Full Strategy: How to Negotiate Equity at Startups and Early-Stage Companies

Equity compensation forms a much larger part of the compensation package in startups and early-stage companies compared to more established firms. Cash is typically tighter, and equity is way to reduce that burden while incentivising executives with a potentially much larger payday down the road.

However, equity compensation fundamentally hinges on risk. If the company succeeds then the value of your equity could be substantial. If the company fails, your equity might be completely worthless.

Equity is a long-term play. If you’re in a financial position to stomach more risk, you may choose to structure your compensation far more heavily around equity, foregoing a larger part of the cash piece in exchange for a potentially much bigger windfall. Alternatively, salary might be more important to you as it's cold hard cash, not something that might pay off sometime in the future.

This isn’t a guide on what you should do — decisions about equity depend heavily on your personal financial goals, risk tolerance and the opportunity in front of you. Rather, it's geared to help you understand how to negotiate equity effectively, understanding the value of what's on the table and how to make sure you’re securing the best possible deal.

A poorly structured equity deal can squander the opportunity for huge upside, while a well-negotiated one can turn years of hard work into a genuinely transformative financial outcome.

Core Definitions

Broadly, you need to be aware of the following, if you aren't already:

• Stock Options: The most common form of equity in early-stage companies. Stock options give you the right to buy company shares at a set price (the strike or exercise price) after a certain period, known as vesting. If the company’s stock price increases, you can buy at the lower strike price and sell at the higher market price, making a profit on the difference. For example: If you have 100,000 stock options with a strike price of $2 per share and the stock price rises to $20, you can exercise your options at $2 and sell at $20, realizing a profit of $1,800,000.
• Restricted Stock Units (RSUs): RSUs are granted shares that don’t require you to buy them, they’re simply awarded once they vest. Unlike stock options, RSUs aren’t tied to an exercise price, which can make them more predictable. However, they can still carry risk, particularly if the company doesn’t perform as expected and the value drops.
• Performance Shares: These shares are granted only if specific performance targets are met. They often tie your equity to achieving company goals such as revenue targets or market growth. Performance shares are riskier because if the company fails to meet the targets, you may receive no equity at all. On the other hand, if the company exceeds expectations, you could see a significant upside.
• Vesting Schedule: The vesting schedule is the timeline over which you earn your equity. Most startups use a four-year vesting schedule with a one-year "cliff". After the first year, 25% of your equity vests, and the remainder vests over time.
• Exercise/Strike Price: The price at which you can purchase your stock options. This price is often tied to the company’s current valuation but can be a point of negotiation. A lower exercise price means greater upside potential if the company grows.
• Acceleration Clauses: In the event of an acquisition, acceleration clauses allow you to “accelerate” the vesting of your stock options. Single-trigger acceleration means that your equity vests upon acquisition. Double-trigger acceleration typically requires two events — an acquisition followed by your termination or similar event.

Assess Your Priorities and Tolerance for Risk

The value of equity is not guaranteed, so how much weight you place on it should align with your personal priorities, financial goals and tolerance for uncertainty.

Fundamentally, how much of your overall compensation package are you willing to risk on the company’s future performance?

If you have a strong personal financial cushion or can afford to take a long-term view, then you might be more open to negotiating a larger equity stake in lieu of cash.

One way to evaluate your personal risk tolerance is to assume a worst-case scenario where the value of your equity turns to zero. Consider what your total compensation then looks like, and whether you'd still be comfortable taking on the role.

It’s also important to consider the liquidity of the equity. Realistically, how soon will you be able to cash out? In startups, liquidity can often be years away, and in some cases, the company may not have an exit at all. If this doesn’t fit with your financial goals, then equity may not be as attractive as a higher base salary or more immediate forms of compensation.

Ultimately, your equity strategy should reflect a balance between the potential for upside vs your need for financial security. If you're relying on equity as a substantial part of your compensation, you need to be able stomach the potential loss.

Evaluate the Value of What’s Being Offered

When you're offered equity, say 10,000 stock options or 1% of the company, you need to understand what that actually looks like in real terms, and what the potential upside is.

Understand the Mechanics

Regardless of what type of equity you've been offered, you need to understand how it works. Things you need to know:

• How do you acquire the equity?
  Are you purchasing stock at a set price (such as with stock options), or are you being granted stock outright (as with RSUs)? Understanding how you “earn” your equity will help you assess its value. For example, stock options give you the right to buy shares at a future date, but RSUs are granted outright, usually subject to vesting.
• What are the vesting terms?
  Most equity offers are subject to a vesting schedule, meaning you won’t own the full amount of equity immediately. Understanding the vesting schedule is essential because it determines when you actually become entitled to the equity, and what the value might look like if you're only likely to have a two year tenure, for example.
• What happens to your equity if you leave the company?
  If you leave the company before your equity has fully vested, you will typically lose the unvested portion. Clarify the company's policy on early termination or departure, as some companies might offer you a buyout of vested equity or a grace period to exercise your stock options, depending on the type of equity you’ve been granted.
• Are there any restrictions or performance conditions?
  Some equity grants may come with restrictions or performance-based conditions. For example, some companies tie the vesting of equity to specific company goals or personal performance targets. These can be milestone-based (such as reaching revenue targets or product development goals) or related to your role (e.g., achieving specific strategic objectives). Understanding these conditions will help you assess the likelihood of realizing the full value of the equity.
• How many shares are outstanding? This is critical when determining the value of your equity stake. The more shares outstanding, the less ownership your granted equity will represent. This is particularly important when you consider the impact of dilution.

Evaluate the Current Value

Your offer may include this, but if it doesn't, do the math. If you don't know the number of shares outstanding, get that information. It can sometimes take a bit of pushback.

As a basic example:

• Current company valuation: $20m
• Equity offered: 10,000 shares (RSU)
• Shares outstanding: 1,000,000

$20m ÷ 1,000,000 = $20/share
10,000 x $20 = equity value of $200,000 based on the current company valuation.

Evaluate the Potential Upside

To get a sense of the potential future value of your equity, consider the company’s growth potential and how that will affect the value of your shares. Do some basic math to estimate the upside, factoring in a few potential growth scenarios. If the company grows, how much will your equity be worth? If it doesn’t grow as expected, what is the worst-case scenario?

For example:

• Current company valuation: $20m
• Stock options granted: 10,000 options
• Strike price: $20/share
• Vesting period: 4 years

So, if the company valuation increases 5x over the four years, and assuming the stock price will increase proportionally to $100/share:

Profit per option: 100−20 = $80/option

Total profit: 10,000 x 80 = $800,000

Run a few different calculations based on your vesting schedule, likely tenure and any performance based equity to get a clear picture of what your potential upside could look like.

Different equity grants have different tax treatments, and the net impact can be significant. I won't go into the weeds here, but always look at the potential liability when evaluating your offer.

Assess Dilution Risk

Dilution risk is unpredictable, but you can make a broad judgement based on the stage of the company. If you're at an early-stage startup, you'll likely go through a few more funding rounds, and you can typically assume 15-25% dilution per funding round (slightly more for seed).

How Much to Negotiate

There’s no hard and fast rule for how much equity you should receive as scenarios can vary greatly, particularly with earlier-stage companies. As always, you get what you negotiate.

At early-stage startups, the risk is higher, and companies are often far more willing to offer larger equity stakes to make up for lower cash compensation. Given the uncertain future and high risk, it’s fair to push for more equity.

In my experience, this is a reasonable guide:

• CEO: 5-10%
• CXO: 2-5%
• VP: 1-2%
• Director: 0.5-1.25%

Again, those aren't hard numbers. As the company matures and reduces risk, equity grants tend to decrease, and you'll usually have to fight harder for equity.

Another way to look at it is to calculate the difference between your cash compensation and market rate for the role, then calculate a reasonable equity figure based on that gap.

For example:

• Market rate for the role: $400k
• Your cash offer: $200k
• Difference: $200k

Assuming a 4-year vesting schedule:

• Difference x 4 years: $200k x 4 = $800k

Asking for $800k in equity assumes no value growth over 4 years, which they may push back on, especially in a leadership role where you are expected to materially increase the company's value. But again, you get what you negotiate.

Negotiating Equity

Like with negotiating salary, how much equity you can achieve hinges on your ability to articulate your value in taking the company from point X to point Y. But, unlike salary, equity compensation at a startup or early-stage company comes with inherent risk, which means that what you negotiate needs to reflect both your contribution to the company's future success and the risks you're taking on by betting on its growth.

Amount of Equity

You might be offered a specific number of shares or a percentage of the company’s equity. Either way, your upside potential is contingent on this being as compelling as possible.

The amount of equity you’re granted should align with the value you’ll bring to the company and the risk you’re assuming. As an executive you are taking on a high-impact role, and your equity should reflect that.

For example:

"Given the work I'll be doing to help get us $50m ARR, I believe the amount of equity offered should reflect both the significant contribution I’ll make and the high risk of joining at this stage. With this in mind, I'd propose a 2% equity stake would be fair."

If you’re taking a significant hit in cash compensation in exchange for equity, you need to clearly articulate how that trade-off will benefit the company’s long-term success and why your equity stake needs to be higher to reflect the risk and opportunity you’re accepting. Use data from your earlier calculations to make the point.

For example:

"Given that my cash compensation is 50% lower than market rate, the equity offered should provide meaningful upside to compensate for the financial trade-off. If the company succeeds in reaching $100m, my equity would translate into a payout of $500,000, which is less than what I would have earned in cash at market rate. Given the critical role I’m taking in driving growth, particularly in scaling the revenue engine, I believe 1% equity is more appropriate. This would align my compensation with the value I’m creating while acknowledging the higher risk of joining at such an early stage."

Vesting Schedule

Startups typically use a four-year vesting schedule with a one-year cliff, meaning you won’t earn any equity if you leave in the first year, but after one year, you’ll vest 25% of your equity. The remaining equity typically vests monthly or quarterly after that.

However, you can negotiate for an accelerated vesting schedule if you're joining at a critical phase of the company’s growth or if you're taking on more risk than other hires.

For example:

"Given the early stage of the company and the risks I’m assuming by joining at this phase, I’d like to discuss a vesting schedule that better reflects the contributions I’ll be making from day one. I propose a two-year vesting period with a six-month cliff, ensuring that I am fairly compensated for my immediate impact on driving revenue."

You could also negotiate a performance-based vesting schedule, which ties your equity to hitting specific business or personal milestones, such as hitting a revenue target or successfully launching a key product. This type of vesting better aligns your compensation with company goals.

For example:

"In addition to a standard vesting schedule, I would like to include performance-based equity tied to hitting specific growth milestones, namely achieving a revenue target of $50m ARR, $100m ARR and so forth. This will ensure my compensation is directly tied to the company’s success, and we’re fully aligned on hitting those numbers."

Dilution Protection

Where fundraising is ongoing and dilution is common, you may see your equity stake significantly reduced unless it is protected, and you can negotiate anti-dilution clauses to do this.

This could be a "full ratchet" anti-dilution provision, which adjusts your equity to maintain the same percentage after a down round (when the company raises funds at a lower valuation). Alternatively, a "weighted average" provision adjusts your stake more gradually, but it’s still designed to prevent excessive dilution.

For example:

"Given the likelihood of additional funding rounds, I’d like to ensure my equity is protected. I’d like to discuss an anti-dilution provision that would help keep my equity commensurate with the risk I'm taking and the value I'm bringing."

Exercise Price

For stock options, the strike price is the amount you will pay to buy the company’s stock at a future date. If the strike price is set too high relative to the current valuation, it could limit your ability to capitalize on the upside. Negotiating a lower strike price can improve your potential upside by making it more affordable to buy the stock once it’s vested.

The strike price is usually tied to the company’s valuation at the time of the grant, but if the valuation is uncertain or fluctuating, you might want to negotiate for a price that’s closer to the current fair market value.

For example:
"Considering the company’s current valuation, the strike price looks lofty. I’d like to request that the strike price be set as close as possible to the current market value to maximize the potential upside and make sure I don't end up underwater."

Acceleration Clauses

Acceleration clauses allow you to accelerate the vesting of your equity in specific circumstances, such as in the event of an acquisition or if you are terminated without cause. This is particularly important at a startup, where acquisitions can happen quickly.

Broadly, there are two options:

• Single-trigger acceleration means that your unvested equity will fully vest upon the occurrence of a single event, typically an acquisition or a change of control of the company. This means that if the company is sold or undergoes a significant change in ownership, all of your unvested stock options or equity grants will immediately vest. This is great for you, but clearly not for the acquiring company. Hence, this trigger can be difficult to negotiate.
• Double-trigger acceleration is a more common clause, and requires two triggering events for your unvested equity to vest: typically, an acquisition or a change of control and your termination (or another condition like significant relocation or role change). This is particularly useful if you don't want to relocate post-acquisition, or if they “top you off”, i.e., they hire someone above you and your role changes.

For example:

"Given the space and phase we're in and the likelihood of an acquisition, I’d like to request double-trigger acceleration, ensuring that my equity fully vests in the event of an acquisition followed by termination without cause or resignation for good reason. We can discuss specifics. My impact in driving growth will be immediate, and this ensure I’m compensated fairly for my contributions."

The Bottom Line

Equity can be a minefield, but it's worth doing the research, math and work needed to understand how the mechanics play out, because the upside potential can compound so significantly in the event of a lofty valuation. Assess what level of risk you can stomach and balance that with the reward you’re negotiating for.