Startups and small enterprises often offer equity to candidates as a perk of the job. However, not many candidates have clarity about the technicalities in the offer. Terms like fair strike price, stock options, common stocks, and others can get overwhelming for a non-technical person. Here’s a comprehensive take on what equity means and entails for candidates to understand their equity offer better.



Equity essentially means having a stake in the company. Founders often give equity to employees to boost their sense of “belongingness” in the company and encourage them to build and grow the company. Not just that, it is only fair that people involved in establishing and growing the company share the gains.



However, an equity offer comes in all shapes and sizes and varies from company to company and employee to employee. Understanding common terms and standards used in equity offers can, therefore, be helpful.

The Equity Offer- An Overview

There are three primary elements of an equity offer:

Stock Options and Strike Price

In most cases, employees get equity compensation in the form of Stock Options. Stock options essentially are rights to own certain amount of shares at a fixed priced.



The fixed price at which the shares can be purchased irrespective of what their market value at that time of purchase is known as the strike price. For example, if the strike price one gets in their equity offer is ₹10/share. Four years down the line, after the company grows and its share is valued at ₹100/share, the person still gets to buy those shares at ₹10/share only. This means that the stock options gives a person an ‘option’ to buy shares at the strike prices even when the company’s valuation increases over time. And the difference between the current valuation and the strike price is known as the spread.

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Vesting Schedule

An equity offer also includes a vesting schedule. It is the plan laid out by the company indicating the period and schedule according to which the equity will be granted.



The equity is granted in parts according to the schedule and it is only after the vesting period is complete that the entire stock options are granted to the employee.

One-Year Cliff

Equity offers can entail a cliff period which is the time minimum time period the employee needs to serve before any equity is granted. within which no fraction of the equity is granted to the employee. This is essentially done to prevent their company share from going to people who are in it just for the equity,. The cliff period could vary anywhere from one to four years, though it’s usually one year long.

The Equity Offer- Standard

There are certain market standards for equity offers. The strike price for the stock options is determined by the board or founders. In most cases, it is the fair market value (or “FMV”) of the company’s common stock at that time. Moving on to the vesting schedule, most companies keep it as four-year vesting with a one-year cliff. Under this, one gets 1/4th vesting at the first anniversary of the grant and then 1/36th vesting per month after that.



Terms Related To Equity

Exercise Your Options

Exercising stock options essentially means purchasing the shares one was promised at the strike price mentioned in the equity agreement. It translates to exercising the right to buy the stock at the strike price regardless of what the market price of that stock is at the moment.

Common Stocks And Preferred Stocks

Common stocks and preferred stocks are the two major types of stocks sold by companies in the market. With respect to startups, the primary difference between owning preferred stocks over common stocks is that those with preferred stocks are paid first when there is a liquidity event. (the company is sold off)

Non-Qualified Stock Options And Incentive Stock Options

Buying stocks based on one’s stock options has tax implications also. These implications are based on the type of stock options mentioned in the equity offer. There are two types of options:



Non-Qualified Stock Options

In this case, when one exercises their options i.e. buy the stocks, the difference between the strike price and the market value is treated as income. So, income tax has to be paid on it. The difference between the market price and the strike price will, therefore, be taxed.

Incentive Stock Option

In this case, the tax has to be paid on capital gains from the stock. Which means one pays tax when they sell the shares they hold in the company and earn out of it.

Liquidity Event

A liquidity event refers to the scenario where the company gets acquired or converts ownership to cash via a public market. Those with equity in the company can now make money out of it by exercising their options and selling off their shares. For those who are still in their vesting period, their vest might get accelerated. They also have the option to work at the purchasing company and complete their vesting schedule. In rare cases, people may have to forfeit the grant to the purchasing company.

Restricted Stock

Some companies also offer restricted stocks to their employees. Restricted stocks are actual shares of the company as opposed to just the right to buy them. This means one gets to own a bit of the company without actually purchasing it ever. These too come with certain restrictions (read the name- “Restricted” stock). One of the most common restrictions, in this case, is vesting, as well.



Stocks and equity options can be a confusing thing to understand. We hope this article brought a little clarity.

