Congratulations, you've received a job offer that includes equity compensation! Getting an equity grant is always exciting, but before you go on a spending spree, you need to understand what you're actually getting. Too many job candidates accept equity packages without asking the right questions, only to discover later that their "valuable" equity grant isn't really worth what they thought.
At Pave, a compensation intelligence platform used by more than 8,600 companies, we see this problem far too often, which is why we created our Visual Offer Letter tool to help companies present transparent and detailed equity award information to candidates.
We've learned that when job seekers truly understand their equity compensation—including vesting mechanics and realistic valuation scenarios—they make better decisions and join companies with appropriate expectations. This benefits everyone: new employees, recruiters, and hiring managers.
With this in mind, here are five of the most important things you need to know about any equity award before signing on the dotted line.
What Type of Equity Award Am I Getting?
Every equity award vehicle, or equity type, works in unique ways and has different financial implications for employees. Here, we’ll focus on the two most common award vehicles: stock options and restricted stock units (RSUs).
Stock options, which are most commonly used at early stage private companies give you a right to buy company shares in the future at a fixed price (i.e., the “strike price”) once certain vesting requirements are met. However, these awards can lose their value if the company’s stock price drops below the strike price.
Meanwhile, RSUs, which are most commonly used at late stage private companies and public companies, represent shares in the company you will receive once certain vesting requirements are met. RSUs always have some value so long as the company remains in business.
Digging a bit deeper, there are also different types of stock options to be aware of, which have specific tax implications. Incentive stock options (ISOs) offer preferential tax treatment to employees but come with certain restrictions. In contrast, non-qualified stock options (NQSOs) are more flexible but create ordinary income tax when they are exercised. RSUs are taxed as ordinary income when they vest, even if shares are not sold.
Understanding the type of equity award you’re about to receive will help you set realistic expectations and plan for taxable events. Don't assume all equity awards work the same way, and it is always wise to consult with a tax professional before receiving or selling equity.
How Does My Equity Award Vest?
The vesting schedule of your equity award determines when you actually get your equity. When stock options vest, you have the right to exercise your options and get shares, and when RSUs vest you instantly become a shareholder.
Vesting schedules vary widely. At private technology companies, awards typically have a four-year overall vesting period with shares earned at different intervals over that timeframe. At public technology companies, the prevalence of awards with three-year vesting periods is climbing.
Pay particular attention to so-called “cliff vesting” events in your awards, as they represent significant financial risk if you leave or are terminated early from a job. One-year cliffs are very common for new employees, meaning no equity vests (or is earned) during your first full year of employment. Then, on the one-year anniversary of your grant, a large vest occurs. Afterwards, most grants switch to so-called “linear vesting,” where a small portion of your equity award vests every month or quarter for the remainder of the overall vesting period.
How Is the Value of My Equity Award Determined?
For public companies, determining the value of equity is straightforward—any shares you receive, either after exercising stock options or earning RSUs, are worth the current stock price. However, for private companies, it's more complex and speculative.
Private companies typically use 409A valuations to set fair market values for their equity, but these can be conservative estimates that may not reflect the company's true potential—or current investor appetite. In the long run, the number of shares you receive as a percentage of the company’s total shares outstanding says a lot more about the potential value you could receive.
Always remember, the value of equity at private companies is largely theoretical until there's a tender offer or exit event (e.g., IPO or acquisition). A million shares means nothing if the company never exits, and even successful exits don't guarantee value for common stockholders if liquidation preferences favor investors. The bottom line: it’s important to ask questions and seek out companies that communicate transparently about their risk-reward profile.
What are the Long-Term Prospects for My Equity Award?
In general, public company equity is viewed as more stable and less risky. You will always know the daily stock price and quarterly earnings reports offer transparent guidance on the company’s performance and direction of travel. While you can’t predict the future, you’ll have good information on hand to assess the level of risk tied to your equity awards.
For private companies, this question gets at a company's exit timeline and growth expectations. Are you joining a company that expects to IPO in two years, or one that plans to remain private indefinitely? Is management optimistic about 10x growth, or focused on steady, profitable expansion?
Companies with shorter exit timelines and aggressive growth targets offer higher potential returns but also higher risk. Those planning for long-term private growth may offer more stability but potentially limited liquidity opportunities.
Understanding management's honest assessment of exit timelines, growth potential, and business strategy helps you evaluate whether the equity component of your compensation aligns with your personal financial goals and risk tolerance.
How Is My Equity Treated at Termination?
This is where employees can get surprised.
Standard equity award agreements usually favor the company—you typically forfeit all unvested equity immediately upon termination, whether voluntary or involuntary. And for vested stock options, you usually have 90 days to exercise after leaving, which can create significant financial pressure if the exercise cost is high. Some companies offer extended exercise periods (10 years is becoming more common at well-funded startups), but this remains the exception rather than the rule.
Pay special attention to acceleration clauses, which determine whether your unvested equity speeds up its vesting schedule in certain scenarios:
Single-trigger acceleration means your equity accelerates based on one event—typically a company acquisition or change of control. If your offer includes single-trigger acceleration and the company gets acquired in year two, you might immediately vest all four years of equity. This is rare and usually only reserved for executives.
Double-trigger acceleration requires two events to occur: a company acquisition AND your termination (usually within 12-18 months post-acquisition). This protects you if you're let go after an acquisition, but keeps you incentivized to stay and help integrate the companies. Double-trigger acceleration is more common and is often considered a fair middle ground.
Also understand any repurchase rights the company may have over your vested shares, particularly at private companies. Some companies retain the right to buy back your shares at fair market value if you leave, which can limit your ability to benefit from future appreciation.
Finally, pay attention to the difference in treatment based on how your employment ends—termination for cause, resignation, or layoff can all have different implications for your equity, including accelerated forfeiture or reduced exercise windows.
All of these features are rarely negotiable, except for executives, but it is still good to ask questions so you can understand agreement terms and manage your expectations.
Getting Clear Answers
The best companies provide detailed equity documentation upfront and are transparent about award valuation, terms, and realistic outcomes. Red flags include vague answers about basic terms, refusal to provide documentation, or pressure to accept quickly without time for review.
Companies should be willing to explain their equity programs clearly. If you can't get straightforward answers to these five questions, that could tell you something important about the organization's culture and transparency.
The Bottom Line
Equity compensation can be an amazing wealth creation vehicle, but it can also be disappointing. The difference often comes down to understanding what you're getting before you commit. When you understand the terms, timeline, and potential outcomes, equity can be a powerful way to participate in the success of the companies you help build.
Don't let excitement about a new opportunity prevent you from asking these key questions. The companies worth joining will respect your diligence and provide clear, honest answers.
Alex is the General Manager for Pave's Market Data product and the firm's Vice President of Marketing and Strategy. He has more than two decades of experience in total rewards, including 10 years working at Aon plc developing, commercializing, and marketing the Radford Survey platform.
