Understanding Employee Equity: What Every Candidate Should Know Before Accepting an Offer

Employee equity can be one of the most valuable parts of a compensation package—and one of the least understood.

If you've ever wondered:

• What employee equity actually is

• The difference between stock options, RSUs, and restricted stock

• How vesting works

• What a strike price is

• How to estimate the potential value of an equity grant

• What questions to ask before accepting an offer

this guide is for you.

I've spent much of my career working with startups, growth-stage companies, and candidates evaluating compensation packages that included equity. Along the way, I've made my own mistakes, learned a few lessons the hard way, and had countless conversations with candidates trying to answer the same question:

The honest answer is: it depends.

This guide won't tell you whether you should accept or reject an offer.

Its goal is to help you understand what you're being offered, ask better questions, and make more informed career decisions.

If you finish this guide with a stronger understanding of employee equity than when you started, it's done its job.

Quick Disclaimer

This guide is intended for educational purposes only. It should not be considered legal, tax, financial, or investment advice. Equity compensation can have significant legal and tax implications that vary based on your jurisdiction and personal circumstances. Where appropriate, this guide encourages readers to consult qualified professionals and authoritative sources before making decisions.

Let’s jump in…

What is Employee Equity?

At its simplest, equity represents ownership in a company.

If you own equity, you own a piece of that business. Depending on the type of equity you receive and the terms attached to it, that ownership may exist today, or it may become yours over time as certain conditions are met.

Many companies include equity as part of an employee’s total compensation package alongside salary, bonuses, benefits, and other incentives.

Why Does it Matter?

Salary is relatively easy to understand.

If you’re offered a salary of $120,000 per year, you have a good idea of what you’ll earn.

Equity is different.

Its value can depend on a wide range of factors, including:

• the type of equity you’ve been granted

• how and when it vests

• the growth of the business

• whether you can eventually sell it

• the terms attached to your grant

That’s why it’s important to understand what you’re being offered before making a career decision.

A helpful mindset

When evaluating an offer, I try to separate compensation into two buckets:

Guaranteed

• Salary

• Benefits

• Vacation

• RRSP or 401(k) matching

• Guaranteed allowances

Potential

• Stock options

• RSUs

• Profit sharing

• Bonuses tied to future performance

• Future appreciation in company value

Neither bucket is inherently better or worse.

The important thing is understanding which parts of your compensation are certain today, and which depend on future events that may or may not happen.

Public vs. Private Companies: What's the Difference?

Before discussing stock options, RSUs, and other forms of employee equity, it’s helpful to understand the difference between a public company and a private company.

Public companies

Public companies have shares that can generally be bought and sold on a public stock exchange.

Many people own shares in public companies without giving it much thought—through a personal investment account, pension plan, ETF, or mutual fund.

Because there is an active market for those shares, it’s usually much easier to determine their value and, subject to any restrictions, sell them.

Private companies

Private companies are not listed on a public stock exchange.

Their shares are typically far less liquid, meaning there may not be an easy or immediate way to sell them.

Many startups are private companies, but so are many mature and highly successful businesses.

Unlike publicly traded shares, there often isn’t a readily available market price that tells you what your ownership is worth.

Why does this matter?

One of the most common misconceptions is that receiving equity automatically means receiving something that can easily be converted into cash.

That’s often not the case.

Understanding whether a company is public or private provides important context for many of the concepts we’ll cover later, including liquidity events, secondary sales, company valuations, and stock options.

Common Types of Employee Equity

There are many ways companies can structure employee equity, and no two compensation packages are exactly alike.

For the purposes of this guide, we’ll focus on the forms of equity that candidates are most likely to encounter.

What Are Stock Options?

Stock options are one of the most common forms of equity offered by startups and growth-stage companies.

In simple terms, a stock option gives you the right to purchase shares in a company at a predetermined price in the future.

Unlike owning stock outright, receiving options does not automatically make you a shareholder.

Why does it matter?

When evaluating a job offer, candidates often focus on the number of options they’re being granted.

In reality, that number tells you very little on its own.

The eventual value of your options can depend on factors such as:

• your strike price

• your vesting schedule

• the company’s future value

• the percentage of the company your options represent

• dilution over time

• whether there’s ever an opportunity to sell your shares

(We’ll cover many of these concepts later in this guide)

A simple example

Imagine you’re granted 10,000 stock options with a strike price of $2 per share.

Five years later, the company has grown significantly and the shares are now worth $20 each.

Your agreement allows you to purchase shares for $2 that are now worth $20.

You could purchase those shares for $20,000 (10,000 × $2) and they would be worth $200,000 (10,000 × $20), creating a potential gain of $180,000 before taxes and other considerations.

Now imagine a different outcome.

Five years later, the shares are worth $1 each.

In that case, exercising your options would generally make little economic sense because you’d be paying more than the shares are worth.

Common misconceptions

Not necessarily. Receiving stock options is not the same as owning shares.

Not necessarily. 50,000 options at one company could represent a much smaller ownership stake than 5,000 options at another.

Not necessarily. Valuation is only one piece of the puzzle, and it doesn’t guarantee you’ll ever have an opportunity to realize that value.

Key takeaway

Stock options can become a meaningful part of a compensation package, but they’re difficult to evaluate without context.

Before assigning a dollar value to them, make sure you understand exactly what you’ve been offered.

What are RSUs? (Restricted Stock Units)

Restricted Stock Units, commonly called RSUs, are another common form of employee equity.

Unlike stock options, RSUs generally don’t give you the right to buy shares. Instead, they represent a promise to grant shares once certain conditions—most commonly a vesting schedule—have been met.

Why does it matter?

From a candidate’s perspective, one of the biggest practical differences is that you typically don’t need to purchase the shares yourself.

That doesn’t mean they’re automatically valuable or immediately accessible, but it does make them fundamentally different from stock options.

A simple example

Imagine your employer grants you 1,000 RSUs with a four-year vesting schedule.

As those units vest, shares are delivered to you according to the terms of your agreement.

What those shares are worth will depend on the company’s value at that time and, in the case of private companies, whether there’s a way to sell them.

One common misconception is that vested RSUs automatically translate into cash.

They don’t.

Vesting and liquidity are two different concepts, particularly in private companies. You may own shares, but there still may not be an immediate or straightforward way to sell them.

Key takeaway

RSUs are generally simpler to understand than stock options, but they’re still worth evaluating carefully.

Understanding when they vest, what restrictions apply, and whether you’ll eventually be able to sell the underlying shares is an important part of assessing their value.

What is Restricted Stock?

Restricted Stock and Restricted Stock Units sound very similar, but they aren’t the same thing.

The key difference is that Restricted Stock generally involves actual ownership of shares from the outset, even though those shares may be subject to restrictions such as vesting requirements or transfer limitations.

By contrast, RSUs are generally a promise to grant shares in the future once certain conditions have been satisfied.

For most candidates, the important takeaway isn’t memorizing the terminology—it’s understanding that two equity grants with similar names can work very differently.

Key takeaway

When someone says, “We’re offering equity,” your first question shouldn’t be:

It should be:

The answer will shape almost every conversation that follows.

A quick note

There are many other forms of equity compensation, including Employee Stock Purchase Plans (ESPPs), phantom stock, and stock appreciation rights (SARs).

If you’re offered a type of equity that wasn’t covered here, don’t guess. Ask questions, request the relevant documentation, and make sure you understand what you’re being offered before making a decision.

What is Vesting?

One of the most important concepts to understand when evaluating employee equity is vesting.

In simple terms, vesting is the process of earning your equity over time.

Just because you’ve been granted stock options or RSUs doesn’t necessarily mean you’ve earned all of them on day one. In many cases, you earn them gradually by continuing to work for the company.

Why does it matter?

When evaluating an offer, the headline number can be misleading.

For example:

That sounds great—but if those options vest over four years and you leave after one year, you may only walk away with a fraction of them.

Understanding the vesting schedule is just as important as understanding the size of the grant itself.

A simple example

Imagine you’re granted 48,000 stock options with a four-year vesting schedule.

A common structure might look like this:

• End of Year 1: 12,000 options vested

• End of Year 2: 24,000 options vested

• End of Year 3: 36,000 options vested

• End of Year 4: 48,000 options vested

Some companies vest monthly, some quarterly, and some use other structures. The details matter.

What is a Cliff?

Many vesting schedules also include a cliff.

A cliff is a minimum period of employment before any equity vests.

For example, a four-year vesting schedule with a one-year cliff typically means:

• Leave after 6 months: 0 vested

• Leave after 11 months: 0 vested

• Reach 12 months: your first portion vests

• After that: additional equity may vest monthly or according to the company’s schedule

The exact terms vary by company and should always be confirmed in your grant documentation.

Key takeaway

Don’t just ask:

Also ask:

What is a Strike Price?

If you’re receiving stock options, one of the first terms you’ll come across is the strike price (sometimes called the exercise price).

The strike price is the amount you’ll pay to purchase each share if you decide to exercise your options.

Why does it matter?

The strike price plays a significant role in determining whether your options may have economic value in the future.

A lower strike price isn’t automatically “better,” and a higher strike price isn’t automatically “worse,” but understanding the relationship between the strike price and the future value of the company is essential.

A simple example

Imagine you’re granted stock options with a strike price of $2 per share.

Years later:

• Strike price: $2

• Current share value: $15

Your agreement allows you to buy shares for $2 that are currently worth $15.

Now imagine instead that the shares are worth $1.

In that situation, purchasing shares for $2 would generally make little economic sense.

Key takeaway

Whenever you’re evaluating stock options, make sure you know the strike price.

Without it, it’s difficult to meaningfully assess what you’ve been offered.

What Does it Mean to Exercise Stock Options?

Receiving stock options does not automatically make you a shareholder.

In most cases, you’ll need to exercise your options if you decide you want to purchase the underlying shares.

Exercising simply means buying those shares at the strike price set out in your agreement.

Why does it matter?

One of the biggest misconceptions candidates have is assuming that stock options and shares are the same thing.

They’re not.

Until you exercise your options (and satisfy any applicable conditions), you may not actually own any shares at all.

It’s also worth remembering that exercising usually isn’t free. Depending on your agreement, you may need to pay the strike price, and there may also be tax implications depending on your jurisdiction and circumstances.

We’ll avoid diving into tax specifics in this guide, but it’s an area that’s worth understanding before making a decision.

A simple example

Imagine you’ve vested 10,000 stock options with a strike price of $2.

If you choose to exercise them, you would generally pay:

• 10,000 × $2 = $20,000

In exchange, you would receive the underlying shares, subject to the terms of your agreement.

Key takeaway

If you’re evaluating a compensation package that includes stock options, don’t just ask:

Also ask:

What Are Exercise Windows?

Another important concept that’s easy to overlook is the exercise window.

An exercise window is the period of time you have to exercise your vested stock options after leaving a company.

Many candidates don’t think about this until they’re already resigning.

By then, it can become a very important consideration.

Why does it matter?

Imagine you’ve spent four years with a startup and have accumulated a significant number of vested options.

When you leave, you may not have forever to decide whether to exercise them.

Some companies provide generous exercise windows.

Others may require employees to make that decision within a relatively short period of time.

If exercising your options would require a significant amount of money, that can create a difficult decision for departing employees.

Questions worth asking

If you’re offered stock options, consider asking:

Key takeaway

The value of stock options isn’t determined solely by the number of options or the company’s success.

The terms attached to those options matter too—and the exercise window can be one of the most important.

What Are Liquidity Events?

One of the most important questions a candidate can ask is:

The answer often comes down to something called a liquidity event.

A liquidity event is an event that creates an opportunity for shareholders to sell their shares.

Why does it matter?

It’s possible to own shares in a successful private company and still have no practical way to sell them.

That’s one of the biggest differences between public and private companies.

In a public company, there’s typically an active market where shares can be bought and sold.

In a private company, that opportunity may not exist unless a specific event occurs.

Common examples

1. Initial Public Offering (IPO)

   
   An IPO occurs when a private company becomes publicly traded.

   
   Depending on the circumstances and any applicable restrictions, shareholders may eventually have the opportunity to sell their shares on the public market.
   
   

2. Acquisition
   
   

   If another company acquires the business, employees and shareholders may have the opportunity to sell their shares as part of the transaction.
   
   

   The details can vary significantly from one deal to another.
   
   

3. Company Buyback

   
   Some private companies periodically offer to buy shares back from employees or existing shareholders.
   
   

   Not every company does this, and there’s no guarantee one will occur.
   
   

4. Secondary Sales
   
   

   Some companies allow existing shareholders to sell shares to approved third parties through private transactions.
   
   

   Whether these are permitted—and under what conditions—depends on the company and its governing documents.
   
   

Key takeaway

When evaluating an equity package, don’t just ask:

Also ask:

What is Dilution?

Dilution is one of the most misunderstood concepts in employee equity.

Fortunately, the basic idea is relatively simple.

When a company issues new shares, your ownership percentage can decrease—even if you still own exactly the same number of shares.

A simple example

Imagine a company has 100 shares outstanding.

You own 10 of them.

Your ownership is:

• 10 ÷ 100 = 10%

Now imagine the company raises money from investors and issues another 100 shares.

You still own your original 10 shares.

But there are now 200 shares in total.

Your ownership becomes:

• 10 ÷ 200 = 5%

You haven’t lost any shares.

But you now own a smaller percentage of the company.

Is dilution always bad?

Not necessarily.

Imagine this scenario:

• You own 10% of a company worth $1 million.

• Your ownership is worth approximately $100,000.

• The company raises capital, grows rapidly, and your ownership is diluted to 5%.

• But the company is now worth $100 million.

• Your 5% stake would now represent a much larger value than your original 10%.

In other words, owning a smaller piece of a much larger pie can still be a very good outcome.

Why does this matter?

Candidates sometimes hear:

Without additional context, it’s impossible to know whether that’s a meaningful ownership stake or a very small one.

It’s also important to understand that your ownership percentage may change over time as a company grows and raises additional capital.

Key takeaway

Don’t focus exclusively on the number of shares or options you’re receiving.

Understanding your ownership percentage—and how it may change over time—is often far more informative.

How to Estimate Potential Value of Equity

This is one of the most common questions candidates ask:

The honest answer is that there’s no simple formula.

The future value of employee equity depends on many variables—many of which won’t be known for years.

That said, understanding a few basic concepts can help you ask better questions and set realistic expectations.

A simple starting point

A very simplified way to think about ownership is:

Estimated Value ≈ Ownership Percentage × Company Value

Think of this as a rough mental model—not a valuation methodology.

For example:

• Ownership: 0.10%

• Company value: $100,000,000

Estimated value:

• 0.10% × $100,000,000 = $100,000

In reality, estimating the future value of employee equity is far more complex.

Why the real answer is more complicated

The eventual value of your equity may be affected by:

• your vesting schedule

• your strike price

• dilution over time

• taxes

• exercise costs

• liquidation preferences

• the terms of your equity agreement

• whether there’s an opportunity to sell your shares

That’s why it’s important to view any back-of-the-napkin calculation as an estimate rather than a prediction.

Key takeaway

Be cautious of anyone who confidently tells you exactly what your equity will be worth in five or ten years. There are simply too many variables to make that prediction with certainty.

The better goal isn’t predicting the future.

It’s understanding what you’ve been offered well enough to make an informed decision today.

Questions to Ask Before Accepting an Equity Offer

If equity represents a meaningful part of your compensation, don’t be afraid to ask questions.

You don’t need to ask every question below, and you certainly don’t need to become an expert overnight. But understanding the basics can help you evaluate an offer more confidently and avoid making assumptions based on incomplete information.

No single answer should determine whether you accept or reject an offer.

Instead, think of these questions as a way to better understand what you’re being offered and have a more informed conversation with your prospective employer.

Final Thought

Equity can be a meaningful part of a compensation package.

But it’s also one of the least understood aspects of compensation.

You don’t need to become an expert in corporate finance or securities law to make a good decision.

You just need to understand enough to ask informed questions, recognize when you need more information, and avoid making assumptions based on a headline number or an exciting story.

If equity represents a meaningful portion of your compensation, consider asking your employer questions and speaking with a qualified accountant, lawyer, or financial professional before making a decision.

Further Reading

Again, this guide is intended to provide a practical overview of employee equity. It is not legal, tax, financial, or investment advice.

If you’d like to continue learning, I’d recommend starting with a small number of credible resources.

Canada

• Canada Revenue Agency: Employee Security Options

• Canada Revenue Agency: Line 24900 — Security Options Deductions

United States

• IRS: Topic No. 427 — Stock Options

• IRS: Publication 525 — Taxable and Nontaxable Income

General Learning

• Y Combinator: All About Startup Equity

• Carta: RSU vs. Stock Options

• Investopedia: Restricted Stock Unit (RSU)

• Investopedia: Stock Compensation