Equity/RSU

Reading an equity grant honestly

An equity offer is usually presented as one large number. That number assumes you stay four years, the company succeeds, you can afford to exercise, and nobody dilutes you. Each assumption is worth pricing separately.

How it works

• Divides the grant across the vesting schedule, accounting for the cliff before anything vests at all.
• Subtracts the exercise cost, since options are the right to buy rather than shares you own.
• Expresses the grant as a percentage of the company, which is the only figure that survives a change in share count.

vested = total shares × (months served ÷ vesting months), after the cliff
gain   = vested × (fair value − strike price)
exercise cost = vested × strike price

ownership % = your shares ÷ total shares outstanding
dilution: the denominator grows at every funding round

Worked example

40,000 options at a 2.00 strike, current fair value 8.00, four-year vest with a one-year cliff, 10,000,000 shares outstanding.

1. after the one-year cliff: 10,000 options vest at once
2. exercising them costs 10,000 × 2.00 = 20,000
3. their value at 8.00 = 80,000, so paper gain = 60,000
4. ownership = 40,000 ÷ 10,000,000 = 0.400%
5. after a round taking the count to 12,500,000: 0.320%

Fully vested the grant shows a 240,000 paper gain — but reaching it needs four years, 80,000 of exercise cost, and no further dilution. A single funding round cut the stake by 20% without changing your share count at all.

Reading the result

• Options are not shares. You hold the right to buy at the strike price, and that right costs money to use. Exercising 10,000 options at a 2.00 strike means finding 20,000 in cash before you own anything.
• Exercising often triggers tax on the paper gain, in the year you exercise, on shares you may not be able to sell. People have owed real tax on gains that later evaporated — check the treatment in your jurisdiction before exercising anything illiquid.
• The share count is not fixed. Every funding round issues new shares, so your percentage falls even though your number does not. Ask for the fully diluted share count, not just the shares outstanding.
• Most option grants expire 90 days after you leave. If you cannot fund the exercise in that window, the equity you vested simply disappears — which is why the cash portion of an offer deserves more weight than the headline equity figure.

Common questions

What is a cliff and why does it matter?

A cliff is a minimum service period before anything vests, usually one year. Leave at eleven months and you get nothing at all, no matter how much has notionally accrued. After the cliff, vesting typically continues monthly or quarterly.

Should I count equity as part of my salary?

Only at a heavy discount, and never as if it were cash. For a public company with liquid shares, annualised value is reasonable. For a private company, compare offers on cash alone first, then ask whether the equity justifies the gap — which forces you to price the risk rather than assume it away.