Most equity education is written for founders and investors. This one is employee equity explained from your side of the table: the four numbers in your grant, what vesting does month by month, the deadline that hits when you resign, and the dilution that happens whether you're watching or not.
One honest note before the details. Startup equity is an upside bet, not deferred salary. It can be worth a great deal. It can also be worth exactly zero. Everything below is about understanding the bet, not talking you into it.
Reading your grant: the four numbers that matter
An option grant is the right to buy shares later at a price fixed today. Whatever the country and whatever the paperwork is called, four terms do almost all the work:
- Number of options. How many shares you can buy. On its own this number is meaningless. See the denominator below.
- Strike price (exercise price). What you'll pay per share when you buy. It's normally set at the most recent independent valuation of ordinary shares: a 409A in the US, an FMV assessment in the UK, a valuation report elsewhere. A low strike is the whole point of joining early: the gap between the strike and what shares are eventually worth is your profit.
- Vesting schedule. When the options become yours. The most common pattern is four years with monthly vesting.
- Cliff. A waiting period, usually one year, before anything vests at all. Leave at month 11 and you walk away with nothing; that's by design, not an accident.
Two more terms hide in the plan document rather than the offer letter: the expiration date (options typically last ten years from grant, but far less after you leave, more below) and the option type, which drives how you're taxed and varies by country.
Then find the number the offer letter almost never states: the fully diluted share count: every share that exists or could exist, including all options and convertibles. 20,000 options means nothing by itself. 20,000 out of 10,000,000 fully diluted shares is 0.2% of the company; 20,000 out of 200,000,000 is 0.01%. Same headline number, twenty-fold difference. If a company won't tell you the denominator, they're asking you to price your own compensation blind.
What vesting means for you, month by month
Vesting is the schedule on which the options stop being a promise and become property. Until an option vests, it isn't yours. Leave, and unvested options evaporate. The standard schedule is "four years, one-year cliff": nothing for the first twelve months, then 25% in one lump at the cliff, then the remainder in equal monthly slices.
Worked example: a 48,000-option grant, four years, one-year cliff
Monthly vesting rate: 48,000 ÷ 48 months = 1,000 options per month.
Month 11: 0 vested. Resign now and you keep nothing.
Month 12 (the cliff): 12,000 vest at once, the first year's worth delivered in one lump.
Month 13 onward: 1,000 more vest each month.
Month 30: 12,000 + (18 × 1,000) = 30,000 vested (62.5%). Leave now and 18,000 unvested options are forfeited. They return to the company's pool.
Check your vesting start date: it's often your first day of work even if the board formally approved the grant months later, but not always, and the difference moves your cliff. Also know that a first grant isn't the end of the story: many companies issue smaller "refresh" grants over time, each with its own schedule. The mechanics of schedules, cliffs, and acceleration get a full treatment in the vesting lesson.
What your options are actually worth
An option's value is the spread: what a share is worth minus what you pay for it. Strike of 0.50, shares worth 2.00: the option carries 1.50 of paper value. Two words matter in that sentence: paper, because private shares mostly can't be sold until the company is acquired or goes public, and worth, because the number everyone quotes (the preferred price investors paid in the last round) is not what your ordinary shares would fetch.
There's a further catch at exit. Investors usually hold preferred shares with a liquidation preference: they're repaid first when the company is sold. In a strong exit that barely matters. In a mediocre one, the preference stack can absorb most of the price before holders of ordinary shares (you) see anything.
Options can be worth zero, four separate ways. The company can fail. The company can exit below its preference stack, leaving nothing for ordinary shares. Your options can expire unexercised after you leave. Or the strike can end up above what shares are worth, making exercise pointless. None of these are rare. Value the salary and the learning first; treat the equity as a lottery ticket with unusually good odds you can actually analyze.
If you leave: exercise windows and the cost to keep your shares
The day you leave, two clocks matter. Unvested options are forfeited immediately. Vested options survive, but only if you exercise them (actually buy the shares, in cash) within a post-termination exercise window. In many US-style plans that window is 90 days; some companies extend it to several years, and the difference is worth thousands of dollars, so find your number in the plan document (not the offer letter) before you resign, and get it in writing.
Worked example: the real cost of leaving
You leave with 30,000 vested options at a 0.50 strike. The latest independent valuation puts ordinary shares at 2.00.
Cash to exercise: 30,000 × 0.50 = 15,000, due within your window, 90 days in a typical plan.
Paper spread: 30,000 × (2.00 − 0.50) = 45,000. In many jurisdictions, some or all of that spread is taxed at exercise, even though you received no cash and can't sell the shares, so the true bill can be 15,000 plus a tax charge on 45,000 of paper gain.
The risk: if the company later fails, the 15,000 (and any tax paid) is gone. If you don't exercise, the options expire and the 45,000 of paper value is gone instead. There is no risk-free choice, only an informed one.
Tax treatment is the one part of this lesson that genuinely changes at the border. The US alone taxes two option types differently, the UK's EMI scheme has its own rules, and other markets differ again (see how equity varies by country). Get local advice before exercising anything large.
How dilution changes your slice
Every funding round creates new shares. Your option count never goes down, but the total share count goes up, so your percentage does fall. That's dilution, and it is not automatically bad: a smaller slice of a much more valuable company is usually a better position.
Worked example: diluted and better off
You hold 20,000 options; the company has 10,000,000 fully diluted shares. Your slice: 0.2%. Shares are worth 2.00; your strike is 0.50, so the paper spread is 20,000 × 1.50 = 30,000.
The Series B issues 2,000,000 new shares to investors and adds 500,000 to the option pool. New total: 12,500,000. Your slice: 20,000 ÷ 12,500,000 = 0.16%, down 20%.
But the round priced shares at 5.00. Your paper spread is now 20,000 × (5.00 − 0.50) = 90,000. Smaller percentage, three times the value.
Dilution only hurts you disproportionately when new shares are created without new value: heavy down rounds, or large option-pool expansions that existing holders absorb. You can't control any of it, but you can track it: your percentage is only ever as current as the last round, so re-ask for the fully diluted count after every raise. Companies that run their cap table on Vquity can spare you the awkward email. The employee portal signs you in with a one-time email code and shows your own stock, options, activity, documents, and a tax view, so your position is something you check, not something you request. Founders: that's what the portals module is for.
Questions to ask your company
None of these are rude. Companies with clean equity practices answer them in minutes; hesitation is itself information.
- How many fully diluted shares are outstanding, so I can turn my grant into a percentage?
- What's my strike price, and what was the most recent independent valuation of ordinary shares?
- How much liquidation preference sits ahead of ordinary shares today?
- What is my post-termination exercise window, and can I see it in the plan document?
- What happens to my options if the company is acquired? Is there any acceleration?
- What type of option is this, and how is it taxed in my country?
- Can I get the grant agreement, plan document, and vesting schedule in writing?
That's employee equity explained, end to end: know your four numbers, know the denominator, know your window before you resign, and re-check your slice after every round. Equity won't pay your rent, but understood properly, it's the one part of your compensation with no ceiling, and you now know exactly how to read it.