Stock Compensation Review: How to Evaluate Equity in Job Offers
Stock compensation can represent 30-50% of your total startup compensation. But equity means nothing if the company fails, and vesting schedules mean you might not get it. This guide teaches you how to evaluate equity, ask the right questions, and decide if stock compensation is worth it.
How to Evaluate Stock Compensation
When evaluating an offer with stock: (1) Ask the company: current valuation, number of outstanding shares, your grant amount and strike price, (2) Calculate your ownership percentage: your shares / total shares = ownership %, (3) Estimate potential value at exit: valuation × ownership % (subject to dilution), (4) Compare to cash salary: if base is $100k and equity grant vests to $50k over 4 years = equivalent $12.5k/year extra compensation, is it worth it?, (5) Evaluate exit likelihood: early-stage startup (50% fail) vs late-stage unicorn (likely to exit) changes value, (6) Understand dilution: each funding round dilutes your ownership (future rounds are likely, especially for startups), (7) Worst case: company raises funding at lower valuation (down round), your options become underwater (worthless).
Dilution and Future Funding
This is often missed: when company raises new funding, existing shares are diluted. Example: (1) You own 1% of company (10,000 shares out of 1M shares), (2) Company raises Series A, issues 5M new shares to investors, (3) Now total shares = 6M, you still own 10,000 = 0.167% (diluted from 1% to 0.167%), (4) Your ownership went from 1M to 6M share total. Most startups will raise 3-5 funding rounds before exit, meaning your ownership might be diluted from 1% to 0.1%. Ask the company: (1) How many more funding rounds likely before exit?, (2) Will you receive pro-rata rights to participate in future rounds (let you buy more shares at new price)?, (3) What is the current share overhang (# of options/RSUs granted but not yet vested)? High overhang means future dilution.
Red Flags in Stock Compensation Offers
Watch for: (1) Extremely high valuations (unicorn wantabes inflating valuation), (2) Vague grant amounts ("you'll get 'competitive' equity" without numbers), (3) No clarity on exercise price or strike price, (4) One-year cliff (okay for standard, but 18+ month cliff is aggressive), (5) Clawback clauses on equity (company can take back vested shares), (6) No acceleration on acquisition (if company is sold, you get nothing unless company is sold at huge multiple), (7) Preference stacks (investors have priority over employees in liquidation), (8) No board observation rights or information rights (you're completely in the dark on company health). Ask to see the cap table (shareholder list and ownership percentages) and ask a lawyer to review stock grant terms.
Frequently Asked Questions
How much equity should I ask for in a startup?
It depends on your role and company stage: (1) Founder: 10-20% (if founder), (2) C-level / VP: 0.5-2%, (3) Senior employee: 0.1-0.5%, (4) Mid-level employee: 0.05-0.2%, (5) Junior employee: 0.01-0.05%. But don't just look at percentage—look at share count and estimated value at exit. Offer $200k salary + 0.01% of a 100M valuation vs $150k salary + 0.1% of a 50M valuation—the latter is bigger. Request numbers, not percentages.
Will my equity be diluted?
Almost certainly yes. Every funding round dilutes your ownership. If you own 1% and company raises a Series A that doubles share count, you now own 0.5%. Companies raising 3-5 funding rounds before exit is typical, so expect dilution to 0.1-0.2% of your original grant. Pro-rata rights help (you can buy more shares at each round to maintain %), but most early employees don't have these. Ask about future dilution plans.
Is stock compensation worth it vs higher salary?
Depends on company stage and exit probability: (1) Early-stage startup (50% failure rate): the risk is high, consider taking higher salary, (2) Late-stage startup funded by tier-1 VCs: exit likely (acquisition or IPO), stock is valuable, (3) Established company with stable equity value: stock is valuable if vesting is reasonable, (4) Rule of thumb: stock compensation is only valuable if company succeeds AND you stay long enough to vest. If either condition is uncertain, negotiate higher salary instead.
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