Startup equity explained: stock options, RSUs, vesting, cliffs and exercise windows

Every startup offer letter has a line about equity, and most candidates skip it because the vocabulary is off-putting. This is the vocabulary, in the order it will matter to you.

What you are being given

Stock options are the right to buy shares in the future at a fixed price (the strike or exercise price). If the company's shares are later worth more than the strike, the difference is your gain. If they are worth less, the options are worth nothing and you simply don't buy. Options are the standard at early-stage startups in the US, UK, India and most of Europe.

RSUs (restricted stock units) are a promise to hand you actual shares once they vest. There is nothing to buy; the shares are just yours on the vesting date. RSUs are typical at later-stage companies and public companies, and rarer at startups because they create a tax bill on vesting.

Restricted stock — actual shares granted up front, subject to forfeiture — is mostly a founder and very-early-employee instrument.

In all three cases the grant is a number of shares (or units), not a percentage. To know what fraction of the company you hold, you need the fully diluted share count, and you should ask for it.

Vesting and the cliff

A grant vests — becomes yours — over time. The standard is four years with a one-year cliff: nothing for the first twelve months, then 25% at once, then the rest monthly or quarterly. Leave in month eleven and you have nothing; leave in month thirteen and you have a quarter.

Variations you'll see: three-year schedules in parts of Europe, back-weighted schedules (10/20/30/40) at a few large companies, and acceleration clauses that vest more of your grant if the company is acquired. Ask which applies.

The exercise window — the clause that costs people the most

If you leave a company with vested but unexercised options, you have a limited period to buy them. The historical default is 90 days. After that they expire.

Why this matters: buying vested options can cost real money — the strike price times the number of shares, and in many countries a tax bill on the difference between strike and current value, payable even though you can't sell the shares. People regularly walk away from vested equity because they couldn't fund the exercise in three months.

Companies that want to be fair extend the window to five, seven or ten years. It is a legitimate thing to ask for, and a legitimate reason to prefer one offer over another.

Tax, briefly and by country

Equity tax is where generic advice fails, so here is only the shape of it:

• United States. ISOs and NSOs are taxed differently; the moment of tax can be at exercise or at sale; an 83(b) election within thirty days of an early-exercise grant can change a great deal. Talk to someone who does this for a living before exercising.
• United Kingdom. EMI options are a tax-advantaged scheme for small companies and are much better for employees than unapproved options. Ask whether the grant is EMI.
• India. ESOPs are taxed at exercise on the difference between fair market value and strike, then again on sale; eligible startups can defer the first tax. See our India-specific ESOP guide. If you're employed in India by a foreign startup through an employer of record, the grant usually comes from the foreign parent: it's taxed in India as a perquisite at exercise, foreign shares must be reported in your return, and you'll need to check whether the plan even permits grants to EOR employees — ask before you count on it.
• Germany, France, and much of the EU. Rules have changed in the last few years to reduce "dry income" tax at exercise, but they differ per country and per scheme (BSPCE in France, the 2024 reforms in Germany).

The universal rule: find out when you will owe tax and whether you'll have cash from the shares to pay it. If the answer is "at exercise, and no", you need the long exercise window above.

Questions to ask before you sign

1. How many fully diluted shares are outstanding? (Turns your grant into a percentage.)
2. What was the price per share at the last funding round, and what is the strike price?
3. What is the exercise window after leaving?
4. Is there any acceleration on acquisition?
5. What is the preference stack — how much do investors get paid before common shareholders see anything?
6. Has the company ever done a buyback or secondary for employees?

A company that answers all six quickly is a company that has thought about its employees' equity. One that stalls on question one is telling you something.

How to value it

Do not use the headline number. Take your grant as a percentage, multiply by a realistic exit value (not the founder's dream), subtract the preference stack, discount heavily for time and the probability of failure, and compare what's left to the salary difference against your alternative. For most early-stage grants the honest answer is "probably zero, possibly life-changing" — and you should take the job for the salary, the work and the people, treating the equity as an option in both senses of the word.