What is the 90-day exercise window and why does it matter?

Standard startup option agreements give you 90 days after leaving to exercise vested options. If you don't exercise within 90 days, those options expire worthless. Exercising options requires paying the exercise price (e.g., if you have 100,000 options at $0.50, that's $50,000) and may trigger taxes. Some progressive startups have adopted 5-10 year exercise windows — ask about this before joining. The 90-day window creates a significant financial barrier to leaving.

How do I calculate the value of my startup equity?

As an approximation: (your options / fully diluted shares) × (last preferred price per share) × (a discount for common vs. preferred, illiquidity, and dilution risk). Ask for: (1) your option count, (2) fully diluted share count, (3) last preferred price or 409A valuation, and (4) liquidation preference structure. Expect future rounds to dilute your percentage. A common rule of thumb is to discount startup equity by 50-80% from the implied value to account for illiquidity and failure risk.

What is a liquidation preference and why does it matter?

Investors in startups typically hold preferred stock with a liquidation preference — they get paid back their investment (and sometimes more) before common stockholders (employees) receive anything in an acquisition. In a "1x non-participating" structure, investors get their money back first, then share pro-rata. In "participating preferred" or "multiple liquidation preference" structures, investors can receive significantly more. In a downside scenario (exit below peak valuation), employees may receive little or nothing. Ask about the cap table and investor terms.

What should I watch for in a startup employment agreement vs. a large company?

Key differences: (1) equity is options (not RSUs), requiring active exercise and creating financial barriers to departure; (2) the agreement may be less standardized and worth a legal review; (3) IP assignment provisions may be less negotiated and more founder-favorable; (4) benefits and severance may be minimal; (5) the company may not have HR infrastructure, meaning dispute resolution is less defined. The equity upside can be significant — but the terms deserve careful attention before signing.

Startup Employee Employment Agreement Guide

Key Issues to Review

Equity: Options vs. RSUs

Critical

Early-stage startups typically grant stock options (not RSUs). Options require you to pay an exercise price and carry the risk that the company may never provide liquidity. Understanding the option type (ISO vs. NSO), exercise price, fully diluted cap table, and liquidation preference stack is essential before accepting.

Exercise Window After Departure

Critical

Standard startup option agreements give you 90 days after departure to exercise vested options — or lose them. Exercising options costs money (the strike price times number of options) plus creates a tax obligation in many cases. Some startups offer extended exercise windows (5-10 years); these are significantly more employee-friendly.

Dilution Risk

Notable

Your equity percentage at hire is not your equity percentage at exit. Future funding rounds dilute existing shareholders. An early hire with 0.5% at grant may have 0.1-0.2% at exit after Series A, B, C, and D rounds. Understanding typical dilution and the company's fundraising plans gives context for equity value.

IP Assignment Breadth

Critical

Startup IP assignment clauses are often just as broad as large company agreements — sometimes more so, because startup founders are anxious about IP ownership. Ensure the prior inventions schedule is properly completed. If you have ongoing consulting work or a side project, negotiate an explicit carve-out.

Liquidation Preference Stack

Notable

In startup exits, preferred shareholders (investors) typically get paid before common stockholders (employees). Liquidation preferences — particularly participating preferred or multiple liquidation preference structures — can mean that common shareholders receive little or nothing in an exit at a lower-than-peak valuation. Understanding the cap table is essential.

What to Look For

Joining an early-stage startup is fundamentally different from joining a large tech company. The compensation structure, legal terms, and risk profile are all meaningfully different. Here's what deserves careful attention before you sign.

Equity in a startup is a lottery ticket — but understand the odds. Stock options are the primary equity instrument at early-stage startups. Unlike RSUs at public companies, options require you to take affirmative action (exercise them) and carry illiquidity risk (you may never be able to sell). To evaluate your equity, you need: (1) the total number of options granted, (2) the exercise price per option, (3) the fully diluted share count (to calculate your ownership percentage), (4) the company's last preferred share price (to estimate the implied common value), and (5) the investor liquidation preference structure. Ask for all of these. A good startup CEO will provide them; reluctance is a yellow flag.

The 90-day exercise window is a critical risk. Standard startup option agreements give you 90 days after departure to exercise your vested options. If you can't or don't exercise within 90 days, the options expire. Exercising options costs money (the exercise price) and may create an immediate tax liability (particularly for NQSOs). Some progressive startups have adopted 5-10 year extended exercise windows — this is significantly more employee-friendly. Ask what the exercise window is before you sign, and understand the financial implications of departure at different vesting stages.

Understand dilution from future rounds. If you're joining at Series A with 0.5% equity and the company raises Series B, C, and D before exit, your percentage will be diluted. Standard dilution in each round is 15-25% (investors buy new shares). A typical fully funded startup may go through multiple rounds before exit, meaning early employee equity can be significantly diluted. This doesn't make startup equity worthless — it just means the raw percentage at grant overstates your expected value.

IP assignment at startups is serious. Startup founders need clean IP chains for venture financing and eventual acquisition. IP assignment provisions at startups are often just as broad as large company agreements. Complete the prior inventions schedule carefully. If you have consulting clients, an ongoing business, or an open source project you maintain, negotiate an explicit written carve-out. Don't rely on verbal assurances — get it in the agreement.

The agreement may be less standardized. Unlike large companies with legal teams and standard agreements, early-stage startups often use NVCA or NVCA-derivative agreements that may have less-than-standard provisions, missing provisions, or founder-favoring terms. If you're joining very early (before Series A), consider having an employment attorney review the specific agreement.

Frequently Asked Questions

Stock options give you the right to buy shares at a fixed exercise price. You profit if the company's value grows above your exercise price. Options cost money to exercise and may create tax obligations. RSUs are grants of actual shares that vest over time — no exercise required, taxed as ordinary income at vesting/settlement. Early-stage startups typically grant options; later-stage and public companies typically grant RSUs. Options carry more risk and more complexity than RSUs.

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This guide is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by reading this page. Consult a qualified employment attorney for advice specific to your situation.