December 12, 2022
What Private Company Executives Get Wrong About Equity
Executives joining private companies tend to negotiate hard on base and bonus, then accept the equity portion of the offer more or less as presented. That is backwards. At most private companies the equity is where the outcome actually lives, and it is also the part of the package governed by rules that are easy to misread until the moment they cost you money.
A share count is not an equity package
If an offer tells you the number of shares and nothing else, you do not yet know what you have been offered. A share count means nothing without the total number of shares outstanding. Ask for the percentage. Then ask what that percentage is measured against, because fully diluted, issued, and outstanding are different denominators and they produce different answers.
Why you are offered options rather than stock
At a company with a meaningful valuation, being handed stock outright is a taxable event. The IRS treats stock issued for services as compensation, so a grant representing a real percentage of a well-funded company generates ordinary income on the spot, at a value you cannot sell shares to cover.
An option avoids that. You are granted the right to buy at a set exercise price, no tax falls due at grant, and the tax consequences arrive later when you exercise or sell. Founder shares look like an exception, but they usually are not a special class at all — just common stock issued at the outset, before there is any valuation to speak of.
ISOs, NQSOs, and the exit that undoes the plan
Incentive stock options carry favorable treatment if you meet the holding requirements: employee status, at least one year after exercise, and two years from grant. Clear those and the entire spread between your exercise price and your sale price is capital gain. No tax at grant, none at exercise.
Non-qualified options work differently. Exercise triggers ordinary income on the spread between what you paid and what the stock was worth that day. Capital gains treatment applies only to whatever appreciation comes after.
Here is the trap. Most private company exits are acquisitions, not IPOs. If you are holding unexercised incentive stock options when an acquisition closes, you never started the holding-period clock. You are paid out on the spread, and the whole amount is ordinary income. The favorable treatment you were counting on required action years earlier.
Two planning moves worth understanding
Early exercise. Exercising while the spread is zero or near zero means no taxable income at exercise and the clock starts running. The trade-off is real: you have put your own money in, and unvested shares carry a risk of forfeiture if you leave.
The AMT interaction. The tax on an ISO spread applies through the alternative minimum tax. Exercising a significant block of non-qualified options generates enough ordinary income to push you out of AMT entirely — which can open a window to exercise a quantity of ISOs in the same year without owing tax on that spread. It requires modeling, but it is a genuine opportunity that goes unused simply because nobody runs the numbers.
Worth checking separately whether your shares qualify as qualified small business stock. The exclusion can eliminate federal tax on a substantial amount of gain, though state conformity varies and California notably does not follow it.
RSUs need two triggers at a private company
Restricted stock units vest into a tax bill. At a public company you can sell shares to cover it. At a private company you cannot, which is why private company RSUs almost always use double-trigger vesting — a time-based condition plus a liquidity condition. Without the second trigger, employees owe tax on something they cannot sell.
The 409A number is not what your equity is worth
A 409A valuation is a specific, narrow figure: the value of a single share of common stock, discounted for lack of marketability and lack of control. It is deliberately different from the pre-money enterprise valuation an investor assigns. It sets your exercise price. It is an indication, not a promise, and it should not be treated as a forecast of what your shares will be worth.
When public markets fall, 409A valuations follow, and options granted at higher prices go underwater. Repricing to the current valuation is a normal response, and it is worth asking whether a company has done it or intends to.
Benchmark against money raised, not valuation
Series letters have lost most of their meaning. A company that raised substantial non-dilutive funding — government grants, a strategic partnership — may be far further along than its round label suggests. The more durable comparison is total capital raised.
One useful distinction: non-dilutive capital should count toward your cash compensation comparison, since more money in the business supports higher cash. It should not count toward the financing bracket you use to benchmark equity, because you deserve credit for the fact that the capital did not dilute anyone.
Where the option pool comes from
This part is not intuitive. When a new institutional investor comes in, the size of the available option pool is negotiated — and the norm is to expand it before the money arrives, which dilutes everyone except the incoming investor.
That makes pool sizing a real negotiation rather than an administrative detail. The practical way to argue it is to work from runway. If the round is expected to last around eighteen months, then how many hires are in the plan for those eighteen months, and what equity percentage does each need? That builds a defensible number. Leave the pool too thin and you will be back asking for an increase later, on worse terms.
Refresh grants come up for two distinct reasons, and they are worth separating. Someone may have grown into a larger role than their original grant reflects. Or successive financing rounds may have diluted a position that was correctly sized when granted. Both need fixing, but they are different problems, and neither is solvable if the initial grant was wrong to begin with.
What happens to unvested equity in an acquisition
Three structures are common. Single trigger acceleration vests everything at the change of control, so you can leave once the sale closes. Double trigger requires the change of control plus a second condition, typically staying on with the buyer for around twelve months. A hybrid vests a portion at closing with the balance contingent on staying another six to twelve months.
Which one you are offered often tracks how redundant your role becomes post-acquisition. A CFO or chief business officer frequently duplicates a function the acquirer already has, so single-trigger acceleration is more common. A CEO the buyer wants to retain is more likely to see a double trigger, precisely because the structure is designed to keep them.
The part that is not on the term sheet
Two things have shifted the ground under these negotiations. Pay transparency requirements now apply in a growing number of states and municipalities, generally requiring a salary range on job postings, and they differ meaningfully by jurisdiction. Separately, an older and broader rule already bars employers in many places from asking what you currently earn — they may ask only what you expect.
And location has largely stopped driving compensation. Strong talent is compensated well outside the traditional coastal hubs, and the companies most flexible about where people sit are the ones winning candidates. Pay follows the role and the competition for it, not the postal code.
Adapted from the J. Thelander Consulting Private Company Compensation Panel webinar with Jody Thelander and Mark Fitzgerald (Wilson Sonsini Goodrich & Rosati), joined by panelists in executive search and tax planning. Nothing here is legal or tax advice — the right answer depends on your specific grant and circumstances.