How to Evaluate Startup Equity: Options vs. RSUs
TL;DR / Quick Take
Equity is a primary wealth builder in tech, but it is highly variable. Public company RSUs are liquid cash-equivalents, whereas early-stage stock options are lottery tickets. To value an offer, you must discount equity based on liquidity, vesting structures, and company risk stage.
The Equity Spectrum: RSUs vs. Stock Options
Not all company shares are created equal. The type of equity you receive depends on the maturity of the company:
- Restricted Stock Units (RSUs): Common in public companies (like Google, Apple, Microsoft) and late-stage startups. They represent actual shares of stock given to you. Once they vest, they are yours and can be sold immediately for cash. They are highly liquid.
- Stock Options: Common in early-stage startups (Seed through Series C). They do not give you stock directly; instead, they give you the right to purchase stock at a fixed price (the strike price). If the stock price goes up, you profit on the difference. If it goes down or the company never exits, they are worth zero.
WMO Equity Risk-Discount Model
To prevent anchoring to unrealistic paper wealth, we apply a liquidity risk multiplier to equity components in our Adjusted Value engine:
Public Company (NASDAQ/NYSE) Instant market liquidity 95% - 100% Late-Stage Private (Series E+) Occasional secondary tenders 75% - 85% Mid-Stage Private (Series C/D) Illiquid, moderate exit likelihood 40% - 60% Early-Stage (Seed / Series A/B) Highly illiquid, 90% failure rate 10% - 25%For example, if an early-stage startup offers you $100,000 in stock options yearly, you should only value that component at $15,000–$25,000 in your Adjusted Value model. If a public company offers $100,000 in RSUs, it is virtually cash-equivalent at $95,000–$100,000.
Vesting Schedules and the 1-Year Cliff
Equity is never handed to you on day one. It is earned over time through a vesting schedule. The standard structure is 4-year vesting with a 1-year cliff:
- The Cliff: You must stay at the company for exactly 12 months to receive any equity at all. If you leave or are laid off at 11 months, you get 0%. At the 1-year mark, 25% of your total grant vests instantly.
- Monthly/Quarterly Vesting: After the cliff, the remaining 75% vests in equal monthly or quarterly increments over the next 36 months (1/48th of the total grant per month).
If you plan to stay at a company for only 18 months, do not model the full 4-year equity package. Calculate your Adjusted Value based only on the 37.5% of equity that will vest during your tenure.
Frequently Asked Questions
What is a strike price?
A strike price is the set price per share at which you can purchase your options. It is typically determined by the fair market value (409A valuation) of the company's stock when your options are granted. You only make money if the stock's exit value exceeds this strike price.
How are RSUs taxed in the US?
RSUs are taxed as ordinary income at the moment they vest. Your employer will typically sell a portion of the vesting shares (usually 22–35%) automatically to cover federal, state, and local income taxes, delivering the remaining shares to your brokerage account.
Can I negotiate my equity grant?
Yes. In tech, equity is often the easiest component to negotiate because it does not directly impact the company's immediate cash flow. If base salary is capped, request a 20–30% increase in the initial equity grant size.