Equity Compensation

Equity Compensation Interview Questions

Master equity discussions in interviews. Learn to evaluate stock options, RSUs, and equity packages to make informed compensation decisions.

Understanding Equity Compensation Types

Equity compensation can be a significant component of your total compensation package, especially at startups and growth companies. Understanding the different types of equity and their implications is crucial for making informed career decisions.

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Stock Options (ISOs/NSOs)
The right to purchase company shares at a fixed price (strike price) for a specific period. ISOs have tax advantages but more restrictions than NSOs.

Pros

  • Potential for significant upside
  • ISOs may qualify for capital gains tax
  • No immediate tax liability
  • Aligned with company growth

Cons

  • Requires cash to exercise
  • May expire worthless
  • Complex tax implications
  • Illiquid until exit event

Key Questions to Ask

  • What is the current strike price and 409A valuation?
  • What is the vesting schedule and cliff period?
  • Are these ISOs or NSOs?
  • What is the exercise window after leaving?
  • Are there any acceleration clauses?
🎁
Restricted Stock Units (RSUs)
Company shares granted to employees that vest over time. No purchase required, but taxed as ordinary income when vested.

Pros

  • No cash required to receive shares
  • Always have some value if company has value
  • Simpler tax treatment
  • Common at public companies

Cons

  • Taxed as ordinary income at vesting
  • Less upside potential than options
  • May trigger large tax bills
  • Subject to company performance

Key Questions to Ask

  • What is the vesting schedule?
  • How are taxes handled at vesting?
  • Can I sell shares immediately upon vesting?
  • Are there any performance conditions?
  • What happens to unvested RSUs if I leave?
🏢
Direct Stock Grants
Actual ownership of company shares, typically with restrictions on transfer. More common at early-stage startups.

Pros

  • Immediate ownership rights
  • Potential voting rights
  • May qualify for QSBS tax benefits
  • Aligned with founders

Cons

  • Immediate tax liability
  • Transfer restrictions
  • Complex valuation
  • Potential 83(b) election required

Key Questions to Ask

  • What are the transfer restrictions?
  • Do I need to make an 83(b) election?
  • What voting rights come with the shares?
  • How is the fair market value determined?
  • Are there any repurchase rights?
💰
Phantom Stock/SARs
Cash payments based on stock price appreciation without actual stock ownership. Stock Appreciation Rights (SARs) work similarly.

Pros

  • Cash payment, no exercise required
  • No dilution of actual equity
  • Simpler administration
  • Immediate liquidity

Cons

  • No actual ownership
  • Taxed as ordinary income
  • Company must have cash to pay
  • Limited upside compared to equity

Key Questions to Ask

  • How is the phantom stock value calculated?
  • When are payments made?
  • What triggers payment events?
  • Are there any forfeiture conditions?
  • How does this compare to actual equity?

When evaluating equity offers, use the "discount factor" approach to avoid overvaluing potential returns. For early-stage startups, discount the theoretical value by 80-90% due to high failure rates. For growth-stage companies, use a 50-70% discount. For public companies with RSUs, use a 10-20% discount for market volatility. This conservative approach helps you make decisions based on realistic expectations rather than best-case scenarios. Remember: equity should be considered a potential bonus, not guaranteed compensation.

Essential Equity Interview Questions

Q
What questions should I ask about equity compensation during interviews?

Asking the right questions about equity compensation demonstrates sophistication and helps you make informed decisions. Here are the essential questions organized by category:

Basic Equity Structure Questions

  • Type of Equity: "What type of equity is being offered - stock options, RSUs, or direct stock grants?"
  • Grant Size: "How many shares or options am I being granted?"
  • Ownership Percentage: "What percentage of the company does this represent based on current outstanding shares?"
  • Vesting Schedule: "What is the vesting schedule and is there a cliff period?"
  • Strike Price: "For options, what is the current strike price and how was it determined?"

    • Valuation and Financial Questions

  • Current Valuation: "What is the most recent 409A valuation or company valuation?"
  • Total Shares: "How many total shares are currently outstanding, including all classes?"
  • Option Pool: "What percentage of the company is allocated to the employee option pool?"
  • Dilution Protection: "How is my equity protected against future dilution from new funding rounds?"
  • Liquidation Preferences: "What are the liquidation preferences for different share classes?"

    • Terms and Conditions Questions

  • Exercise Period: "How long do I have to exercise options after leaving the company?"
  • Acceleration: "Are there any acceleration clauses for vesting in case of acquisition or termination?"
  • Transfer Restrictions: "Are there any restrictions on selling or transferring shares?"
  • Tax Implications: "What are the tax implications of this equity grant?"
  • Exercise Costs: "What will it cost to exercise my options, including taxes?"

    • Company and Exit Strategy Questions

  • Exit Timeline: "What is the company's expected timeline for an exit event (IPO or acquisition)?"
  • Exit Strategy: "What is the company's preferred exit strategy?"
  • Financial Health: "How is the company's current financial position and runway?"
  • Growth Trajectory: "What are the key metrics and growth targets for the next 2-3 years?"
  • Competitive Position: "How does the company differentiate itself in the market?"

    • Future Equity Opportunities

  • Additional Grants: "Are there opportunities for additional equity grants based on performance?"
  • Promotion Equity: "How does equity compensation change with promotions?"
  • Refresh Grants: "Does the company provide refresh grants to retain employees?"
  • Performance Equity: "Are there any performance-based equity incentives?"
    • Sample Equity Discussion
    Candidate: "I'm excited about the equity component of this offer. Could you help me understand the details? I see you're offering 10,000 stock options. What percentage of the company does this represent based on the current cap table?"

    Interviewer: "Based on our current outstanding shares of about 10 million, this would represent approximately 0.1% of the company."

    Candidate: "That's helpful, thank you. What's the current strike price for these options, and what was the most recent 409A valuation? Also, could you walk me through the vesting schedule?"

    Interviewer: "The strike price is $2.50 per share based on our recent 409A valuation of $25 million. The vesting is standard 4-year with a 1-year cliff."

    Candidate: "Great. A couple more questions: What happens to unvested options if the company is acquired? And what's the exercise window if I were to leave the company?"
    Why this works: This conversation demonstrates knowledge of equity terminology, asks for specific quantitative details, and covers key risk factors like acceleration and exercise windows. The candidate maintains enthusiasm while gathering essential information for decision-making.

    Be cautious about companies that are reluctant to answer basic equity questions or provide vague responses about valuation, ownership percentages, or terms. Transparency about equity details is crucial for making informed decisions. If a company can't or won't provide clear answers about your potential ownership stake, consider this a red flag about their equity practices or financial transparency.

    Evaluating Equity Value and Risk

    Q
    How do I evaluate the value of equity compensation offers?

    Evaluating equity compensation requires analyzing both potential value and associated risks. Here's a comprehensive framework for assessment:

    Equity Evaluation Framework
    1
    Calculate Ownership Percentage
    Determine your actual ownership stake in the company.
    • Shares granted ÷ Total outstanding shares
    • Include all share classes in calculation
    • Account for option pool dilution
    • Consider future dilution from funding
    2
    Estimate Company Valuation
    Project potential future company value based on multiple factors.
    • Review recent funding valuations
    • Analyze comparable company multiples
    • Assess market size and growth
    • Evaluate competitive position
    • Consider exit timeline and strategy
    3
    Calculate Potential Returns
    Estimate potential value under different scenarios.
    • Conservative scenario (2-3x growth)
    • Moderate scenario (5-10x growth)
    • Optimistic scenario (20x+ growth)
    • Account for liquidation preferences
    • Subtract exercise costs and taxes
    4
    Assess Risk Factors
    Evaluate the probability of achieving projected returns.
    • Company stage and maturity
    • Market competition and risks
    • Management team track record
    • Financial runway and burn rate
    • Regulatory and industry risks
    5
    Apply Discount Factors
    Adjust projected value for risk and illiquidity.
    • Early stage: 80-90% discount
    • Growth stage: 50-70% discount
    • Late stage: 30-50% discount
    • Public company: 10-20% discount
    • Consider illiquidity timeline
    6
    Compare to Alternatives
    Evaluate against other compensation options.
    • Higher base salary at other companies
    • Cash bonuses vs. equity upside
    • Public company RSUs vs. startup options
    • Risk-adjusted expected value
    • Personal financial situation

    Equity Valuation Example

    Company: Series B SaaS startup Grant: 5,000 stock options Strike Price: $1.00 per share Current 409A Valuation: $50M ($5.00 per share) Total Outstanding Shares: 10M shares Your Ownership: 5,000 ÷ 10,000,000 = 0.05% Scenario Analysis: Conservative (3x growth to $150M): - Your stake value: $150M × 0.05% = $75,000 - Exercise cost: 5,000 × $1.00 = $5,000 - Net value: $75,000 - $5,000 = $70,000 Moderate (10x growth to $500M): - Your stake value: $500M × 0.05% = $250,000 - Exercise cost: $5,000 - Net value: $250,000 - $5,000 = $245,000 Optimistic (20x growth to $1B): - Your stake value: $1B × 0.05% = $500,000 - Exercise cost: $5,000 - Net value: $500,000 - $5,000 = $495,000 Risk-Adjusted Value (70% discount for Series B): - Conservative: $70,000 × 30% = $21,000 - Moderate: $245,000 × 30% = $73,500 - Optimistic: $495,000 × 30% = $148,500 Expected Value: ~$50,000 - $75,000 over 4-7 years
    Company Stage Typical Ownership % Risk Level Discount Factor Liquidity Timeline Key Considerations
    Seed/Series A 0.1% - 1.0% Very High 80-90% 5-10 years High upside potential, high failure rate
    Series B/C 0.05% - 0.5% High 50-70% 3-7 years Proven product-market fit, scaling challenges
    Late Stage (Series D+) 0.01% - 0.1% Medium 30-50% 1-3 years Lower risk, more predictable returns
    Pre-IPO 0.001% - 0.05% Low-Medium 20-40% 6 months - 2 years Near-term liquidity, market risk
    Public Company 0.0001% - 0.01% Low 10-20% Immediate Immediate liquidity, market volatility

    Key Risk Assessment Factors

  • Company Stage Risk: Earlier stage = higher risk but potentially higher returns
  • Market Risk: Market size, competition, and economic conditions
  • Execution Risk: Management team's ability to execute business plan
  • Financial Risk: Runway, burn rate, and funding requirements
  • Liquidity Risk: Timeline and probability of exit event
  • Dilution Risk: Future funding rounds reducing your ownership percentage
  • Regulatory Risk: Industry-specific regulatory challenges
  • Technology Risk: Technical feasibility and competitive threats

    • When evaluating equity offers, create a "personal equity portfolio" mindset. If this is your first equity grant, you might accept higher risk for higher potential returns. If you already have equity in other companies or significant savings, you might prefer lower-risk equity with more predictable outcomes. Consider your overall financial situation, risk tolerance, and career stage when making equity decisions. Diversification applies to equity compensation just as it does to investment portfolios.

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