Startup Stock Options Explained: How to Evaluate an Equity Job Offer

"We're offering 20,000 options" sounds generous until you realize that number means nothing on its own. Whether equity in a startup is meaningful depends on what percentage of the company it represents, what you pay to buy the shares, how and when you earn them, the taxes involved, and whether the company ever has a sale or IPO. Here is how to read the offer.

The three common types of equity

Some very early employees and founders receive restricted stock directly instead, which is where the 83(b) election comes in (more on that below).

The IRS rules for ISOs are detailed, including holding-period requirements for favorable treatment and an annual limit on how much can qualify as ISOs. Options beyond that limit are treated as NSOs.

Step 1: Turn the number into a percentage

Ask the company for the fully diluted shares outstanding, which counts all shares, options and other rights to shares. Then:

Your options ÷ fully diluted shares = your ownership percentage

That percentage is what matters. Companies are usually willing to share this number with candidates who ask; reluctance is worth noting.

Remember that future funding rounds will dilute that percentage, typically at each round.

Step 2: Understand the strike price and 409A

The strike price (or exercise price) is what you pay per share to buy your options. For options to avoid adverse tax treatment under Section 409A of the tax code, the strike price is generally set at or above the company's common stock fair market value, determined by an independent 409A valuation.

Two numbers are useful:

• 409A price: the current fair market value of common stock, roughly your strike price for new grants.
• Preferred price: the price investors paid in the last round. It is usually higher than the 409A price because preferred stock carries extra rights.

The gap between them is not "free money." It reflects real differences in rights and risk.

Step 3: Read the vesting schedule

You earn options over time through vesting. A common US schedule is four years with a one-year cliff: nothing vests in the first year, then 25% vests at the one-year mark, and the rest vests monthly or quarterly after that.

Things to check:

• Cliff length and whether any credit is given for prior work.
• Acceleration: some agreements vest some or all unvested options if the company is acquired and you are let go ("double-trigger" acceleration). This is more common for senior hires.
• Refresh grants: whether the company grants additional equity over time.

Step 4: Know your exercise window

When you leave a company, unvested options are generally forfeited and vested options must be exercised within a post-termination exercise window. Many companies use 90 days, which aligns with the ISO rules: ISOs exercised more than three months after employment ends generally lose their ISO status and are treated as NSOs.

Some companies offer longer windows. That is a valuable, often overlooked benefit, because exercising can require significant cash and can trigger taxes on shares you cannot sell.

Step 5: Tax basics, without the trap doors

Simplified, and not tax advice:

• ISOs: no regular income tax when you exercise, but the difference between fair market value and strike price counts for the alternative minimum tax. If you meet holding periods, profit on sale can be taxed as long-term capital gains.
• NSOs: the spread at exercise is taxed as ordinary income and reported on your W-2 if you are an employee. Later growth is taxed as capital gains when you sell.
• RSUs: taxed as ordinary income when shares are delivered. At private companies, RSUs often have a second trigger, such as an IPO, before they settle.
• 83(b) election: for restricted stock or early-exercised options, filing an 83(b) election with the IRS within 30 days lets you be taxed on the value at grant, which may be very low early on. Miss the deadline and there is no fix.

Certain startup stock may qualify for special federal tax treatment on gains under the qualified small business stock rules, which have specific requirements and were amended in 2025. Ask a tax professional whether they apply to you.

Step 6: Compare offers fairly

When comparing a startup offer with a salaried job elsewhere:

1. Value the salary and benefits gap in cash.
2. Estimate equity value under a few scenarios: failure (zero), a modest outcome and a strong outcome.
3. Account for dilution from future rounds and the liquidation preferences investors hold, which are paid before common stock in a sale.
4. Factor in the time until you could plausibly sell, which can be many years.

A realistic approach is to accept the salary only if you could live on it, and treat equity as an upside bet, not part of your budget.

Questions to ask before you sign

• How many fully diluted shares are outstanding?
• What was the latest 409A valuation, and when was it done?
• How much has the company raised, and what are the investors' liquidation preferences?
• What is the vesting schedule, and is there any acceleration?
• What is the post-termination exercise window?
• Does the plan allow early exercise?
• Are there refresh grants or performance grants?
• Does the company have a history of tender offers or secondary sales that let employees sell some shares?

Before you decide

Equity can be the most valuable part of a startup offer or worth nothing at all, and the documents decide which outcomes are even possible. Get the numbers in writing, read the option agreement and equity plan, and talk to a tax professional before exercising or filing an 83(b). The time spent up front is small compared with the years of work the equity represents.

This article explains how startup equity generally works and is not tax or legal advice. Tax rules change; confirm current details with the IRS and a qualified adviser.