Understanding Startup Offers

7 min read
The cleanest path to financial freedom is to join an established company, perform well, invest wisely, and coast to retirement. Breakout startups propose a hack—an alternative career accelerated through learning, wealth, and reputation. Most startups fail, though, and provide no financial return. (Even if a startup fails, it can be great fun and provide a tremendous opportunity for rapid growth.) Picking the right company is hugely important; you will want to scrutinize every aspect of this decision to the best of your ability.
TL;DR Joining a startup as an early employee can be a great career hack if done correctly. Beating the odds and winning the startup game begins with understanding the compensation outlined in your offer letter. There are several key components—the type of stock options granted (NSOs, ISOs, RSUs, or RSAs), 409a valuation, preferred price, and the total number of fully diluted shares—that all have major financial and tax implications. Don't be afraid to ask the founder or hiring manager for the information you need to fully understand your offer and to negotiate if you're not satisfied.

Editor's Note: Bolded terms are defined in the Definitions section below

One of the least commonly understood aspects of startups is compensation. Compensation is made up of several factors: salary, benefits, bonuses, and equity. Equity will be your largest driver of compensation at a startup. Thus, it is critical that you understand how your equity functions.Â

This guide explains how startup equity works, the basic tax implications, and how to evaluate startup offers.Â

DISCLAIMER: This material has been prepared for informational purposes only. Please read the disclaimer and consult your tax, legal, and accounting advisors before making any decision.Â

Stock Options 101

Early-stage companies often grant stock options as part of your compensation package.Â

A stock option gives you the right to purchase a fixed number of shares of your company's stock at a predetermined price. Purchasing your shares is known as exercising the option and the predetermined price is referred to as the strike price or exercise price. You earn the ability to exercise your options over a period of time. This process, called vesting, follows the vesting schedule outlined in your stock option agreement. (A standard vesting schedule is four years, with a 25% one-year cliff.)

The pre-tax value of your stock options is simply the difference between the company's share price and your strike price. For…
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