Our Offerings within Equity

Equity is one of the most powerful tools in a startup’s toolkit. It represents ownership in the company, but its impact goes far beyond just numbers on a cap table. Equity shapes founder relationships, determines how much control investors have, and serves as a critical incentive for employees who take a chance on an early-stage business.

For founders, equity defines not only who owns the company but also who has a stake in its success. The way equity is allocated between co-founders can set the tone for the company’s culture, trust, and long-term alignment. An unclear or unfair equity split can create tension that lingers for years.

For employees, equity compensation transforms a job into an ownership opportunity. Startups rarely compete with established companies on salary alone, so equity grants allow early hires to share in the upside if the company grows. The right equity plan can attract top talent, retain them through critical years, and build a true ownership culture.

For investors, equity represents both risk and reward. By purchasing shares, they fund the company’s growth in exchange for ownership and future financial return. The type of equity they hold - common or preferred - influences their rights, protections, and position in the event of an acquisition or IPO.

Equity is also dynamic. Ownership percentages shift as new investors come on board, as employees exercise options, and as companies raise successive funding rounds. Dilution is a natural part of the journey, and managing it strategically is essential to maintaining balance between founders, employees, and investors.

This guide explores equity in all its dimensions - from founder allocations and employee option pools to vesting, 83(b) elections, dilution, and exit scenarios. By the end, you’ll understand not only the mechanics of startup equity but also the strategies that help you use it to build a stronger, more sustainable company.

Equity compensation is one of the defining features of the startup world. Unlike established corporations that rely heavily on cash salaries and benefits, startups often use equity to attract, motivate, and retain talent. By giving employees a direct ownership stake in the company, equity aligns personal incentives with company growth - if the business succeeds, everyone shares in the upside.

Why Startups Use Equity Compensation

For early-stage companies, cash is scarce. Competitive salaries may not be feasible, especially when hiring experienced engineers, product managers, or executives who could command high pay at larger firms. Equity helps level the playing field: it gives employees a reason to join a riskier venture in exchange for the possibility of outsized rewards later.

But beyond finances, equity compensation creates:

• An ownership culture – Employees behave more like partners when they hold a stake in the company’s future.
  
• Long-term commitment – Equity vesting schedules encourage employees to stay through the crucial early years.
  
• Alignment of interests – Founders, employees, and investors all share a common goal: increasing company value.
  

When used effectively, equity compensation turns employees into stakeholders who think like founders.

Common Equity Instruments 

Startups have several tools available for equity compensation. The right choice often depends on company stage, valuation, and the specific role of the recipient.

1. Restricted Stock (RSAs)

• Actual shares granted to recipients immediately.
• Typically subject to vesting, with the company holding repurchase rights on unvested shares.
  
• Common for founders and very early employees, when the company’s valuation is low and shares are inexpensive.
  

2. Stock Options

• The right to purchase shares in the future at a fixed “exercise price.”
• Most common form of startup equity compensation.
  
• Valuable because employees can benefit from growth in company value without upfront cost.
• Two main types: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) (we’ll dive deeper in Section 5).
  

3. Restricted Stock Units (RSUs)

• A promise to deliver shares once certain conditions are met (usually vesting).
• No upfront purchase required, unlike RSAs or stock options.
• More common in later-stage startups with higher valuations, where immediate stock issuance would be too costly for employees.
  

4. Less Common Instruments

• Stock Appreciation Rights (SARs): Rights to the increase in share value over a set period, paid in cash or stock.
• Phantom Stock: Provides cash bonuses tied to stock value without issuing actual equity.
• These are typically used in special circumstances, such as when a company wants to mimic equity participation without changing ownership structure.
  

The Role of Vesting

Equity grants rarely vest all at once. Instead, they are distributed over time through vesting schedules. This protects the company if an employee leaves early and rewards those who commit long-term.

• The standard schedule is four years with a one-year cliff. This means employees must stay at least one year to receive their first portion (typically 25%), with the remainder vesting monthly or quarterly over the next three years.
  
• Some startups use performance-based vesting, where shares vest upon achieving milestones.
  
• Vesting aligns incentives and ensures equity is earned, not just given.
  

Valuation and Tax Considerations

Equity value is tied directly to company valuation. When valuation rises, so does the value of employee equity. But this also creates tax considerations:

• RSAs may trigger taxes at grant unless the recipient files an 83(b) election.
• ‍Stock options are taxed when exercised, depending on whether they are ISOs or NSOs.
  

• RSUs are taxed as ordinary income when shares are delivered.
  

We will explore these tax strategies in detail in later sections.

Communication is Key

Equity compensation is powerful, but also complex. Many employees join startups without fully understanding how their options work, what vesting means, or how to think about equity value.

Founders should:

• Use clear, jargon-free explanations.
  
• Provide transparency about valuation and dilution.
  
• Offer resources or workshops to help employees understand their equity.
  

When employees understand the potential value of their equity, they are more likely to feel invested in the company’s success.

The Takeaway

Equity compensation isn’t just about pay - it’s about building a culture of ownership and aligning everyone around growth. By choosing the right instruments, setting clear vesting schedules, and communicating openly, founders can turn equity into one of their most effective tools for attracting talent and building loyalty.

One of the earliest and most important equity decisions a startup makes is how to divide ownership among the founders. Unlike employee grants, which can be adjusted over time, founder equity sets the foundation for control, incentives, and long-term alignment. Getting this wrong can create disputes, demotivation, and even founder departures.

How to Split Equity Among Founders

There is no universal formula for dividing founder equity. The split should reflect contributions, responsibilities, and the long-term commitment of each founder. Common approaches include:

1. Equal Split

• Recommended by many accelerators like Y Combinator.
• Simplifies negotiations and reinforces a sense of fairness.
• Recognizes that the bulk of value creation lies ahead, not in past contributions.
  

2. Contribution-Based Allocation

• Equity percentages reflect each founder’s skills, financial contributions, intellectual property, or sweat equity.
• Can be seen as “fairer” in the short term but risks creating resentment if contributions change over time.

Key insight: What matters most is alignment and trust. A lopsided split that feels unfair can undermine the team, while an equal split can strengthen long-term commitment even if contributions aren’t identical at the start.

Why Founders Should Vest Their Equity

Just like employees, founders should be subject to vesting schedules. This ensures that founders earn their equity over time and protects the company if someone leaves early.

• Standard vesting: Four years with a one-year cliff.
  
• If a founder departs before the cliff, the company can repurchase unvested shares.
  
• If a founder leaves later, only vested shares are retained.
  

Why it matters:

• Prevents a departed founder from holding a large ownership stake without contributing.
  
• Reassures investors that the team is committed long term.
  
• Creates fairness among founders who stay and build the company.
  

Investors almost always require founder vesting before funding. Implementing it from the start avoids renegotiations later.

Understanding Par Value

When a company issues stock, each share is assigned a par value - a nominal amount written into the certificate of incorporation.

• Most startups set par value extremely low (typically $0.00001 to $0.0001 per share).
  
• This allows founders to purchase millions of shares at minimal cost, while leaving room for substantial price appreciation in later rounds.
  
• Par value is not the same as market value. Investors pay the fair market value set during funding rounds, which may be several dollars per share.
  

Example:

• 10 million authorized shares at $0.00001 par value = $100 total par capitalization.
  
• At Series A, those same shares might be worth $3.00 each.
  

Setting par value low provides flexibility, minimizes early tax burdens, and avoids complications when granting equity to founders and employees.

Founder Preferred Stock

In some cases, founders may use preferred stock structures to balance control and flexibility.

1. Super Voting Shares

• Give founders more voting power per share.
• Help maintain control even with minority ownership.
• Common in later-stage companies like Meta or Alphabet.
• However, most early-stage investors resist super-voting structures.
  

2. Alchemy Shares

• Start as common stock but convert to preferred stock during financing events.
• Provide founders with additional financial upside in exits or secondary sales.
• Start as common stock but convert to preferred stock during financing events.
• Provide founders with additional financial upside in exits or secondary sales.
• More acceptable to investors than super voting rights, if kept within limits (often capped at 20% of shares).
  

Considerations:

• Complex stock structures can raise red flags with early investors.
  
• Keep things simple at the beginning, unless founder-preferred terms are strategically necessary.
  

Strategic Takeaways for Founders

• Aim for equity splits that feel fair, not just mathematically precise.
  
• Put founder shares on a vesting schedule to protect the company and reassure investors.
  
• Set par value low to maximize flexibility and minimize taxes.

Be cautious with preferred stock structures - they can help with control but may complicate fundraising.

When founders and employees talk about equity, confusion often arises because people use percentages without understanding the underlying math. The truth is that equity isn’t just about “I own 10 percent” or “she owns 5 percent.” Those percentages are always relative to the total number of shares authorized and issued. To build a clean and transparent ownership structure, it’s essential to understand how shares are created, counted, and presented on a cap table.

Authorized Shares

When you incorporate, you specify in your formation documents the total number of authorized shares - essentially the maximum number of shares your company is allowed to issue.

• Most startups authorize 10 million shares at incorporation.
  
• This large number doesn’t change the company’s value but creates flexibility for future grants and funding rounds.
  
• Authorized shares are like “blank checks” - they don’t count toward ownership until they are actually issued.
  

Outstanding Shares

Outstanding shares are the shares that have actually been issued to founders, employees, or investors. These are the shares that count toward ownership percentages at any given time.

• If your company authorizes 10 million shares but only issues 8 million, then only those 8 million are considered outstanding.
  
• Outstanding shares determine the ownership breakdown on the cap table today.
  

Fully Diluted Shares

Ownership gets more complicated once you factor in equity grants that haven’t yet been exercised - like stock options in the employee pool or convertible securities. To capture the full picture, investors and lawyers use the concept of fully diluted shares.

• Fully diluted shares = Outstanding shares + All potential shares that could be issued (options, warrants, RSUs, convertibles).
  
• This is the denominator investors use when calculating their percentage ownership.
  
• If your startup has 8 million outstanding shares plus an option pool of 2 million, the fully diluted total is 10 million.
  

Why this matters: When an employee is told they own “1 percent,” it almost always means 1 percent of fully diluted shares, not outstanding shares. Failing to clarify this point is a common source of confusion.

The Standard 10 Million Share Structure

Why do so many startups choose 10 million shares at incorporation?

• Psychological value – It’s easier to grant an employee 50,000 shares than to say they own 0.5 percent.
  
• Flexibility – A larger share count makes it easier to divide equity without issuing fractional shares.
  
• Investor familiarity – Most investors are accustomed to this structure and prefer its simplicity.
  

Example:

• Three founders split 8.5 million shares among themselves.
  
• 1.5 million shares (15 percent) are reserved for the employee option pool.
  
• Authorized shares = 10 million. Outstanding shares at incorporation = 8.5 million. Fully diluted shares = 10 million.
  
  

Why Percentages Can Be Misleading

Employees often focus on percentages when negotiating equity, but percentages are always tied to the total share count - which changes as the company grows.

• 50,000 shares might be 0.5 percent today but 0.25 percent after a new funding round.
  
• Promising equity in percentages without tying it to actual share numbers creates misunderstandings.
  
• Best practice: Always grant equity in number of shares, not percentages. Then explain how those shares relate to both current and fully diluted totals.
  

The Takeaway

Understanding shares is the foundation of equity literacy. Authorized shares create capacity. Outstanding shares reflect current ownership. Fully diluted shares tell the complete story, including future grants and obligations. For founders, employees, and investors alike, clarity around these concepts prevents disputes and ensures everyone speaks the same equity language.

As startups grow, they need a way to attract and retain top talent without relying solely on cash salaries. This is where equity incentive plans and option pools come into play. These structures set aside shares specifically for employees, advisors, and contractors, ensuring the company has the flexibility to grant equity as part of compensation packages.

An option pool is more than a legal technicality. It’s a strategic decision that affects hiring, culture, fundraising, and valuation. Founders who misunderstand or delay setting up a pool often run into costly problems later.

What Is an Option Pool? 

An option pool is a block of shares reserved for future equity grants to employees and other contributors. While commonly called an “Employee Stock Option Plan (ESOP),” this is a misnomer. The correct term is Equity Incentive Plan (EIP), because option pools may include more than just stock options.

Instruments commonly granted under an EIP include:

• Stock options (Incentive Stock Options and Non-Qualified Stock Options)
  
• Restricted stock awards (RSAs)
  
• Restricted stock units (RSUs)
  
• Other equity-linked incentives like stock appreciation rights (SARs)
  

The pool ensures the company has the flexibility to issue equity in structured, legally compliant ways as the team grows.

How Big Should the Pool Be?

There’s no universal rule, but early-stage startups typically reserve 10 to 20 percent of total equity for the option pool.

• Smaller teams may start with 10 percent if hiring needs are limited.
  
• High-growth startups may reserve closer to 20 percent to cover planned hires across engineering, sales, and leadership roles.
  
• Investors often negotiate option pool size as part of funding rounds, since they want enough equity reserved for key hires without excessive dilution to their shares.
  

Example:

• A company authorizes 10 million shares.
  
• Founders issue 8.5 million shares to themselves.
  
• 1.5 million shares are reserved for the option pool (15 percent).
  
• Fully diluted, the founders own 85 percent and the option pool represents 15 percent.
  

When Should You Create an Option Pool?

The best time to create an option pool is at incorporation. This prevents the company from issuing 100 percent of shares to founders and later trying to “carve out” a pool - which can create complications and conflicts.

Why timing matters:

• Adding a pool later dilutes existing shareholders, including founders.
  
• Investors may require you to increase the pool before funding, effectively shifting dilution onto the founders.
  
• Establishing the pool early creates a clean, professional cap table.
  

How Are Option Pools Approved?

Equity Incentive Plans require formal approval through both the board of directors and shareholders.

The approval process generally includes:

1. The board designs the plan, including pool size, plan administrators, vesting rules, and exercise windows.
   
2. The plan is drafted into legal documents.
   
3. Shareholders review and approve the plan.
   
4. Once approved, the company can begin issuing equity grants under the plan.
   

In early-stage startups, approvals often happen via written consent rather than formal meetings.

Best Practices for Managing an Option Pool

• Align pool size with hiring plans. Don’t set aside too few shares, but avoid over-allocating and diluting founders unnecessarily.
  
• Review pool size regularly. As the company grows and raises capital, you’ll likely need to adjust the pool.
  
• Document every grant. Clean records are critical for compliance and investor confidence.
  
• Work with experienced legal counsel. Equity grants are governed by securities laws, and mistakes can create liability.
  

The Strategic Impact of Option Pools

Option pools aren’t just about mechanics - they influence company culture, hiring ability, and fundraising dynamics.

• For founders: Pools create flexibility but also cause dilution, so size them carefully.
  
• For employees: Pools provide ownership opportunities that motivate long-term commitment.
  
• For investors: Pools protect their investment by ensuring the company can hire and retain top talent.
  

Handled properly, an option pool is one of the most powerful tools a startup has to build its team and sustain growth.

Stock options are the most common form of equity compensation in startups. They give employees, advisors, and contractors the right to buy company stock at a fixed price (the “exercise price” or “strike price”) in the future, usually after a vesting period. If the company’s value increases, employees can exercise their options and capture the upside.

But not all stock options are the same. The two main types are Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). Each carries different tax implications, eligibility rules, and strategic uses. Understanding the differences is critical for founders when structuring equity plans and for employees when evaluating their compensation.

Incentive Stock Options (ISOs) 

ISOs are a special category of options available only to employees. They come with potential tax advantages, making them attractive to early hires and long-term contributors.

Advantages:

• No tax at the time of exercise (if conditions are met).
  
• Gains may qualify for long-term capital gains rates instead of ordinary income tax, significantly lowering tax liability.
  
• Seen as more attractive by employees who can afford to hold shares.
  

Limitations:

• Only employees are eligible (not contractors, advisors, or board members).
  
• Strict holding requirements: shares must be held at least 2 years from grant date and 1 year from exercise to qualify for favorable tax treatment.
  
• Subject to a $100,000 annual limit on exercisable ISOs per employee.
  
• May trigger Alternative Minimum Tax (AMT) at exercise, depending on income and valuation.
  
• Must generally be exercised within 90 days of leaving the company.
  

Best for: Full-time employees in early-stage startups who want tax-advantaged ownership.

Non-Qualified Stock Options (NSOs)

NSOs are more flexible than ISOs and can be granted to employees, contractors, advisors, and board members. They don’t offer the same tax benefits, but they provide companies with greater versatility.

Advantages:

• No limits on who can receive them.
  
• No $100,000 annual exercise cap.
  
• Easier administration and fewer restrictions compared to ISOs.
  
• Provide companies with a tax deduction when exercised.
  

Limitations:

• Taxed as ordinary income at exercise on the difference between strike price and fair market value.
  
• Subject to withholding taxes for employees.
  
• Less attractive to employees if the company’s valuation is high.
  

Best for: Contractors, advisors, international hires, and employees who exceed ISO limits.

Key Differences at a Glance

Vesting and Exercise Windows

Like other equity grants, stock options vest over time, typically following the four-year schedule with a one-year cliff. Employees only gain the right to exercise their options as they vest.

Exercise windows:

• Standard: 90 days after leaving the company.
  
• Extended windows: Some startups now offer 6–12 months, or even multiple years, to make exercising more affordable for employees.
  
• Early exercise: Some option grants allow employees to exercise before vesting, subject to company repurchase rights. Early exercise combined with an 83(b) election can significantly reduce tax liability if the company grows in value.
  
  

Strategic Considerations for Founders

• Use ISOs for full-time employees where possible, since they are more attractive due to tax benefits.
  
• Use NSOs for contractors, advisors, board members, and employees who exceed ISO limits.
  
• Clearly communicate tax implications and risks to employees. Many employees don’t fully understand how options work, which can lead to dissatisfaction or financial surprises later.
  
• Maintain compliance with 409A valuations to ensure strike prices are set at fair market value.
  

The Takeaway

Stock options are powerful incentives, but they are not one-size-fits-all. ISOs provide employees with valuable tax advantages but are limited in scope. NSOs are more flexible but less tax-friendly for recipients. For founders, the key is to balance flexibility, compliance, and employee motivation. For employees, understanding the type of option granted - and its tax consequences - is critical to making the most of their equity.

Vesting is one of the most important mechanisms in startup equity. It ensures that ownership is earned over time, not granted all at once. Without vesting, a co-founder could leave after a few months and still retain a large ownership stake, or an early employee could walk away with significant equity before contributing meaningful value.

Vesting aligns incentives, protects the company, and motivates long-term commitment. And when major events like acquisitions occur, acceleration provisions provide additional protection for employees and founders, ensuring they are fairly compensated during transitions.

What Is Vesting? 

Vesting is the process by which equity ownership rights transfer gradually over time. Instead of receiving full ownership on day one, recipients earn equity in increments, tied to their continued work at the company.

Purposes of vesting:

• Rewards employees for long-term commitment.
  
• Protects the company from giving away equity to short-term hires.
  
• Creates stability and alignment among founders, employees, and investors.
  

Types of Vesting Schedules

1. Time-Based Vesting
   
   
   • The most common approach.
     
   • Employees earn equity gradually over a set period.
     
   • Standard schedule: four years, with a one-year cliff.
     
2. Performance-Based Vesting
   
   • Equity vests when specific milestones are achieved.
     
   • Examples: revenue targets, product launches, user growth, or other strategic goals.
     
3. Hybrid Vesting
   
   • Combines time-based and performance-based criteria.
     
   • Useful for tailoring incentives to key executives or specialized roles.
     

The One-Year Cliff

Nearly all startup vesting schedules include a cliff - a minimum time period before any equity vests.

• Standard: one year.
  
• If the employee leaves before the cliff, they receive nothing.
  
• If they stay past the cliff, they vest 25 percent immediately, with the remainder vesting monthly or quarterly.
  

Why cliffs matter:

• Protect the company from handing equity to short-term hires.
  
• Ensure cultural fit before ownership is granted.
  
• Reinforce employee commitment during the first year, when risk is highest.
  

A Typical Vesting Scenario

An employee is granted 48,000 shares under a four-year vesting schedule with a one-year cliff:

• Months 0–12: 0 percent vested.
  
• Month 12: 25 percent vests (12,000 shares).
  
• Months 13–48: Remaining 75 percent vests monthly (1,000 shares per month).
  
• Month 48: 100 percent vested (48,000 shares).
  

Acceleration: Vesting in Special Situations 

While vesting ensures gradual ownership, acceleration provisions allow employees or founders to vest faster under certain circumstances - most often in the event of an acquisition.

Types of Acceleration

1. Single Trigger Acceleration
   
   
   • All unvested shares vest immediately upon a single event, usually an acquisition.
     
   • Rarely used, since it may demotivate employees post-acquisition.
     
2. Double Trigger Acceleration
   
   
   • The most common structure.
     
   • Requires two events:
     
     
     1. The company is acquired.
        
     2. The employee is terminated without cause (or resigns for good reason).
        
   • Protects employees while still keeping them motivated through the transition.
     

Why Investors Prefer Double Trigger

• Keeps employees engaged after acquisition.
  
• Reduces investment risk by avoiding mass equity acceleration at closing.
  
• Aligns employee, company, and investor interests during transitions.
  

Common Pitfalls in Vesting

• Failing to communicate vesting terms clearly to employees.
  
• Using the same vesting schedule for every role, regardless of responsibilities.
  
• Forgetting to revisit vesting schedules as the company evolves.
  
• Omitting acceleration provisions, which can harm retention during acquisitions.
  

The Takeaway

Vesting schedules transform equity from a static grant into a dynamic retention tool. They create fairness, motivate long-term contributions, and protect the company’s ownership structure. Acceleration provisions add another layer of protection, ensuring employees and founders are compensated fairly during major transitions. Together, vesting and acceleration form the backbone of effective equity compensation.

While stock options are the most common form of startup equity, they aren’t the only tool available. Two other instruments - Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs) - play important roles in equity compensation. Both grant ownership in company stock, but they function very differently in practice.

Understanding when to use RSAs versus RSUs is critical for founders, since the choice can impact taxation, cash flow, and employee motivation.

Restricted Stock Awards (RSAs)

RSAs are actual shares of company stock granted to a recipient upfront, typically subject to vesting. The company retains the right to repurchase unvested shares if the recipient leaves early.

Key Features of RSAs:

• Ownership begins immediately, even if subject to vesting.
  
• Usually granted when the company’s valuation is very low, making the purchase price minimal.
  
• Common for founders and very early employees.
  
• Subject to ordinary income tax unless the recipient files an 83(b) election.
  

Advantages of RSAs:

• Low-cost way for founders and early hires to acquire meaningful equity.
  
• Recipients have immediate shareholder rights (voting, dividends).
  
• Simple structure when valuation is negligible.
  

Limitations of RSAs:

• Less practical once the company’s valuation increases, since recipients must pay fair market value for shares.
  
• Without an 83(b) election, taxes can become a major burden as shares vest.
  

Best for: Founders and very early employees joining when the company has little or no valuation.

Restricted Stock Units (RSUs)

RSUs are promises to deliver stock in the future once certain conditions are met (usually vesting). Unlike RSAs, recipients do not own stock upfront - they only gain shares when vesting is complete.

Key Features of RSUs:

• No upfront purchase required.
  
• Shares are delivered upon vesting, not at grant.
  
• Taxed as ordinary income when shares are delivered.
  
• More common in later-stage startups and public companies.
  

Advantages of RSUs:

• No need to pay for shares upfront, which can be prohibitive at higher valuations.
  
• Employees avoid the risk of buying stock that could later decline in value.
  
• Easier for companies to manage at later stages.
  

Limitations of RSUs:

• No shareholder rights until shares are actually delivered.
  
• Taxed as income upon vesting, regardless of whether the shares are liquid.
  
• Less common in very early-stage companies due to accounting and tax complexities.
  

Best for: Later-stage startups and public companies with higher valuations.

Comparing RSAs and RSUs

Strategic Use Cases

• Founders and early employees: RSAs make sense when company valuation is low and shares can be purchased inexpensively. Filing an 83(b) election protects against future tax burdens.
  
• Later hires: RSUs are better for senior hires at later stages, where fair market value is too high for an upfront purchase. They provide equity without requiring employees to take financial risks upfront.
  

The Takeaway

RSAs and RSUs are both valuable tools, but they serve different purposes at different stages. RSAs reward early contributors when stock value is negligible, while RSUs make equity grants feasible for later-stage employees when valuations rise. Founders should carefully consider which instrument to use, based on company stage, valuation, and employee profile.

Few topics in startup equity create as much confusion - or as many costly mistakes - as the 83(b) election. For founders and early employees receiving restricted stock or early-exercised options, filing an 83(b) election can mean the difference between a minimal tax bill today and a crushing tax liability in the future.

What Is an 83(b) Election?

An 83(b) election is a filing with the IRS that allows the recipient of restricted stock (or early-exercised options) to pay taxes on the stock’s value at the time of grant, rather than as it vests.

• Without an 83(b): You pay taxes each time shares vest, based on their fair market value at that moment. If the company grows quickly, the tax bill increases dramatically with each vesting event.
  
• With an 83(b): You lock in taxes at today’s (often negligible) value, even if the company grows significantly later.
  
  

Why It Matters for Founders and Early Employees

At incorporation, the fair market value of shares is typically extremely low. Founders may buy millions of shares for a few hundred dollars. Filing an 83(b) election ensures they pay taxes based on that low value, rather than future, higher valuations.

Example:

• A founder is granted 4 million shares at a price of $0.0001 each ($400 total).
  
• With an 83(b) election: They pay ordinary income tax on $400 at grant. No further taxes are due until the shares are sold.
  
• Without an 83(b) election: Each year as shares vest, they pay taxes on the fair market value at that time. If valuation rises to $1.00 per share, they could face hundreds of thousands of dollars in taxable income before any liquidity event.
  
  

The 30-Day Filing Deadline

The IRS requires that 83(b) elections be filed within 30 days of the grant date. This deadline is strict - there are no extensions, and missing it can have severe consequences.

Filing process:

1. Complete IRS Form 83(b).
   
2. Mail it to the IRS office where you file your return.
   
3. Include a copy with your personal tax return for that year.
   
4. Provide a copy to your employer for their records.
   

Tip: Always send your filing via certified mail with return receipt to confirm delivery.

Risks of Not Filing

Failing to file an 83(b) election can create massive, unexpected tax burdens.

• You may owe taxes on shares as they vest, based on increasing company valuation.
  
• Taxes are due even if your shares are illiquid and cannot be sold.
  
• If you later leave the company, you could face a tax bill on unvested shares you never fully owned.
  

Risks of Filing

While filing is usually beneficial for founders and early hires, there are risks:

• If the company fails, you may have paid taxes upfront on shares that become worthless.
  
• The upfront payment may be wasted if you leave before vesting is complete.
  

That said, in most early-stage situations, the cost of filing is minimal compared to the potential tax savings.

Who Should File an 83(b)?

• Founders receiving restricted stock at incorporation – almost always.
  
• Early employees with restricted stock grants – generally advisable if share value is low.
  
• Employees with early-exercised stock options – recommended if shares are inexpensive and long-term commitment is expected.
  

The Takeaway

An 83(b) election is one of the most important tax filings a founder or early employee will ever make. Done correctly, it locks in today’s low valuation and avoids years of escalating tax bills. Done incorrectly - or missed entirely - it can result in painful financial consequences.

For any founder or employee receiving restricted stock, filing an 83(b) within the 30-day window should be a top priority.

Equity ownership in a startup is not static. As the company raises money, issues stock options, or grants new equity, existing shareholders’ percentage of ownership decreases. This process is called dilution.

Many founders and employees view dilution as inherently negative, but the reality is more nuanced. While dilution reduces the percentage of the company you own, it often increases the overall value of your stake. Understanding dilution is critical to managing expectations and making smart decisions during fundraising and hiring.

What Is Dilution?

Dilution occurs when a company issues new shares, which increases the total number of outstanding shares. As the denominator grows, each existing shareholder’s percentage ownership shrinks.

Example:

• Before funding: 10 million total shares. A founder owns 5 million (50 percent).
  
• After issuing 2.5 million shares to new investors: 12.5 million total shares. The founder still owns 5 million, but their ownership drops to 40 percent.
  

The founder’s percentage ownership declined, but if the funding round increased the company’s valuation, their stake in dollar terms may actually be worth more.

Common Triggers for Dilution

1. Funding Rounds
   
   
   • Each time investors purchase new shares, existing shareholders’ percentages decrease.
     
   • Dilution is the tradeoff for raising capital to grow the business.
     
2. Option Pool Expansion
   
   
   • When companies increase the employee option pool, dilution occurs.
     
   • Investors often require pool expansion before a financing round, shifting dilution onto the founders.
     
3. Convertible Securities
   
   
   • SAFEs, convertible notes, and warrants convert into equity during funding rounds, adding to the share count.
     
4. Exercised Options and RSUs
   
   
   • When employees exercise options or RSUs vest, more shares enter circulation, contributing to dilution.
     

Why Dilution Isn’t Always Bad

It’s easy to focus on the shrinking percentage, but dilution must be considered alongside company growth.

• Value creation: If your ownership percentage decreases but the company valuation increases significantly, the dollar value of your stake rises.
  
• Capital access: Dilution allows the company to raise the funds necessary to scale, hire, and build competitive advantage.
  
• Team incentives: Dilution from employee option pools ensures you can attract top talent, which in turn increases company value.
  

Example:

• A founder owns 50 percent of a $2 million company = $1 million stake.
  
• After dilution, they own 40 percent of a $10 million company = $4 million stake.
  
• Lower percentage, much higher total value.
  

Managing Dilution Strategically

• Plan option pools early: Setting aside equity at incorporation avoids last-minute negotiations before funding rounds.
  
• Negotiate pool size during financing: Investors may push for larger pools than necessary. Push back with realistic hiring projections.
  
• Track fully diluted ownership: Always understand your ownership percentage based on fully diluted shares, not just current outstanding shares.
  
• Communicate with employees: Help them see that dilution is part of growth, not a loss of value.
  

The Takeaway

Dilution is not a sign of failure - it’s a natural part of building a company. Every funding round, option grant, or equity issuance reduces ownership percentages, but ideally increases company value at the same time. The key is to manage dilution thoughtfully, balance the interests of founders, employees, and investors, and always keep an eye on the bigger picture: building a larger, more valuable company.

Not all equity is created equal. In startups, ownership is generally divided into common stock and preferred stock. Both represent ownership in the company, but they carry very different rights, protections, and implications for founders, employees, and investors.

Understanding the distinction is critical for founders. While employees and founders typically hold common stock, investors almost always demand preferred stock, which gives them financial and legal advantages.

Common Stock

Who holds it:

• Founders
  
• Employees (via stock options, RSAs, or RSUs)
  
• Advisors (via options or restricted stock grants)
  

Key features of common stock:

• Basic ownership rights: One vote per share on matters like electing directors.
  
• Lowest priority in liquidation: Common shareholders are paid last if the company is sold or liquidated.
  
• Upside potential: If the company succeeds, common stockholders participate in unlimited upside.
  
• Typically lacks special protections: No guaranteed dividends, liquidation preferences, or anti-dilution rights.
  

Why it matters: Common stock represents the entrepreneurial risk. Founders and employees shoulder the highest risk but also enjoy the purest upside if the company thrives.

Preferred Stock

Who holds it:

• Angel investors
  
• Venture capitalists
  
• Strategic investors
  

Key features of preferred stock:

• Liquidation preference: Investors get their money back (often with a multiple, like 1x or 2x) before common shareholders receive anything.
  
• Dividend rights: Preferred stock may carry dividends, though most early-stage investors don’t expect cash payouts.
  
• Conversion rights: Preferred stock can usually convert into common stock, often at the investor’s discretion.
  
• Protective provisions: Investors gain veto power over major company decisions, such as issuing new shares or selling the company.
  
• Anti-dilution protections: Investors are shielded from some of the downside of future down rounds.
  

Why it matters: Preferred stock reduces investor risk and ensures they are compensated first in liquidity events.

Comparing Common and Preferred Stock

Strategic Considerations for Founders

• Expect preferred stock in every financing round. Investors will demand protections that tilt the balance of risk in their favor.
  
• Focus on the “preference stack.” Multiple rounds of preferred stock can create a seniority system where later investors get paid before earlier ones - and always before common holders.
  
• Understand alignment: Founders and employees benefit most from upside growth, while investors are protected against downside risk. Keeping interests aligned requires balancing both.
  
• Don’t ignore the details: Terms like liquidation preferences, anti-dilution clauses, and protective provisions can significantly affect founder outcomes.
  

The Takeaway

Common stock and preferred stock represent two sides of the startup equation. Founders and employees hold common stock, bearing more risk but enjoying the purest upside. Investors hold preferred stock, giving them protection and priority in liquidity events. The balance between the two is at the heart of every fundraising negotiation - and understanding that balance is key to protecting founder interests while attracting capital.

In addition to stock, options, and RSUs, another equity instrument that sometimes appears in startup financing is the warrant. Warrants are similar to stock options, but they are typically issued to investors, lenders, or strategic partners rather than employees.

Founders may encounter warrants when negotiating financing or commercial agreements. While they may seem like a minor detail, warrants can affect dilution, valuation, and investor relationships.

What Is a Warrant?

A warrant is a contract that gives the holder the right to purchase shares of stock at a fixed price (the exercise price) for a specific period of time.

Key features:

• Similar to stock options but usually issued to non-employees.
  
• Can be tied to financing, debt, or strategic partnerships.
  
• Often last longer than employee stock options (5–10 years).
  
• Upon exercise, warrant holders become shareholders, just like option holders.
  

How Warrants Differ from Stock Options

While warrants and stock options function similarly, the differences lie in who receives them and why they are issued.

When Startups Issue Warrants

1. Debt Financing
   
   
   • Lenders may ask for warrants as part of a venture debt package.
     
   • Warrants give them additional upside if the company succeeds.
     
2. Strategic Partnerships
   
   
   • Companies may issue warrants to key business partners or vendors.
     
   • Provides incentive for long-term collaboration and commitment.
     
3. Equity Financing Rounds
   
   
   • Occasionally, investors request warrants in addition to preferred shares.
     
   • Warrants act as a “sweetener” in competitive funding negotiations.
     

Dilution and Valuation Implications

Like stock options, warrants add to the fully diluted share count, which reduces the percentage ownership of existing shareholders.

• Warrants may not have immediate impact, since they are not exercised until later.
  
• However, investors and acquirers always calculate ownership based on the assumption that all warrants will eventually be exercised.
  
• The impact of warrants should always be modeled on the cap table before signing any financing agreement.
  

Best Practices for Founders

• Model the dilution. Always calculate how warrants will affect ownership if exercised.
  
• Negotiate terms. Warrants can be a valuable tool for closing financing, but try to limit their size and scope.
  
• Track carefully. Warrants must be included in your equity records and cap table to avoid surprises later.
  
• Consult counsel. Warrant agreements often contain detailed terms that can create unexpected obligations.
  

The Takeaway

Warrants are not as common as stock options, but they frequently appear in financing and strategic partnership deals. They function like long-term options for investors and partners, giving them the right to buy stock in the future. While useful for securing capital or relationships, warrants also contribute to dilution and must be managed carefully.

For many startups, the ultimate goal is an exit - through acquisition, merger, or an IPO. In these scenarios, how equity is structured and managed has a direct impact on what founders, employees, and investors actually take home. Understanding how equity plays out in acquisitions and other exits helps you negotiate terms, protect your team, and maximize outcomes.

How Equity Is Treated in Acquisitions

When a company is acquired, the acquiring company typically purchases all outstanding shares. The proceeds are then distributed according to the capital stack - the hierarchy of ownership rights.

• Preferred shareholders (investors) usually get paid first, thanks to liquidation preferences.
  
• Common shareholders (founders, employees, advisors) receive proceeds only after preferred obligations are met.
  
• Option holders and RSU holders may have their grants assumed, accelerated, or cashed out depending on the acquisition agreement.
  

The structure of your equity agreements determines who gets what - and in what order.

Option Pools and Acquisitions

Employee stock options play an important role in acquisitions. Options may be:

1. Assumed by the acquiring company – Converted into options for the acquirer’s stock, keeping employees invested.
   
2. Cashed out – Employees receive a payout for vested options, while unvested options may be forfeited.
   
3. Accelerated – Unvested options become fully vested, often under acceleration provisions (see below).
   

How your option pool is handled can significantly affect employee morale and retention during and after a deal.

Acceleration Provisions in Exit Scenarios 

Acceleration determines whether employees and founders vest additional equity upon an acquisition.

• Single Trigger Acceleration: All unvested equity vests immediately upon acquisition. Rare in practice, since it can demotivate employees post-deal.
  
• Double Trigger Acceleration: Requires both (1) an acquisition and (2) termination without cause (or resignation for good reason). This is the most common and investor-friendly structure.
  

Why it matters: Double trigger acceleration protects employees from being left behind in a deal while still encouraging retention through the transition.

Liquidation Preferences and Founder Outcomes

Liquidation preferences in preferred stock agreements heavily influence how proceeds are distributed.

Example:

• Company sells for $20 million.
  
• Investors hold $15 million in preferred stock with a 1x liquidation preference.
  
• Investors receive $15 million before common shareholders see anything.
  
• Founders and employees split the remaining $5 million.
  

In down exits, preferences can wipe out common shareholders entirely.

Employee Considerations in M&A

Acquisitions are high-stakes events for employees with equity. Common outcomes include:

• Retention packages – Acquirers often grant new RSUs or cash bonuses to keep key employees post-acquisition.
  
• Option repricing – If options are underwater (strike price higher than exit value), acquirers may issue replacement grants.
  
• Cash buyouts – Employees may receive immediate liquidity for vested equity.
  

Clear communication about equity treatment helps maintain trust and reduce anxiety during acquisitions.

IPO Scenarios

In an IPO, equity converts into publicly traded stock. Employees, founders, and investors all have the opportunity to sell shares - subject to lock-up periods (typically 180 days) that prevent immediate liquidation.

Key considerations in IPOs:

• Liquidity: Employees finally have a market to sell shares.
  
• Dilution: New shares issued in the IPO further dilute existing holders, though typically offset by higher company valuation.
  
• Transparency: Once public, all equity structures, preferences, and payouts become visible.
  

The Takeaway

Equity is not just about ownership during the life of the company - it determines how proceeds are shared in exits. Investors with preferred stock receive downside protection, while common holders (founders and employees) rely on upside growth and thoughtful deal terms. Option pools, acceleration provisions, and liquidation preferences all play a critical role in shaping outcomes.

For founders, planning equity with exit scenarios in mind ensures fairness, protects employee incentives, and positions the company for smoother negotiations when opportunities arise.

Equity is one of the most valuable assets a startup has. Managed well, it motivates founders, attracts top talent, and satisfies investors. Managed poorly, it leads to disputes, compliance issues, and loss of control. Many equity mistakes are avoidable, but once made, they can be extremely costly to fix.

Here are the most common pitfalls founders should watch out for.

1. Over-Granting Equity Too Early

Some founders give away large portions of equity to early employees, advisors, or contractors without considering long-term dilution. While early contributions matter, equity is finite and must be allocated strategically.

Prevention:

• Use equity benchmarks for roles and stages.
  
• Reserve meaningful grants for hires who will stay through key growth phases.
  
• Compensate advisors modestly - they typically receive a fraction of a percent, not whole points of equity.
  

2. Failing to Document Equity Grants Properly

Verbal promises or vague emails about “a few percent” are recipes for disaster. If not documented in board-approved agreements, these promises can lead to disputes or even lawsuits.

Prevention:

• Document all equity grants in writing.
  
• Ensure they are approved by the board and tracked on the cap table.
  
• Use professional legal counsel to draft and review grant agreements.
  

3. Ignoring Vesting and 83(b) Elections

Granting equity without vesting creates risk that someone can leave early but still retain ownership. Likewise, failing to file 83(b) elections can saddle founders and employees with unnecessary tax burdens.

Prevention:

• Always implement vesting schedules for founders and employees.
  
• Remind recipients of the 30-day 83(b) filing deadline.
  
• Keep permanent records of all elections filed.
  

4. Neglecting Compliance Obligations

Equity is subject to securities laws, tax rules, and valuation requirements. Skipping compliance can expose the company to penalties and make it unattractive to investors.

Common issues include:

• Failing to obtain 409A valuations for setting option strike prices.
  
• Forgetting to file necessary state or federal securities exemptions.
  
• Not updating option pools or cap tables after grants.
  

Prevention:

• Work with startup counsel familiar with securities compliance.
  
• Schedule regular 409A valuations (at least annually or after major events).
  
• Maintain accurate, up-to-date equity records.
  

5. Poor Communication About Equity Value

Employees often misunderstand what their equity is worth, leading to disappointment and distrust. Founders sometimes avoid talking about dilution or liquidity, creating unrealistic expectations.

Prevention:

• Be transparent about valuation, dilution, and vesting.
  
• Provide education sessions or resources on how equity works.
  
• Frame equity as long-term upside, not guaranteed wealth.
  

6. Ignoring Dilution Dynamics

Some founders focus too much on maintaining their percentage ownership rather than growing the overall value of the company. Refusing to accept reasonable dilution can stall fundraising or hiring.

Prevention:

• Model dilution scenarios before financing rounds.
  
• Balance founder ownership with the need to raise capital and recruit talent.
  
• Remember: owning a smaller percentage of a much larger company usually means greater absolute value.
  

7. Complex or Unusual Equity Structures

Exotic share classes, overly generous advisor grants, or complicated vesting rules can scare off investors. Simplicity is key in the early stages.

Prevention:

• Stick with standard equity structures until you have clear strategic reasons to deviate.
  
• Avoid super-voting shares, complex liquidation waterfalls, or unnecessary carve-outs in the early years.
  

The Takeaway

Most equity pitfalls boil down to two mistakes: failing to plan ahead and failing to document properly. By implementing standard structures, maintaining compliance, and communicating openly, founders can avoid costly errors and keep their company attractive to employees and investors alike.

Equity isn’t static. The structure you put in place at incorporation is only the beginning. As your company grows, raises capital, and expands internationally, your equity framework will need to adapt. Thinking ahead helps you avoid surprises, maintain fairness, and keep your business attractive to both employees and investors.

Refreshing the Option Pool

Your first equity incentive plan and option pool won’t last forever. As you hire more employees, you’ll eventually run out of available shares.

Best practices for refreshing the pool:

• Plan ahead: Investors often negotiate pool expansions during fundraising rounds. Model your hiring needs so you don’t over-allocate or under-allocate.
  
• Expect dilution: Every expansion dilutes existing shareholders, but the tradeoff is retaining and motivating talent.
  
• Tie grants to role benchmarks: Use industry guidelines to size grants appropriately for new hires at different levels.
  

Preparing for Future Funding Rounds

Each round of financing brings new investors and additional dilution. But raising capital also increases company value.

Founder considerations:

• Cap table management: Keep ownership records current, including fully diluted shares.
  
• Negotiate pool sizing: Investors may push for a larger pool than you actually need. Defend your hiring plan with data.
  
• Understand preferences: Each financing round adds new preferred stock with specific rights. Track how preferences stack across rounds.
  

Adapting Equity Structures

Equity tools that work at the seed stage may not fit at later stages. For example:

• RSAs: Effective when valuation is low, but impractical later.
  
• Stock options: Standard for early- and mid-stage startups, but RSUs may become more common as valuation rises.
  
• Acceleration terms: Early employees may have broad acceleration protections, but later investors may limit them.
  

Regularly review your equity practices with legal and tax advisors to ensure they match your company’s stage and strategy.

Planning for International Expansion

Hiring globally introduces new complexities. Equity rules vary across jurisdictions, and U.S. stock option plans often don’t translate abroad.

Approaches for international teams:

• Country-specific option plans tailored to local tax laws.
  
• Phantom stock or cash-based incentives where equity isn’t practical.
  
• Careful compliance with employment and securities regulations in each country.
  

Expanding globally requires equity structures that motivate international employees without creating tax or legal headaches.

Keeping Employees Engaged

Equity’s power lies in making employees feel like owners. As your company grows, it’s easy for equity to become abstract or undervalued.

Ways to keep engagement high:

• Provide clear, transparent updates on company valuation and what it means for equity holders.
  
• Offer refresher workshops so employees understand how options, vesting, and dilution work.
  
• Reinforce the narrative that equity is a long-term upside opportunity, not a short-term guarantee.
  

The Takeaway

Looking ahead, equity should be treated as a living framework that evolves alongside your company. From refreshing option pools to planning for new funding rounds and adapting to international growth, your equity strategy will need regular attention. Founders who plan proactively, negotiate thoughtfully, and communicate clearly will avoid surprises and keep equity working as a powerful tool for growth.