x? (Forces a real payout calculation across exit scenarios)

That last question is the one most candidates never ask. It runs the actual math before you've committed years to find out the answer in real time.

What You Still Can't Know

Even with all of this, startup equity involves genuine uncertainty. The company might raise at a much higher valuation and your stake might be worth ten times your estimate. It might raise a down round, anti-dilution provisions activate, and common stock absorbs structural damage while preferred holders are protected.

The goal isn't a precise number. It's replacing imaginary math, percentage times last round valuation, with real math: what you'd receive across realistic exit scenarios, after the preference stack is paid. That shift is the difference between an informed decision and an optimistic one.

Once you've run the equity math, see the guide on how to counter a job offer for how to push on base and sign-on without killing the process. If the base looks thin relative to market, the lowball offer guide covers when and how to push back effectively.

SpaceComplexity builds voice-based technical interview practice. The equity math only matters if you get the offer first.

The Short Version

The percentage on your offer is calculated on fully diluted shares, not outstanding shares. Confirm which.
The minimum exit price where your equity has value equals the total liquidation preference stack, not the last round's valuation.
Participating preferred reduces your payout in every exit scenario versus non-participating. Ask which applies.
Runway is cash divided by burn rate. Ask for both raw numbers.
The 90-day post-termination exercise window means vested options can expire with your resignation letter if you can't afford to exercise. Some companies offer 5 to 10 year windows instead.
Ask what your equity would be worth in specific acquisition scenarios. That answer, not the percentage, is what you're actually evaluating.