Founder Offer Letters and Equity Packages: A Plain-English Guide to Getting It Right
First-time founders make their most expensive mistakes in offer letters and equity grants. Mis-grants are nearly impossible to unwind. This is a plain-English guide to building offers, equity ranges by stage, cliff and vesting standards, 409A and FMV traps, and the legal touch points you cannot skip.
An offer letter is a 1-page document with 10-year consequences. Founders routinely improvise on equity, vesting, cliffs and acceleration in the early days and inherit lawsuits and cap-table chaos as they scale. The good news: there is a small set of standards, well-established for two decades, that you can copy verbatim with confidence.
Anatomy of an offer letter
- Role title, level, reporting line, start date.
- Base salary (annualized) and pay frequency.
- Variable compensation: bonus, commission — formula or target %.
- Equity grant: number of options/units, strike price (or 'subject to 409A'), vesting schedule, cliff.
- Benefits summary (medical, leave, retirement match) — link to formal docs.
- At-will employment statement (US) / appropriate notice clauses (other jurisdictions).
- Confidentiality + IP assignment reference (signed separately).
- Conditions: background check, references, work authorization.
- Offer expiration date (typically 7 days from receipt).
- Signature block + counter-signature.
Equity 101 for founders
- An option is a right to BUY shares at a fixed strike price in the future.
- Vesting is the schedule on which those options are earned.
- Cliff is the period before any vesting happens — standard 1 year.
- Strike price is set by 409A valuation (US) — fair market value at grant.
- Exercise window is how long after leaving you have to buy the vested options (standard: 90 days; modern: 10 years).
- Cap table is the running record of who owns what — your most important spreadsheet.
Equity ranges by stage and role
These ranges are illustrative; the only reliable benchmark is comparable hires at peer companies. Sources: Index Ventures Optionplan, AngelList compensation data, Pave benchmark.
| Role / Stage | Pre-seed | Seed | Series A | Series B+ |
|---|---|---|---|---|
| Engineer (mid) | 0.5–1.5% | 0.2–0.5% | 0.05–0.15% | 0.02–0.05% |
| Senior engineer | 1.0–2.5% | 0.4–1.0% | 0.10–0.30% | 0.05–0.10% |
| Director / Head | 2–5% | 1–2% | 0.3–0.7% | 0.15–0.30% |
| VP | 3–7% | 1.5–3% | 0.5–1.0% | 0.25–0.50% |
| C-level (non-founder) | 5–10% | 3–5% | 1–2% | 0.5–1.0% |
Always discuss equity as both a share count AND a % of fully diluted. Showing only one number is how candidates get burned at exit.
Cliff, vesting, acceleration
- Standard vesting — 4 years monthly with a 1-year cliff. Industry default since the 1990s.
- Single-trigger acceleration — vesting accelerates on a single event (e.g., acquisition). Rare; usually founder-only.
- Double-trigger acceleration — vesting accelerates on TWO events (acquisition + termination without cause). Common for execs.
- Refresh grants — top up after years 2–3 to keep total unvested equity meaningful as the original vests.
- Modern variants — some companies use 5-year vesting (e.g., Stripe); others use longer post-termination exercise windows (10 years).
A 'no cliff' grant to early team members feels generous and is a common founder mistake. If someone leaves at month 6 with 6 months vested, the cap table gets cluttered and you can't issue their shares to a replacement.
409A, FMV and the strike price
US companies issuing stock options must value the stock at fair market value (FMV) via a 409A valuation (named after IRS section 409A). Without it, employees face huge tax penalties on exercise. 409A valuations cost ~$2k–$5k from providers like Carta, Pulley, or AngelList Stack, and must be refreshed annually or after material events.
- Set strike price = current 409A FMV. Never below.
- Refresh 409A annually, after each priced round, or after material business change.
- Document board approval of every grant — minutes, board consent, exercise of grant authority.
- Time grants to be at or just after a refreshed 409A (lower valuations mean lower strike — better for employees).
ISO vs NSO vs RSU
| Instrument | Best for | Tax at grant | Tax at exercise | Tax at sale |
|---|---|---|---|---|
| ISO (Incentive Stock Option) | US employees, early stage | None | AMT may apply on spread | Long-term capital gains if held |
| NSO (Non-Qualified Stock Option) | Contractors, advisors, non-US | None | Ordinary income on spread | Capital gains |
| RSU (Restricted Stock Unit) | Later-stage / public | None | N/A (no exercise) | Ordinary income at vest, capital gains after |
Negotiation guardrails
- Decide your level + equity range BEFORE the conversation. Don't pull bands from thin air mid-call.
- Have a written 'best and final' you can deliver if pushed — and stick to it.
- Pair upward flexibility on one dimension with discipline on another (e.g., 10% more equity, no signing bonus).
- Counter-offers from current employer are usually a trap — surface this in the conversation.
- Document every change in the offer letter; verbal promises rot.
Legal touch points
- Employment lawyer reviews the template every 12–18 months.
- Country-specific compliance (notice periods, statutory benefits, non-compete enforceability) — never copy a US template to EU/UK without review.
- Stock plan administered with your law firm + a cap table tool (Carta, Pulley).
- Background checks must comply with local laws (FCRA in US, GDPR in EU).
- Right-to-work / visa: handled before offer, not after.
Anti-patterns
- Equity grants without board approval — voids the grant.
- Strike price set 'low to be generous' — invalidates 409A safe harbor; employees pay penalties.
- Verbal promises of equity 'later' — unenforceable, breeds mistrust.
- Different offer terms for similar roles without justification — pay-equity exposure.
- Letter conditions ('subject to founder approval') that bind nothing.
References
- Index Ventures — Optionplan — Index Ventures
- Carta — Equity 101 Library — Carta
- AngelList — Compensation Benchmarks — AngelList
- Pave — Compensation Data — Pave
- Holloway — The Holloway Guide to Equity Compensation — Holloway
- Cooley GO — Founder Resources — Cooley LLP
Read next
All playbooksOptions vs RSUs, vesting, cliffs, refreshes, exercise windows, dilution, and the questions every operator should be able to answer about their own grant.
How to set pay targets, bands, transparency, and review cadence — before you have to negotiate a single offer.
A decision framework for founders: the signals that say it's time, which role to hire first, what the first 90 days should produce, and how to pay for it.