The offer says twenty thousand options. It is presented as the exciting part, the reason the base is fifteen thousand under what you could get elsewhere, and the founder says it with the tone of someone handing you something.
Here is what twenty thousand options tells you about what you have been given: nothing at all. Not approximately nothing. Nothing. It is a numerator with no denominator, and until you have the second number the first one cannot be read.
Four questions about that grant have real answers, and you can get all four before you sign. The fifth question, the one everybody actually asks, has no honest answer at all, and the confident-sounding people who answer it anyway are the reason engineers keep taking bad trades.
One: what percentage do you own?
Divide your options by the fully diluted share count. Fully diluted means every issued share, the entire option pool including the part not yet granted, and anything convertible into shares later. Not the shares issued so far. The whole thing.
Twenty thousand options of ten million shares is 0.2 per cent. The same twenty thousand of two hundred million shares is 0.01 per cent, one fiftieth as much, and the offer letter reads identically in both cases. This is not a subtle distinction that matters at the margin. It is a factor of fifty, and it is invisible unless you ask.
So ask, in writing, for the fully diluted share count. A company that gives it to you without fuss is normal. A company that will not, or that answers a different question, or that tells you the percentage without the numbers behind it, has told you something useful about how it will treat you later.
Two: what does it cost you to say yes?
Options are not shares. You have been given the right to buy shares at a fixed price, the strike, at some point in the future, using your own money. If your grant is twenty thousand options at a strike of one dollar, exercising the lot costs you twenty thousand dollars in cash.
That is the number worth holding next to your salary rather than reading on its own. On a base of 180,000 it is about six weeks of gross pay, which most people can find with notice. On a strike of five dollars it is a hundred thousand, which most people cannot find at all. The grant has not changed size; what has changed is whether you can ever take it up.
There is tax on top of this and it varies with the plan, the timing and your circumstances, so get advice specific to you rather than a rule of thumb from an article. What is worth knowing in advance is that in some structures the tax falls due when you exercise, on paper gains, for shares you cannot sell. People have been caught badly by that.
Three: how much comes off the top before you see anything?
This is the one that surprises people, and it is the reason a large exit can pay an employee very little.
When investors put money into a priced round they almost always take a liquidation preference: the right to get their money back at exit before common shareholders, which is what you hold, get anything. On a 1x preference, a company that has raised ten million and sells for twelve million pays the investors their ten, and the remaining two million is divided among everyone else.
Take the grant above. Twenty thousand options, ten million shares, so 0.2 per cent. Strike of one dollar. The company has raised ten million on a 1x non-participating preference. Here is what that grant returns across a range of exits, against what the headline arithmetic suggests:
| Company sells for | 0.2% of the sale | What you actually net |
|---|---|---|
| AUD 15m | 30,000 | nil |
| AUD 20m | 40,000 | nil |
| AUD 30m | 60,000 | 20,000 |
| AUD 50m | 100,000 | 60,000 |
| AUD 100m | 200,000 | 160,000 |
At a hundred million the gap is forty thousand dollars and the grant is still clearly worth having. At thirty million the headline says sixty thousand and the reality is twenty. At twenty million the headline says forty thousand and the reality is nothing whatsoever.
Note which end of that table is more likely. A hundred million dollar outcome is the one everybody pictures when they accept a lower base; the twenty and thirty million outcomes are the ordinary ones, and those are exactly where the preference stack eats the result.
If the preference is participating rather than non-participating, it is worse still: the investors take their money back and their share of what is left. Working out how much worse needs the cap table, which you will probably not be given, so the honest position is to know the question exists and to ask which kind you are under. At a modest exit it is usually most of your outcome.
Four: below what price is it worth nothing?
Combine the two preceding numbers and you get the single most useful figure in an equity conversation, and one that almost no offer letter contains. The exit has to clear the preference stack, and then your share of what is left has to at least cover what it costs you to exercise. Below that price the grant returns nothing at all, however many options you hold.
For the grant above, that figure is twenty million dollars. Ten million to clear the preference, and ten million more before 0.2 per cent of the remainder covers the twenty thousand dollar strike.
You are not being asked whether the company will succeed. You are being asked whether it will sell for more than twenty million dollars. Those are different questions, and only one of them is on the table.
That reframing is the whole point. "Do you believe in this company" is unanswerable and slightly manipulative. "Do you think this sells for over twenty million" is a question you can actually hold an opinion about, and it is the question your grant is really asking.
The ninety days almost nobody asks about
One more term, buried in the plan documents, catches good people every year: the post-termination exercise window. When you leave, you typically have ninety days to exercise your vested options or forfeit them.
Read that again with the numbers attached. You resign, and within ninety days you must produce twenty thousand dollars in cash, possibly with a tax bill attached, to buy shares you cannot sell, in a company you no longer work for, which may be worth nothing. The alternative is to walk away from four years of vesting.
Some plans offer a longer window, five or ten years, and it is worth more to you than a slightly larger grant would be. It is also the sort of thing a company will occasionally improve if you ask before signing and never once you have. Ask for it in writing.
What nobody can tell you, including us
Search for an equity calculator and you will find plenty that produce a single confident figure. Every one of them gets there the same way: it multiplies an exit valuation somebody made up by a probability somebody else made up. The output looks like analysis. It is arithmetic performed on two guesses, and the confidence is entirely manufactured by the formatting.
We are not going to do that, and we built our equity check so that it cannot. It works out your percentage, your cost to exercise against your salary, what a given exit returns after the preference stack, and the price below which you get nothing. It will not tell you what your equity is worth, because we hold no data on exit outcomes and neither does anyone offering you a number for your specific private company. Where a field cannot be filled in, it produces a question to put to your employer instead of quietly assuming a zero. It runs entirely in your browser and uploads nothing, which matters when the figures you are typing are your employer's.
The right way to size a grant is the one that survives all of this: decide the base salary you would accept if the equity were worth precisely zero, and treat the equity as upside on top. If the base only works because of the options, you have not been offered a job with equity. You have been offered a pay cut with a story attached. Our guide to evaluating a startup job offer covers the rest of that decision, and the salary checker will tell you what the base alone should be.
What to ask for, in writing
- The fully diluted share count. Without it your number of options cannot be interpreted at all.
- The strike price, and the date and result of the most recent independent valuation. Your upside lives in the gap between them.
- How much has been raised, and on what preference terms. Specifically whether it is participating or non-participating, and whether any round carries a multiple above 1x.
- The vesting schedule and the cliff. Four years with a one year cliff is standard. Anything longer is a real cost to you.
- The post-termination exercise window. Ninety days is common and expensive. Longer is materially better.
- The size of the remaining option pool. It tells you how much further dilution is already committed.
Six questions, all answerable, none of them unreasonable to ask. A company that answers them plainly is one you have learned something good about. A company that treats them as a lack of enthusiasm has answered a different and more important question.
Common questions
What is my startup equity worth?
Nobody can tell you, and anyone who gives you a single confident number has multiplied an exit valuation they invented by a probability they invented. What can be worked out is your percentage of fully diluted shares, what exercising would cost you, how much investor preference comes off the top before you see anything, and the exit price below which the grant returns nothing at all. Those four have answers. The fifth question, what it will be worth, does not.
How do I work out what percentage of the company my options are?
Divide your number of options by the fully diluted share count, which includes all issued shares, the whole option pool and anything convertible. Twenty thousand options of ten million shares is 0.2 per cent. The same twenty thousand of two hundred million is 0.01 per cent, a fiftieth as much. The share count is the number that decides it, and an offer that states options without it has told you nothing.
What is a liquidation preference and how does it affect me?
It is the investors' right to take their money back at exit before common shareholders, which is what employees hold, receive anything. If a company has raised ten million on a 1x preference and sells for twelve million, investors take ten and the remaining two million is split among everyone else. Participating preference is worse again: investors take their money back and then their share of what is left. At a modest exit this is usually most of the outcome, and it rarely appears in an offer letter.
What happens to my options if I leave before the company sells?
In most Australian plans you have a post-termination exercise window, commonly ninety days, in which you must buy the vested options outright or lose them. That means leaving can present you with a bill for tens of thousands of dollars, payable in cash, for shares you cannot sell. Ask for the window in writing before you accept. A longer window, five or ten years, exists in some plans and is worth more than a slightly larger grant.