Before You Sign That Equity Contract, Read This
Equity can be life-changing or worthless. The difference is knowing what you signed.
Equity has become one of the most powerful tools for startups and high-growth companies. It helps founders attract talent they couldn’t afford otherwise, keeps teams aligned, and builds a sense of shared ownership.
On paper, it’s great.
Why startups love offering equity
Three simple reasons.
One. They need talent they can’t afford.
Startups run lean. Salaries lag behind big tech and large corporations. Equity becomes the balancing mechanism.
Two. Equity aligns incentives.
If the company wins, you win. Employees start acting more like owners. Boards and founders love this.
Three. It boosts retention.
Vesting schedules and one-year cliffs keep people around long enough to build something that lasts.
Rather than only compensation, Equity is a retention strategy.
Equity is a bet. Far from guaranteed compensation. A bet on the company, the founders, the market, and your ability to stay long enough to see a liquidation event.
You should know exactly what you’re betting on.
What to watch out for
Most people don’t understand how their equity works. And that’s not their fault. The way equity is presented during recruiting is often confusing or incomplete.
Here are the most important things to pay attention to:
• Contract: Most equity contracts give you the right to buy shares, not actual shares
• Vesting: Equity almost always includes vesting schedules and a one-year cliff
• Exercise: There may be an exercise window that forces you to buy before the exit
• Liquidity: Options are illiquid and only pay at an exit or approved secondary sale
• Dilution: Every fundraising round dilutes your ownership percentage
• Exit: Most startups will never reach an exit that makes the equity meaningful
The Most Common Types of Equity Contracts
Not all equity contracts are equal. Here are the most common structures.
1. Employee Stock Option Plans (ESOPs)
You receive the option to buy company shares later at a fixed strike price.
Pros:
High upside if the company grows
Strong alignment with long-term value
Cons:
You must pay to exercise
Can become worthless if the stock price is below the strike
Where common:
US startups and private tech companies. Increasing adoption in Europe but still less common.
2. Employee Stock Purchase Plans (ESPPs)
You set aside part of your salary to buy shares later at a discount.
Pros:
You accumulate funds over time
Guaranteed purchase discount
Straightforward for public company stock
Cons:
You still need to make the purchase
Mostly unavailable in private companies
Where common:
US public companies with favorable tax treatment. Rare in Europe.
3. Virtual Stock Option Plan (VSOP)
You don’t own shares. Instead, you receive a cash payout that mirrors the value of shares at exit. Economically similar to ESOPs but without issuing shares.
Pros:
No exercise cost
No upfront cash needed
Clean for the company’s cap table
Cons:
You cannot become an actual shareholder (no voting rights or dividends)
Pays out only at exit or designated payout event
Where common:
Very common in Europe, especially where issuing shares is more complex.
4. Restricted Stock Units (RSUs)
You receive actual shares automatically when they vest.
You automatically receive the shares after the vesting period, without having to pay for them.
Pros:
No strike price
Automatically delivered at vesting
No voting rights or dividends until conversion
Cons:
Taxation typically happens at vesting
Do not include voting rights or dividend benefits until conversion
Where common:
US public companies and later-stage startups. Increasingly used in Europe by large tech and multinationals.
5. SARs (Stock Appreciation Rights)
You receive compensation based on the increase in stock value over time.
Pros:
No need to purchase shares
You benefit only from upside
Paid in cash or stock
Cons:
Worthless if the stock doesn’t appreciate
Taxed as ordinary income when exercised
Where common:
Mid-size and large US companies. Rare in Europe.
6. RSAs (Restricted Stock Awards)
You receive real shares immediately, but they remain restricted until vesting.
Pros:
You own the shares upfront
Often include voting rights and dividends
No strike price
Cons:
Shares remain restricted until vesting
Taxation typically occurs at vesting
Where common:
US early-stage startups, especially for first hires or founders. Much less common in Europe.
Conclusion
Equity can have a major impact on your compensation and long-term upside. But only if you understand what you’re receiving, what it costs you, when it becomes liquid, what risks you’re taking, and what needs to happen for it to actually be worth something.
Before signing anything, take the time to understand the mechanics. Equity can be the best part of your compensation or the most overrated.
As always, if you enjoyed reading this piece, let me know with a like or a comment.
Thank you for reading,
Enrico