What Is Equity?
A practical guide to what equity means at a private company, the main types of equity employees receive, and how to evaluate what your grant may actually be worth.
When a private company offers you equity, it is offering some form of ownership or ownership-linked compensation.
That sounds simple. In practice, it can mean very different things depending on what you actually receive. “20,000 shares” and “20,000 options” are not the same thing. Neither is an RSU grant, restricted stock, or a promise of future settlement.
This guide explains what equity is, how it shows up in startup compensation, and what to look at before assuming your grant is worth a specific dollar amount.
Equity means ownership — but the details matter
At the highest level, equity gives you a stake in the company. If the company becomes more valuable, your stake may become more valuable too.
But the economic result depends on several variables:
- what type of award you received
- whether it vests over time
- whether you must pay to exercise it
- what rights your shares have
- whether the company ever offers liquidity
In other words, equity can represent meaningful upside, but it is rarely cash today.
Common forms of private-company equity
Stock options
Options give you the right to buy shares later at a preset exercise price. The two main employee types are ISOs and NSOs.
Restricted stock units (RSUs)
RSUs are a promise that shares or cash will be delivered later if certain conditions are met. At many late-stage private companies, settlement is delayed until a liquidity event.
Restricted stock
Restricted stock is actual stock issued upfront, usually subject to vesting or repurchase rights.
Common stock vs. preferred stock
Employees usually end up with common stock. Investors often buy preferred stock, which can carry different economic and control rights.
What determines whether your equity is valuable?
A grant can look impressive on paper and still be worth very little in practice. Focus on these five questions:
1. What percentage of the company does it represent?
A raw share count is not enough. You want to understand your grant relative to total shares outstanding on a fully diluted basis.
2. What is the current value of the company?
A private valuation is not the same as public market liquidity, but it helps frame the upside range.
3. What is your strike price or purchase price?
For options, the spread between the exercise price and eventual sale price matters a lot.
4. What has to happen before you can sell?
Even if your shares are worth something on paper, company rules, transfer restrictions, and the absence of a market can delay liquidity for years.
5. How concentrated are you?
A large equity grant can become a large personal-finance risk if too much of your future wealth depends on one company.
What employees often miss
A grant is not the same as cash compensation
Salary is guaranteed once earned. Equity is contingent on time, company performance, and liquidity.
A headline valuation is not your personal valuation
Employees often compare their common stock to the last preferred financing round. That can be directionally useful, but the economics are not identical.
Taxes can arrive before liquidity
Exercising options, vesting into stock, or participating in a sale can create tax consequences before you feel “rich.”
A simple framework for evaluating an offer
When you receive equity, try to gather:
- the type of award
- the number of units
- the vesting schedule
- the strike price, if any
- the latest 409A or fair-market-value context
- total shares outstanding or percentage ownership guidance
- the post-termination exercise window, if applicable
That checklist will tell you far more than a standalone share count.
Final takeaway
Equity is not just a perk. It is a bundle of rights, risks, timing rules, and potential upside.
The best starting point is not “What is this worth today?” It is:
- what exactly do I own,
- what has to happen before it turns into cash,
- and what tradeoffs come with getting there?
Related guides
Sources and further reading
- IRS Publication 525: https://www.irs.gov/publications/p525
- IRS stock options topic: https://www.irs.gov/taxtopics/tc427