March 6, 2025
What Happens to Equity After the Initial Grant
Most discussion of startup equity stops at the offer letter. The more consequential decisions come later — when a financing closes, when a grant fully vests, when someone has been diluted past the point where their original award still makes sense. These are the mechanics that determine what an equity package is actually worth, and they are rarely explained to the people holding it.
Build the structure before you need it
The strongest habit among CEOs who avoid compensation problems is doing the work early. That means mapping every position in the company, projecting the roles you expect to add over roughly the next three years, and setting ranges for salary, bonus, and equity at each level against market data.
The reason is credibility. When a recommendation reaches the compensation committee, it needs a rational basis behind it. A defensible framework built in advance is very hard to argue with; an ad hoc number is very easy to argue with. And the framework does not have to produce a perfect answer — nobody can. It has to produce a decision you can explain.
There is a hard constraint that catches first-time founder CEOs. Once you start hiring senior people, you cannot bring someone in whose cash compensation exceeds your own without the whole internal structure falling out of alignment. Founders who under-set their own compensation early discover this at exactly the moment they are trying to recruit.
The cash-versus-equity trade-off is largely gone
The old assumption was that a candidate accepting below-market cash would be compensated with a larger equity grant. That correlation is much weaker than people expect, and in current market data it barely holds.
Sophisticated candidates who know their skills are scarce now expect both. They understand the game well enough to treat equity as upside rather than as payment. One practical consequence at the company level: teams end up hiring fewer people at higher compensation rather than more people at lower.
It also means you should not assume that someone at the seventy-fifth percentile on equity took less cash to get there. Frequently they are at the seventy-fifth percentile on both.
Founder re-vesting: the thing nobody warns founders about
When a financing closes, investors look at the vesting schedules of the key people whose continued involvement they are effectively buying. If a founder is substantially vested already, the investor may reasonably object — they are putting money in against the risk that the founder vests fully and leaves within a year.
The fix is re-vesting. Typically it is done by moving the vesting start date forward, keeping the same schedule shape. The practical effect is that equity which had already vested becomes unvested again, and therefore subject to repurchase by the company if the founder departs.
This is standard and not adversarial, but it materially changes a founder’s position and it should not be a surprise at signing.
Refresh grants, and when founders actually get them
A refresh is simply a new grant, usually issued to correct dilution from a financing round or to reflect a role that has outgrown its original award.
For founders, the intuition most people have is wrong. Founders holding a large percentage generally do not receive refreshes, because they are already well above any market benchmark. Refreshes become relevant when successive rounds have diluted a founder down to or below market for their role — someone who started with a third of the company and has been diluted may need nothing, while someone who started with a tenth and has been diluted to seven or eight percent probably does.
One structural note: any additional equity a founder receives beyond their original founder shares comes out of the employee option pool. Founder shares are a one-time event at formation.
For employees, refreshes are rarely a formal programme. The prevailing approach is to identify the genuinely key people — in a thirty-person company that might be six or eight individuals — and refresh based on performance and criticality. There is no entitlement, and there is a blunt logic to it: someone who is not performing is on their way out anyway, so the retention question does not arise.
The argument worth making to a board is that a startup offers no pension and no retirement plan. Equity is the entire long-term component of the package, and it is the reason people stay.
Boxcar grants and Evergreen clauses
Two terms that get confused with refreshes.
A boxcar grant is an award that begins vesting where an existing one ends, stacked behind a grant that is fully or nearly fully vested. It resets the retention clock for someone who has run out of unvested equity.
An Evergreen clause governs the size of the option pool, automatically increasing it on a defined basis. That is a cap table mechanism, not an individual award. A refresh concerns one person’s grant; an Evergreen concerns everyone’s dilution.
Pool percentage means nothing without headcount
Option pools have shrunk over the past several years, particularly in early rounds, and commonly sit somewhere in the low-to-mid teens as a percentage of the company.
But that percentage is meaningless in isolation. A ten percent pool is comfortable at ten employees and genuinely difficult at thirty. Whether it works depends entirely on the hiring plan, and the hiring plan depends on the business model — a company deploying capital into software engineers or bench scientists needs a substantially larger pool than a lean virtual company routing most of its spend to contract research organisations.
The size of the founding team matters too. A large, capable founding group needs less pool than a thin one that has to hire its way to a complete team.
And getting it wrong is expensive in a specific direction. Pool increases are almost always negotiated as part of a financing and placed in the pre-money, which means they dilute existing holders — founders and earlier investors — and not the incoming investor. Set the pool too large and you have diluted yourself unnecessarily. Set it too small and you will be back in front of the board asking for an increase, which comes from the same place.
A related pressure: rounds are being raised earlier and larger, as investors seek to control their own destiny rather than risk a recapitalisation two years out. More capital earlier makes pool sizing harder, not easier.
What an option is actually worth
A common and misleading practice: a company tells a candidate that fifty thousand options at a dollar-a-share 409A price represents fifty thousand dollars of value.
It does not. An option is a right to buy. That fifty thousand dollars is what the employee would have to pay in to acquire the shares. The value is entirely in future appreciation — the spread between the exercise price and whatever the shares are eventually worth. If the price per share reaches twenty dollars, that same grant carries roughly nine hundred and fifty thousand dollars of value: a million dollars of stock less the fifty thousand paid to exercise.
The honest version of this conversation walks people through exit scenarios, including the one where the equity is worth nothing. Companies that explain the cap table and the mechanics build more trust than companies that quote a headline number. The alternative is people discovering at exit that they misunderstood what they held.
That includes the case where a subsequent 409A comes in below the price someone already paid. Options can go underwater, and whether to exercise on the way out of a company is a genuinely personal financial decision rather than something an employer should advise on.
Acceleration on a change of control
The large majority of CEO employment agreements now provide full acceleration of equity on a change of control, and double trigger is the prevailing structure — the sale plus a second condition, usually a qualifying termination.
Two practical points. Most corporate equity plans deliberately leave acceleration to board discretion rather than writing it in, which preserves flexibility to get a deal done. And key employees below the CEO should expect to be asked to stay six to twelve months post-close to earn their full equity. That is not merely a buyer’s demand; a CEO has a reputational stake in the product succeeding after the sale, and continuity is how that happens.
Two smaller things worth knowing
Counsel prefers share numbers to percentages. Grants get documented in actual shares, converted off the fully diluted count, for good administrative reasons. That is fine for the paperwork — but when you are evaluating an offer, convert it back. A share count without a denominator tells you nothing.
Milestone vesting is more trouble than it looks. Performance and milestone-based vesting creates real accounting complexity, and crafting bespoke arrangements for individual employees becomes a distraction that scales badly. Time-based vesting over four years with a one-year cliff remains standard precisely because it is simple, and standardising early is worth more than optimising each case.
The thread running through all of it: nearly every difficult equity conversation later traces back to whether the initial grant was set correctly. Refresh mechanics, pool increases, and acceleration terms are all ways of correcting for something that was easier to get right at the start.
Adapted from the J. Thelander Consulting Q1 Private Company Compensation Trends & Insights webinar with Jody Thelander, Jen Fang (Wilson Sonsini Goodrich & Rosati) and Chris Owens (CEO, R3 Vascular). Nothing here is legal, tax or financial advice.