Equity Agreements Explained Simply

Equity agreements give you a share in a company's future value. They're a big part of why people join startups—but they come with jargon that's easy to miss. If you don't understand the key terms, you might overestimate what you're getting, or miss important details (like how long you have to exercise after you leave, or what happens in a sale). Here's a simple overview of how equity usually works, what the main terms mean, and what to check before you sign.

Stock options vs restricted stock

Before you sign, you need to know what type of equity you're getting. The two most common types are options and restricted stock. They work differently.

Options

Options give you the right to buy shares at a set "strike" price later. You don't pay when you get the grant—you pay when you "exercise" (actually buy the shares). If the company's share price goes up, you can buy at the strike price and (subject to tax and any lock-up) sell at the higher price. If the company isn't worth more than the strike price when you exercise, options can be worth little or nothing. You're also taking the risk that the company might not have a liquidity event (sale or IPO) for years, or ever. So options are a bet on the company's future value. The strike price is usually set at the "fair market value" of the shares at the time of grant—so when you're granted options, they're often "at the money" (strike equals current value) or close to it. If the company grows, the value of your options grows; if it doesn't, they may never be worth much.

Restricted stock

With restricted stock, you get actual shares (not just the right to buy). But they may "vest" over time—meaning you earn them gradually—and the company may have the right to buy them back ("repurchase") if you leave before they're fully vested. For example, you might get 10,000 shares that vest over 4 years with a 1-year cliff: you get nothing until year 1, then 2,500 shares, then 1/48 of the rest each month. If you leave at month 6, the company can buy back the unvested shares (usually at the price you paid, or nominal value). Restricted stock is often used for founders or very early employees; options are more common for employees who join later. The tax treatment can differ (e.g. in the US, restricted stock may be subject to an 83(b) election—get advice).

Vesting

Vesting is how you "earn" your equity over time. It protects the company (you don't get everything on day one and then leave) and aligns your incentive with staying. Here's what the main terms usually mean.

4-year vesting with 1-year cliff

This is the most common pattern. You earn 25% of your grant after one year (the "cliff"), then usually 1/48 of the total per month (or 1/16 per quarter) for the next three years. If you leave before the cliff, you get nothing—so if you're at 11 months and you quit or are let go, you lose all unvested equity. After the cliff, you keep what's vested. For example, if you have 48,000 options and you leave at 2 years, you've vested 24,000; the other 24,000 typically lapse (the company takes them back). The cliff is there so the company doesn't give away a lot of equity to someone who leaves in month 2. From your perspective, the cliff is a risk: if you're not sure you'll stay a year, understand that you get nothing if you leave before then.

Single-trigger vs double-trigger (in an acquisition)

If the company is acquired, what happens to your unvested equity? This is critical. "Single-trigger" acceleration means your unvested equity vests automatically when the deal closes—so you get everything (or a portion, e.g. 50%) as if you'd stayed. "Double-trigger" means your unvested equity vests only if (1) the deal happens and (2) you're terminated or your role is materially hurt (e.g. salary cut, demotion) within a certain period (e.g. 12 months) after the deal. Double-trigger is common—it protects you if the acquirer lets you go or sidelines you, but it doesn't give you a windfall just because the company was sold. Single-trigger is more protective for you (you get your equity on the deal regardless of whether you stay), but many companies don't offer it. Check your agreement: does it have single-trigger, double-trigger, or no acceleration? If there's no acceleration and you're laid off right after a sale, you could lose a lot of unvested equity.

Key terms to check

Before you sign, make sure you understand these. They can have a big impact on what you actually get.

Strike price

For options, the strike price is the price you'll pay per share when you exercise. It's usually set at the fair market value of the shares at the time of grant (as determined by the company's board or a 409A valuation in the US). So when you're granted options, they're often "at the money"—you're not paying a discount, but you're not overpaying either. If the company grows, the spread between the strike and the current value is your gain (subject to tax). Ask what the strike price is and when it was set. If the company hasn't done a valuation in a while, the strike might be stale (too low), which can have tax implications (e.g. in the US, "cheap" options can be subject to different tax treatment).

Expiration (exercise window)

If you leave the company, how long do you have to exercise your options? This is one of the most important terms. Often it's 90 days: if you don't exercise within 90 days of leaving, your options lapse (you lose them). The problem is that exercising costs money (you have to pay the strike price for each share), and you may also owe tax. If you have a lot of options and the strike price is high, you might need tens or hundreds of thousands of dollars to exercise—and if you've just left your job, you might not have that cash. So a 90-day window can force you to either come up with a lot of money quickly or give up your options. Some companies offer a longer window (e.g. 7 or 10 years, or until the original expiration date of the options). That's much better for you. Check your agreement: what's the post-termination exercise period? If it's only 90 days, understand the cost of exercising and plan accordingly (e.g. savings, or ask if the company would extend the window).

Dilution

When the company raises new funding or grants more equity, your percentage of the company can go down—that's dilution. For example, if you have 1% and the company issues a lot of new shares in a new round, you might end up with 0.7%. The agreement usually doesn't prevent dilution (investors and new hires get equity too), but it should be clear on how many shares or options you get and under what plan. You might see "fully diluted" numbers—that means your % is calculated including all existing shares plus all options and other rights that could become shares. That gives you a clearer picture of your real share of the company. Ask: how many shares (or options) do I get? What's that as a % on a fully diluted basis? Has the company done recent rounds that could dilute me further?

Running your equity agreement through BeforeYouSign can highlight vesting, exercise windows, and what happens in a sale so you know what you're getting and what to ask the company or a lawyer.