Equity in an offer, and what it is worth before anything vests

There is a short answer about equity compensation and a useful one, and they are not the same. What follows is the useful one.

What is actually being offered

Equity in a package can mean shares granted outright, options to buy shares at a fixed price, or units that convert on a future date. Each behaves differently on tax, on leaving and on what happens if the company is sold, and the labels vary between countries.

The first question is which instrument it is, and the second is what document governs it, because the plan rules matter more than the offer letter. Ask for the plan documents before accepting, since they contain the terms that decide almost everything and are rarely summarised accurately. This is general information rather than financial or tax advice, and equity in an offer is exactly the situation where a qualified adviser earns their fee.

Vesting, cliffs and the calendar

Vesting spreads the entitlement over time, so the grant becomes yours in stages rather than on the day it is announced. A cliff means nothing vests until a threshold date, and leaving one day before it typically forfeits the entire portion. Schedules can be monthly, quarterly or annual after the cliff, and the difference changes what a departure at any given moment costs you.

Some plans require a further event, such as a sale or a listing, before anything can actually be converted into money. A grant that vests fully but cannot be sold is not liquid, and treating it as savings is a mistake people make repeatedly.

The valuation problem

A private company's share price comes from its most recent funding round or an internal valuation, not from a market where you could sell. That figure is an input to a negotiation between the company and its investors, and it carries assumptions you cannot see.

Put simply, preference terms held by investors can mean that in a modest sale, ordinary shares held by employees receive very little. Asking what percentage of the company the grant represents, and on what basis, is more informative than asking what it is worth. Where the company will not answer that, the honest response is to value the equity at close to nothing and negotiate the cash.

Leaving, and what you keep

Plan rules usually distinguish between good and bad leavers, and the definitions are often broader than the phrase suggests. Vested options frequently must be exercised within a short window after leaving, which can require finding real money at short notice. Exercising may also create a tax charge on a gain you cannot yet realise, which is the situation that ruins people.

These mechanics are the reason employees stay in roles they have outgrown, and they should be understood before joining rather than when resigning.

Ask specifically what happens to vested and unvested holdings on resignation, redundancy and dismissal, and get it in writing.

How to weigh it in an offer

Compare offers on guaranteed cash first, and treat equity as an upside rather than a substitute for salary you need to live on. A large grant at a company whose survival is uncertain is a concentrated risk sitting on top of the risk that your job depends on the same company.

For most people, that concentration is the argument against treating equity as a substitute for other savings, whatever the potential return. Where equity is a genuine part of the package, negotiate the cash as though it were absent and treat any eventual proceeds as a windfall. People who have done well from equity generally also had a salary that worked, which is the part the stories omit.

If that does not fit your week, it is not a failure of willpower.

Questions to ask before signing

How many shares are in issue on a fully diluted basis, and what does the grant represent as a proportion of that. What was the last valuation, when was it set, and what preference terms sit above ordinary shares.

In practice, what is the vesting schedule, the cliff, and the exercise window after leaving for each category of leaver. What tax event occurs at grant, at vesting and at exercise in the country where you will be taxed. Ask all of these in writing, and treat evasive answers to any of them as information about the rest.

The takeaway

Get the plan rules, ask what the grant is as a percentage, and negotiate the cash as if the equity were zero.

Small and repeatable beats ambitious and abandoned, almost every time.