Equity for Founders and Employees: A Working Primer

60-Second Summary

Founders need to understand: option pool, strike price, vesting cliff, 409A, ISO vs NSO.
Equity is a long-term incentive; most employees value it less than founders assume.
Refresh grants matter as much as the initial grant — they retain past the cliff.
Be transparent about how equity works. Confusion creates resentment.

Equity is part of compensation that most people don’t understand — including the founders giving it. The mechanics aren’t complicated, but they vary by instrument, country, and stage, and small mistakes compound into real money and real grievances.

Not legal or tax advice

This article is an operator primer. Equity touches securities, tax, and employment law that vary by country and individual circumstance — talk to a qualified attorney and accountant before granting, exercising, or selling.

Why equity literacy matters

Equity is often 20–40% of a tech offer’s value — opaque math erodes trust
Common employee mistakes (not exercising, exercising too late, ignoring tax) cost real money
Common founder mistakes (under-pooling, no refresh policy, off-cycle grants) erode the cap table
Pay-transparency laws increasingly require disclosing equity value, not just stock count

Options vs RSUs vs RSAs

The three instruments you’ll encounter

Instrument	What it is	When used
ISOs (Incentive Stock Options, US)	Right to buy shares at strike price; favorable US tax if held	Most US private-company employee grants
NSOs (Non-Qualified Stock Options, US)	Same right; taxed at exercise as ordinary income	When ISOs cap doesn’t apply (contractors, advisors, large grants)
RSUs (Restricted Stock Units)	Shares delivered (not bought) on vesting; taxed as income at vesting/settlement	Public and late-stage private companies
RSAs (Restricted Stock Awards)	Actual shares granted (often purchased at fair value); 83(b) election common	Founders and very early employees

Outside the US, the rules differ sharply: EMI options in the UK, BSPCE in France, ESOPs in India, virtual stock units in Germany — each with its own tax treatment. Don’t copy a US grant template across borders without local review.

Vesting, cliffs, and acceleration

Standard private-company schedule

1
4-year vest
Total grant earned over 4 years of continuous service.
2
1-year cliff
Nothing vests in year 1; on the 1-year anniversary, 25% vests at once. Then monthly.
3
Monthly thereafter
Equal monthly increments (typically 1/48th of grant per month after cliff).
4
Acceleration (sometimes)
Single- or double-trigger: vest on acquisition, or on acquisition + termination without cause.

Newer patterns

Some companies have moved to 5- or 6-year vests for refreshes, or back-weighted vesting (e.g., 10/20/30/40%). Read your specific grant; ‘standard’ is shifting.

Exercise windows and tax basics

Post-termination exercise window: classically 90 days, increasingly 5–10 years at modern companies
Exercise = pay strike price × number of shares; you now own the shares (taxable event for NSOs and AMT for ISOs)
Selling shares later triggers capital gains tax (long-term vs short-term depends on holding period)
83(b) election (US): file within 30 days of grant for RSAs/early-exercised options to fix tax at low value
Section 409A valuation sets the strike price for new option grants in the US — refreshed at least annually

If you leave a private company with vested options and a 90-day exercise window, you face a hard deadline. Many employees lose their equity here. Ask about extended PTE windows before signing.

Refresh and promotion grants

A new-hire grant is fully earned in 4 years. Without refresh grants, your most senior people have the smallest live equity stake. Modern companies grant refreshes annually (~25% of new-hire value) or at promotion, tied to performance and band.

Common refresh policies

Policy	When granted	Size guide
Annual evergreen	Each year for everyone	20–30% of new-hire grant
Performance-based	Each year for top performers	Higher % for top tier; 0 for low tier
Promotion refresh	On level change	Top-up to new level’s new-hire band
Retention grant	Ad hoc for critical roles	Sized to retain through next milestone

Pool management and dilution

The option pool is the share allocation set aside for employee equity. Each funding round typically refreshes the pool (often to 10–15% of post-money). Pool size, refresh cadence, and grant sizing together determine how much equity employees see — and how much founders are diluted.

10–15%

Typical post-money option pool

Varies by stage and industry

0.05–2%

Range of employee grants by level

Early-stage Senior IC: ~0.1–0.5%

20–30%

Total founder dilution by Series B

Including pool refreshes

When equity actually pays

Acquisition with cash payout for vested shares
IPO and lockup expiration
Tender offer or secondary sale on the private market (increasingly common at growth stage)
Stock buybacks (rare at startups)

Most option grants at most startups end up worth zero. Calibrate the equity story to candidates honestly — the math should be ‘what could it be worth if things go well?’, not ‘what is it worth?’

Questions employees should ask

What type of grant is this — ISO, NSO, RSU, RSA — and what are the vesting terms?
What is the current 409A / preferred price / FMV, and when does it refresh?
What is the post-termination exercise window?
What is the company’s policy on refresh grants and at what cadence?
What dilution has occurred in the last 12 months, and what’s expected this year?
Is there a secondary program or tender process?
What happens to my grant in an acquisition (acceleration, conversion)?

References

Index Ventures — Option Plan Guide — Index
Carta — Equity 101 — Carta
Holloway — Equity Compensation — Holloway
IRS — ISO vs NSO (US) — IRS
HMRC — EMI scheme (UK) — HMRC
Sequoia — Founder’s Guide to Equity — Sequoia

Frequently asked questions

ISO or NSO?

ISO if you're a US employee — preferential tax treatment if you meet the holding requirements. NSO if you're a contractor, board member, or foreign worker. Most early-stage US grants are ISOs; later-stage grants often spill into NSO due to the $100k ISO limit.

What's a 409A and why does it matter?

A 409A is the IRS-required independent valuation of common stock that sets your option strike price. Setting strike below the 409A creates immediate taxable income to the employee — a costly mistake. Re-run the 409A after every priced round or material event.

Do new hires understand their equity?

Almost never. Carta's research: under 30% of equity-holding employees can correctly explain their grant. The remediation is a one-page equity primer at offer time, not a 90-minute legal review at year five.