Types of Equity: It’s More Than Just Stock Options
Equity compensation comes in many forms:
- ISOs and NSOs (Stock Options): Common in early-stage startups; ISOs are tax-advantaged but only for employees.
- Profit Interest Units: Great for LLCs; tax efficient and no upfront cost.
- Restricted Stock (RSAs & RSUs): RSAs are for very early-stage companies; RSUs are for mature companies with significant valuation.
- Phantom Stock: No actual equity, but cash bonuses tied to company performance.
Ask These 5 Questions Before Accepting Any Offer
- How much do I really own? Shares mean nothing without knowing the company’s total share count.
- What’s my strike price? You only profit if the company’s stock exceeds this value.
- Do I need to pay to exercise? Exercising options often requires you to write a check—without a guaranteed payoff.
- When will I owe taxes? Depending on the structure, taxes could hit before you see a cent.
- What happens when I leave? Many options expire quickly post-departure.
The Real Danger: Down Rounds
Down rounds (funding at a lower valuation) trigger clauses that dilute employee equity—often to the point of worthlessness. Worse, these are often invisible to the employees until it’s too late.
Follow the Money: Who Owns the Company?
Ownership structure and the type of investor involved (VC, growth equity, or private equity) dramatically affect your chances of profiting from stock options. VCs often prioritize high-risk, high-reward strategies that may not align with employee interests. Growth equity and private equity take more stable, cashflow-focused approaches.
Watch the Cash Burn
When startups operate with negative cash flow, they’re on a countdown to bankruptcy or another funding round—which might be a down round. Understanding if a company is cashflow positive is key to evaluating risk.
Conclusion: Be Smart, Not Sorry
Startup equity can change your life—but only if you understand it. Ask the hard questions, assess the company’s financial strategy, and don’t sign anything without knowing exactly what you’re getting.
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