Startup Equity 101

Startup Equity 101: What Founders and Entrepreneurs Need to Know

Every startup story begins with an idea — but ownership is what decides who actually benefits when that idea works.

Startup equity is the language of ownership. It defines who controls the company, who shares in its upside, and how much everyone’s time and risk are ultimately worth.

If you’re a founder, early employee, or investor, understanding how equity works isn’t optional — it’s the foundation of every major business decision you’ll make.

This guide breaks down startup equity in plain English — from splitting founder shares and managing dilution to employee stock options, negotiation, and taxes — so you can build, raise, and reward with confidence.

Why Equity Matters

For most startups, equity isn’t just a financial instrument — it’s the currency of belief.

The earliest teams often work for less cash because they own a piece of the upside. Investors risk their capital because they believe that piece will be worth more later. And when it works, wealth creation can be life-changing.

Consider this: early Google employees who received stock options for pennies per share became multi-millionaires when the company went public.

The mechanics of ownership may look complicated, but the idea is simple — equity turns contribution into reward.

What You’ll Learn

This chapter breaks down:

• How equity works at a basic level — shares, ownership, and the cap table.

• How founders should think about splitting equity (and why vesting matters).

• How funding rounds dilute ownership — and why that’s not always a bad thing.

• How employee stock options, RSUs, and restricted stock really work.

• How to negotiate equity as a founder or early hire.

• The key tax concepts that can save you millions — QSBS, 83(b) elections, and more.

• Whether you’re starting your company, joining one, or investing in the next big thing, understanding equity will help you make smarter, more confident decisions.
  
  

Bottom Line

Equity is the story of who owns your dream — and how that ownership evolves as it grows.

Handled well, it aligns founders, teams, and investors around a shared outcome.

Handled poorly, it can turn great startups into complicated messes.

So let’s break it down, one piece at a time.

What Is Startup Equity and the Cap Table

Every startup begins with 100% ownership — and a blank spreadsheet that will eventually shape who controls what.

That spreadsheet becomes your cap table: the running record of who owns which shares, and how those shares change as the company evolves.

Before we get into fundraising or option pools, let’s start at the foundation — what equity actually means, how ownership is tracked, and why getting this part right early will save you from chaos later.

Equity, in Plain English

Equity is ownership — a claim on your company’s value and future.

If your business were a pie, each slice (or share) represents a piece of that ownership. At the very beginning, the founders own all of it. But every time you bring on someone new — a co-founder, investor, or employee — you’re trading a slice for capital, skill, or time.

The goal isn’t to cling to your slice. It’s to make the pie bigger.

Because 20% of a $100 million company is worth far more than 100% of an idea.

The Cap Table: Your Startup’s Ownership Ledger

A capitalization table, or cap table, is your company’s official ownership ledger. It lists every shareholder, what they own, and what type of security they hold (common stock, preferred stock, options, etc.).

At first, it’s simple — maybe just you and a co-founder splitting things evenly.

Fast forward six months:

• You raise a pre-seed round and issue shares to investors.

• You create an employee stock option pool.

• Maybe you bring in an advisor with a small equity grant.
  
  

Suddenly, that once-simple spreadsheet becomes a live financial document. It determines how proceeds are split during exits, how much ownership remains for founders, and how new hires get compensated.

That’s why accuracy matters.

Most early teams start with Google Sheets, but as complexity grows, tools like Carta or AngelList Equity are the norm — they automate updates, manage valuations, and prevent the “spreadsheet-of-doom” scenario.

Here’s an example of how a well-structured cap table might look:

Common vs. Preferred Stock

Not all shares are created equal. Startups typically issue two main types of stock: common and preferred.

Common stock

• Usually held by founders, employees, and advisors.

• Represents basic ownership — high risk, full upside, no guarantees.

Preferred stock

• Typically issued to investors during funding rounds.

• Includes extra rights and protections, like liquidation preferences (investors get paid back first if the company sells).
  
  

Think of it this way: common stockholders are the builders betting on growth. Preferred stockholders are the backers protecting their downside. Both matter — just for different reasons.

As a founder, you don’t need to memorize every investor clause, but you should always understand what class of shares you and your team hold, and what rights come with them.

Why This Matters

Your cap table is more than a spreadsheet — it’s the story of your company in numbers.

Every cell represents someone who’s believed in what you’re building — a co-founder, a first hire, a backer who took the leap.

Keep it clean, current, and transparent. Because when a major event happens — a new round, an acquisition, or an IPO — that document determines how success is shared.

Key Takeaways

Equity = ownership. It’s the currency that powers startups.

Cap tables track that ownership. Treat them as living documents, not afterthoughts.

Common vs. Preferred: Founders and employees usually hold common stock; investors get preferred with extra protections.

Keep your cap table clean — mistakes compound as your company grows.

Splitting Equity Among Founders

Few conversations test a founding team’s trust more than this one:

Who gets how much?

It sounds simple — you’ve all worked hard, you’re all taking a risk — but how you divide equity early on can shape the culture, control, and even survival of your company.

Let’s unpack how to approach the split, what data shows about what “normal” looks like, and why vesting is your safety net when things don’t go as planned.

There’s No Perfect Formula

How you split equity depends on what each person brings to the table — time, capital, ideas, expertise, relationships, or risk tolerance.

Traditionally, early teams leaned toward unequal splits: for example, 60/40 if one founder contributed more capital or IP. But more recently, startups have been trending toward equal splits, reflecting a shared commitment rather than a scoreboard of past effort.

Data backs that up:

According to Carta, among startups with two co-founders, 45.9% split equity 50/50 in 2024, up from 31.5% in 2015.

In short: today’s founders are more likely to treat co-founding as an equal partnership — even if one person had the original idea.

But whatever you choose, clarity matters more than precision.

A split that feels fair — and is documented clearly — is better than one that feels “perfect” but breeds resentment later.

Why Vesting Protects Everyone

Once you’ve agreed on the split, don’t stop there.

Protect the company (and yourselves) with founder vesting — a simple but essential agreement that founders earn their shares over time.

Without vesting, if a co-founder walks away six months in, they still keep their full ownership stake. That’s a nightmare scenario for future fundraising and morale.

A standard vesting schedule looks like this:

• 4 years total vesting

• 1-year cliff — if a founder leaves before one year, they get nothing

• The remaining shares vest monthly or quarterly over the next three years

That structure ensures everyone’s equity matches their ongoing contribution. It’s not about mistrust — it’s about accountability and alignment.

The Human Side

Equity isn’t just math — it’s psychology.

When you divide ownership, you’re really defining how much each founder feels seen, valued, and invested in the outcome.

Unequal splits aren’t wrong, but they require even clearer communication about why.

Ask yourselves:

• Who’s taking the biggest risk right now?

• Who’s full-time versus part-time?

• Who’s putting in personal capital or guarantees?

• What would feel fair six months from now, not just today?
  
  

If you can answer those honestly and document them cleanly, you’re ahead of 90% of founding teams.

Founder Tip

Put it in writing early.

Don’t wait until your first investor meeting or legal formation to settle the conversation. The longer you delay, the harder it gets — and investors notice when founder alignment feels shaky.

Even a simple Founder Agreement drafted with counsel (or standardized templates from firms like Cooley GO or Clerky) is enough to make things real.

Key Takeaways

• No universal split: focus on fairness and clarity over perfection.

• Equal splits are rising: nearly half of co-founders now split 50/50.

• Vesting protects everyone: standard 4-year schedule with a 1-year cliff.

• Equity is emotional: handle it with transparency and respect.

How Funding Rounds Dilute Equity

When you raise money, you’re not just adding cash to the business — you’re selling part of it.

That trade-off is called dilution, and it’s one of the most misunderstood parts of startup life.

Many founders panic when they see their ownership percentage drop. But in most cases, it’s not a loss — it’s growth.

Let’s break down how dilution actually works, what the data says about typical ownership at each stage, and how to stay smart about protecting your piece of the pie.

What Dilution Really Means

Dilution happens when your company issues new shares — usually to investors or employees — which reduces the percentage owned by existing shareholders.

Think of your company as a pie. When you raise money, you don’t take away slices from existing owners; you bake a bigger pie and give new slices to investors.

Your slice gets smaller, but the total pie (the company’s valuation) grows.

Example:

• You start with 100% ownership.

• You raise a round selling 20% of the company to investors.

• Now you own 80% of a bigger, more valuable company.
  
  

The key is whether that trade makes your smaller slice worth more in absolute terms — and whether you’ve left enough room for future growth.

The Math in Motion

Here’s what the data shows, using averages from Carta:

So yes — founder ownership typically shrinks with every round. But as long as valuation increases, that smaller percentage is worth more.

A founder holding 20% of a $100 million company is doing better than one holding 80% of a $5 million one.

The Rule of Thumb

In most venture-backed startups, each early round dilutes founders by 15–25%.

That means:

• A Seed round might cost ~20%.

• A Series A another ~20%.

• A Series B around 15%.
  
  

Later rounds tend to have smaller dilution because valuations are higher.

Investors often expect some equity reserved for a future employee option pool — typically 10–15% of total shares.
If you don’t plan for that pool before fundraising, you’ll give up even more ownership later when it’s added in.

How to Stay in Control

You can’t avoid dilution entirely — it’s the price of growth. But you can manage it strategically.

Here’s how:

• Raise what you need, not what you can. More capital means more dilution; only raise if you have a clear use for it.

• Negotiate valuation carefully. A higher valuation means selling less ownership for the same capital, but it also raises expectations.

• Size your option pool wisely. Don’t let investors dictate an unnecessarily large pool that dilutes founders more than needed.

• Model future rounds. Think two or three rounds ahead so you don’t end up with less than 10% before an exit.

The Founder Mindset

Founders often fixate on the shrinking percentage — but what matters is the value of that percentage.

The goal isn’t to own the biggest possible slice — it’s to grow the size of the company so dramatically that even a smaller slice is worth more than you imagined.

Or as one investor puts it:

“I’d rather own 10% of something huge than 100% of nothing.”

Key Takeaways

Dilution = new ownership added. Your percentage drops, but the company’s value should rise.

Typical rounds: Founders give up roughly 15–25% per early stage.

Plan for the option pool. It’s part of every serious raise.

Raise strategically. The best founders trade ownership for growth — not just money.

Equity Compensation for Employees (Stock Options & More)

Startups rarely win talent with the biggest salaries.

They win with belief — and with equity.

Equity compensation turns team members into owners. It says, “If we grow this thing together, we all share the upside.”

That’s powerful. It’s also complicated.

Let’s make sense of how it actually works: options, vesting, valuations, and why this system became the currency of startups.

Why Startups Use Equity

Most startups can’t compete dollar-for-dollar with big-company paychecks. So instead, they offer a trade: a little less cash now for a potential windfall later.

Equity rewards long-term commitment. It keeps people invested — literally — in the company’s growth.

And for early hires, it can be life-changing if the company succeeds.

Think of it this way: cash keeps the lights on. Equity keeps people building after midnight.

Stock Options 101

The most common form of employee equity is the stock option — the right to buy shares at a fixed price, called the strike price (or exercise price).

That strike price is based on the company’s fair market value at the time of grant — determined by a 409A valuation, which startups must update regularly for compliance.

The bet is simple:

If the company grows, the share price rises, and employees can later buy shares at the original low strike price, then sell at a profit.

Example:

• You get options to buy 10,000 shares at $1 each.

• Five years later, if those shares are worth $10 each, exercising means paying $10,000 to buy stock worth $100,000 — a $90,000 gain.
  
  

That’s the magic of equity — if the company wins, everyone wins.

Vesting: Earning Your Shares Over Time

Options don’t belong to you immediately. They vest over time — usually over four years with a one-year cliff.

Here’s what that means:

• Nothing vests in your first year (the “cliff”).

• After one year, 25% vests at once.

• The remaining 75% vests monthly or quarterly over the next three years.
  
  

If you leave before the one-year mark, you get nothing. Leave after two years, you keep half.

Vesting aligns commitment with ownership — stay longer, earn more of the upside.

There’s also a detail most employees miss: the post-termination exercise window — how long you have to buy your vested shares after leaving.

It’s typically 90 days, though some progressive startups extend that period to make equity more usable.

ISOs vs. NSOs: Two Flavors of Options

You’ll hear two acronyms tossed around — ISOs and NSOs.

In plain terms: ISOs are better for employees if you qualify. NSOs are the default catch-all.

Founders and CFOs should understand both — because granting the wrong type can create expensive tax headaches later.

The Option Pool

Every startup sets aside an option pool — a block of shares reserved for future hires, advisors, and employee grants.

Investors often require this before funding, typically around 10–15% of total shares.

It’s a way to make sure the company can hire competitively without renegotiating ownership each time.

But beware: investors usually want that pool created before their investment — meaning it dilutes the founders, not them.

Plan your pool size strategically; too small and you’ll be scrambling to expand it later, too large and you’re giving away ownership that might never be used.

Other Forms of Equity Comp

While stock options are the norm, a few other forms exist — usually depending on stage and structure.

• Restricted Stock Awards (RSAs): Actual shares bought early, often by founders or very early employees, that vest over time. These are usually paired with an 83(b) election to lock in low tax value.

• Restricted Stock Units (RSUs): Promises of shares that vest later — common in later-stage or public companies when the stock already has value.

• Phantom Stock or SARs: Cash bonuses tied to share value growth, used when issuing actual equity is complex or restricted.
  
  

Early-stage startups typically stick with options; once the company matures, RSUs and similar instruments become more practical.

Typical Employee Equity Grants

How much equity is “normal” depends on timing, role, and stage.

Here’s what the data shows for tech startups (based on Holloway and AngelList benchmarks):

These are broad guidelines — geography, funding, and company stage all shift the ranges.

What matters most is internal consistency: people notice when the equity math doesn’t add up.

Key Takeaways

Equity compensation = shared upside. It rewards long-term belief.

Stock options are standard. Understand strike price, 409A valuation, and vesting.

ISOs vs. NSOs: Know the difference — it affects your taxes.

Option pool: Plan for 10–15% and negotiate when it’s created.

Transparency builds trust. Founders who explain equity clearly attract better, longer-lasting teams.

Negotiating Equity in Job Offers

Equity isn’t just a perk — it’s part of your compensation.

And like salary, it’s negotiable.

Whether you’re a founder building a team or an early hire weighing an offer, understanding how to value and negotiate equity is what turns “startup lottery tickets” into informed decisions.

Why You Should Negotiate

Founders expect candidates to negotiate.

Investors negotiate. You should, too.

The best (and usually only) time to adjust your equity grant is before you join. Once the paperwork’s signed, those numbers rarely move.

So if the offer feels light — ask questions. Ask early. Ask clearly.

You can’t control the outcome, but you can control whether you understand the tradeoff.

How to Read an Equity Offer

When a startup says you’re getting “10,000 stock options,” that number means nothing without context.

Here’s what you need to know to decode it:

• How many total shares exist? 10,000 shares out of 1 million is 1%. 10,000 out of 100 million is 0.01%. Big difference.

• What’s the strike price? That’s the price you’ll pay per share if you exercise your options — set by the company’s 409A valuation.

• What’s the vesting schedule and cliff? Standard is four years with a one-year cliff.

• What’s the exercise window? How long you have to buy your vested shares after leaving — often 90 days.

• Are they ISOs or NSOs? The type affects your taxes and who can receive them.
  
  

If an offer doesn’t include those details, ask.

Not because you’re difficult — because you’re smart.

Valuing the Tradeoff

Equity is the riskiest part of your compensation package. It might become worth millions, or it might be worthless if the company never exits.

A simple rule: secure your short-term needs with salary, treat equity as upside.

Don’t trade so much guaranteed income that you can’t afford to stay long enough for your options to matter.

For founders, the same rule applies in reverse: don’t oversell the dream.

Be transparent about risk and reward. Candidates respect honesty more than hype.

The Art of the Ask

If you want more equity, sometimes you just have to ask.

Here’s a simple way to frame it:

“I’m really excited about the mission and the upside here. Would you consider increasing the equity component slightly so I can have more skin in the game?”

Keep the tone collaborative, not confrontational.

Equity discussions should feel like partnership-building, not poker.

Founders, this goes both ways: when a great candidate asks for more, see it as a sign they’re serious. Negotiation isn’t greed — it’s engagement.

Do Your Homework

Before accepting or granting equity, get context.

• Check funding history on Crunchbase or PitchBook.

• Look up similar roles on AngelList or Levels.fyi to compare equity ranges.

• Ask how the company plans to grow and whether there’s a path to liquidity.

A Note on Exercising

Equity isn’t real until you exercise your options.

That means paying your strike price — and possibly taxes — to actually own the shares.

This can be expensive.

One study found the average startup employee would need roughly $543,000 to fully exercise all their options, including tax costs.

That doesn’t mean you shouldn’t take them — it just means you should plan ahead.

Start saving early or explore financing options like Secfi or Equitybee, which help employees cover exercise costs without selling their shares.

Key Takeaways

Negotiate before you join. Once you sign, equity rarely changes.

Understand the offer. Shares alone don’t matter — percentage, strike price, and vesting do.

Balance cash and equity. Cover your base, treat equity as upside.

Transparency wins. Founders who explain the math build trust; employees who ask smart questions show commitment.

Tax Considerations for Startup Equity

Most tax rules take your money. This one might actually give some back.

Startup equity isn’t just about ownership — it’s about timing, structure, and strategy. The right tax moves can save you millions; the wrong ones can cost you just as much.

Let’s unpack the big three every founder, early employee, and investor should understand: Qualified Small Business Stock (QSBS), 83(b) elections, and stock option taxation.

1. Qualified Small Business Stock (QSBS) — The Holy Grail

Section 1202 of the U.S. tax code is one of the most generous breaks available to startup founders and investors.

If your company qualifies as a C-corp and its total assets were under $50 million when you issued shares (rising to $75 million for stock issued after mid-2025), your stock might count as Qualified Small Business Stock (QSBS).

Hold that stock for five years, and you can exclude up to $10–15 million of capital gains from federal tax when you sell.

Yes — potentially zero capital gains tax on up to eight figures of profit.

To qualify:

• You must have received the stock directly from the company (not purchased from another shareholder).

• The company must be active, not an investment or finance firm.

• You must hold the shares for at least five years.
  
  

Investors love QSBS so much that many insist on maintaining eligibility clauses in term sheets. Founders should too — losing QSBS status can cost you dearly down the road.

Example:

If you sell $12 million in QSBS-qualified stock, you could potentially exclude that entire gain from federal tax. Without QSBS, you might owe over $2 million in taxes.

Same sale. Very different outcome.

Bottom line: if you’re building a C-corp, get your accountant to confirm your QSBS status and document it early. This one’s worth the paperwork.

2. The 83(b) Election — Pay Pennies Now or Dollars Later

If you receive restricted stock that vests over time — common for founders and early employees — you should learn one number: 30 days.

That’s how long you have to file an 83(b) election after getting your grant.

Filing means you agree to pay income tax now, when the shares are nearly worthless, instead of later, when they’ve (hopefully) skyrocketed.

Example:

You receive 100,000 founder shares at $0.001 per share — worth $100 total. File 83(b): you pay tax on $100 today.

Skip it: five years later those shares might be worth $500,000, and you’ll owe ordinary income tax on that full amount.

Filing converts what would have been a huge ordinary income tax bill into a small upfront one — and future gains are taxed at lower long-term capital gains rates.

Key rule: you must file within 30 days of the grant. No exceptions, no extensions, no forgiveness.

The IRS doesn’t do “oops” on this one.

Founders almost always file an 83(b). For employees, it depends — if you early-exercise options (turning them into stock before they vest), you can use an 83(b) to start the long-term capital gains clock sooner.

3. Stock Option Taxes — The Part No One Warned You About

Equity sounds fun until tax season hits.

Here’s what really happens when you exercise stock options:

• ISOs (Incentive Stock Options): No regular income tax at exercise, but you might trigger the Alternative Minimum Tax (AMT) if your “spread” (the difference between strike price and current value) is large. If you hold shares for at least one year after exercise and two years after grant, gains may qualify for long-term capital gains rates.

• NSOs (Non-Qualified Stock Options): Taxed as ordinary income on the spread at the time of exercise. No AMT, but higher taxes up front.

Translation: ISOs are more tax-friendly, NSOs are more flexible.

In both cases, don’t exercise without understanding the potential tax bill — it can be enormous if the stock has appreciated significantly.

Rule of thumb:

• Exercise when valuations are still low (less spread = less tax).

• Hold long enough to qualify for capital gains when possible.

• Consult a professional before exercising if you’re anywhere near a liquidity event.

Other Taxes to Watch

Even with QSBS, some taxes can still apply.

• Net Investment Income Tax (NIIT): Adds 3.8% to high earners’ investment gains.

• State Taxes: California, New York, and others tax capital gains even if QSBS exempts them federally.

• International Rules: If you operate or hire globally, equity taxes vary wildly by country. For example, the U.K.’s Enterprise Management Incentive (EMI) scheme lets employees exercise options tax-free if conditions are met, and pay only 10% on eventual sale — far better than U.S. treatment.
  
  

The rules change constantly, so plan early and get local expertise if you’re expanding internationally.

Founder Tip

The tax code rewards early, informed action.

If you’re a founder, that means filing your 83(b) the day you incorporate.

If you’re an employee, it means asking about QSBS eligibility and exercising options when valuations are still manageable.

The difference between “I didn’t know” and “I filed on time” can literally be millions.

Key Takeaways

• QSBS: Up to $10–15M in capital gains could be tax-free if you meet the rules.

• 83(b): File within 30 days — pay pennies now, not dollars later.

• Stock options: Know when taxes hit (ISOs = later, NSOs = now).

• Plan early: Taxes on equity reward the prepared and punish the surprised.

Conclusion and Key Takeaways

Equity is the foundation of startup wealth — and one of the easiest things to misunderstand.

At its best, it’s what aligns founders, employees, and investors to build something bigger than any one person could alone.

At its worst, it’s a source of confusion, conflict, and tax surprises that show up years later.

Understanding how equity works — who owns what, how it changes, and how it’s taxed — gives you leverage, clarity, and control.

The Quick Recap

Equity = Ownership.

Every share represents a slice of your company. Keep a clean, accurate cap table so everyone knows where they stand.

Founder Splits.

There’s no perfect formula — focus on fairness and transparency. Use vesting to protect the company if someone leaves early.

Funding and Dilution.

Expect to give up 15–25% per early round. Don’t fight dilution — manage it. A smaller slice of a bigger pie is usually a good trade.
Employee Equity.

Stock options are standard. Set a clear vesting schedule, size your option pool wisely, and educate your team. People work harder when they understand what they own.

Negotiation.

Whether you’re hiring or joining, discuss equity openly. Ask about total shares, strike price, vesting, and exercise windows. Transparency builds trust.

Taxes.

Know your acronyms:

• QSBS can save you millions.

• 83(b) elections must be filed within 30 days.

• ISOs vs. NSOs determine when taxes hit.

Plan early — equity rewards the informed.

Global Considerations.

If your team or investors are international, get local advice. Tax treatment and compliance rules vary dramatically.

The Bigger Picture

Equity isn’t just a financial tool — it’s the story of who built your company and how they share in its success.

Every line on your cap table represents belief: a co-founder who took a risk, a team that stayed late, an investor who bet on the vision.

Handle it with care, keep it transparent, and never treat it as an afterthought.

Because when your company wins, this is the map that decides how the win gets shared.

Bottom Line

Equity is more than ownership — it’s alignment.

Get it right early, and you’ll build a company where everyone rows in the same direction.

Get it wrong, and you’ll spend years untangling the fallout.

Learn the rules, keep the math clean, and stay curious.

The more you understand your equity, the more power you have to make it work for you — and for everyone building beside you.

Next Chapter Preview

QSBS: The $10 Million Tax-Free Exit

A deep dive into Qualified Small Business Stock (QSBS) — the most powerful (and misunderstood) tax break in the startup world.

We’ll unpack how founders and early investors can legally avoid taxes on up to $10 million in capital gains when they sell their company — and the small mistakes that can quietly cost them the exemption.