<aside> 💡
A companion to the FNDN Series edition "5 things a Head of People must know about equity". This page holds the detail that didn't fit in the article: the key terms, the sums, the benchmarks, and what to tell people at each stage. It's a design and communication guide. It isn't tax, legal or financial advice, so check local rules with an adviser before you act.
</aside>
| Term | What it means | Why a Head of People cares |
|---|---|---|
| Equity | Ownership in the company, granted as shares or as the right to buy shares | It's part of total reward, so it sits in your offers and your budget |
| Option | The right to buy a share later at a fixed price | Most startup employees get options, not shares |
| Strike price (exercise price) | The fixed price an option holder pays to buy each share | The gap between strike and share price is where the value sits |
| Fair market value (FMV) | The independent tax value of an ordinary (common) share. In the US this is the 409A valuation | Usually sets the strike price, and sits well below what investors paid |
| Common vs preferred shares | Investors usually hold preferred shares with extra rights, like being paid first at a sale. Employees hold common | Explains why FMV can be 60–90% below the investor price at early stages |
| Fully diluted shares | Every share that exists or could exist: issued shares, granted options and the unallocated pool | The only honest base for working out ownership % |
| Ownership % | Options ÷ fully diluted shares | It’s often more accurate to think in terms of % rather than $ |
| Option pool | The shares set aside for employees. Split into allocated (granted) and unallocated (still available) | When the unallocated pool runs out, you can't make offers |
| Vesting | Earning your options over time, usually 4 years | The main retention lever in a grant |
| Cliff | The first period before anything vests, usually 1 year | Anyone leaving before the cliff gets nothing |
| Vesting commencement date | The date vesting starts, ideally the start date | Check it matches what the offer letter says |
| Exercise | Paying the strike price to turn options into shares | Costs real money, and can trigger tax |
| Post-termination exercise window | How long a leaver has to exercise vested options, often 90 days | Short windows push leavers into a hard financial decision |
| Good and bad leaver | Rules that decide what a leaver keeps, depending on how they leave | Harsh bad-leaver terms damage trust and get talked about |
| Acceleration | Faster vesting on a defined trigger. | Some companies accelerate vesting on a sale, for example (so people get to cash their full grant vs just whats vested) |
| Dilution | Your % shrinking as new shares are issued, usually at each funding round | Explain it up front so it's never a surprise |
| Liquidity event | A moment when shares can be sold: a sale, an IPO or a secondary sale | Until one happens, equity is paper value |
| Liquidation preference | Investors' right to get their money back first at a sale | At a modest exit, it can leave little for common shareholders |
| Refresh grant | An extra grant to an existing employee, often from year 2–4 | Keeps unvested value ahead of people after the new-hire grant runs out |
| Promotion top-up | A grant that brings a promoted person up to the grant for their new level | Stops promoted people holding less than new hires |
| RSU | Restricted stock unit: a promise of shares with no strike price | Common at late-stage and public companies, rare early on |
| Burn rate | How fast the pool is being used | Your early warning that the pool won't cover the hiring plan |
Ownership % Options ÷ fully diluted shares.
Today's paper value Options × (latest preferred price − strike price).
Value at tax price Options × (FMV − strike price). Usually close to zero for new grants, because the strike is normally set at FMV.
Cost to exercise Options × strike price.
Worked example: why option counts mislead
| Offer A | Offer B | |
|---|---|---|
| Stage | Series A | Series C |
| Options | 10,000 | 5,000 |
| Strike price | $1.00 | $6.00 |
| Investor price | $4.00 | $20.00 |
| Fully diluted shares | 40,000,000 | 120,000,000 |
| Ownership | 0.025% | 0.004% |
| Paper value today | $30,000 | $70,000 |
Offer A has twice the options and a larger slice of a smaller company. Offer B is worth more than twice as much today. Neither number tells you the risk. That's a judgement about the company, and it's the part candidates most need help to think through.
Run this at least once a year, and again before every funding round.