Employee equity: options, vesting, cliffs and the 90-day window

A stock option gives the holder the right to purchase a set number of shares at a fixed price — the strike price — determined when the grant is made. If the company's share value rises, the option becomes valuable. If it never rises above the strike, the option is worthless regardless of how many were granted.

The strike price is set at the fair market value of common stock on the grant date, typically established by an independent valuation. Employees who join earlier get lower strike prices, which is a large part of why early equity is worth so much more than a later grant of the same size.

The standard schedule is four years with a one-year cliff. Nothing vests for the first twelve months; on the anniversary, twenty-five percent vests at once, and the remainder vests monthly over the following three years. Leaving before the cliff means leaving with nothing.

The cliff exists to protect the company and the other shareholders from permanent dilution caused by a hire that does not work out. It applies to founders too in most venture-backed companies, and founder vesting is frequently reset or extended at a financing.

This is the clause that surprises people most. Under a standard grant, an employee who leaves has ninety days to exercise vested options — meaning to actually pay the strike price, in cash, for every share they want to keep. Miss the deadline and the vested options are cancelled.

For an employee with 30,000 vested options at a $2 strike, that is a $60,000 cash decision, potentially with a tax bill attached, made about a private company whose shares cannot be sold. Many people cannot fund it, and equity that was genuinely earned simply disappears back into the pool.

A number of shares means nothing without the total share count. Ten thousand shares out of a million is one percent; out of a hundred million it is a hundredth of a percent. Ask for the percentage on a fully diluted basis, the current preferred price, and the strike price. A company unwilling to share those numbers has told you something useful.

Then apply a probability discount. Most startups do not reach a large exit. Equity is a lottery ticket with better-than-lottery odds, and it should be valued as an upside on top of a salary you can live on, not as a substitute for one.

Single-trigger acceleration vests some or all of a grant when the company is acquired. Double-trigger requires two events: the acquisition, and the employee being terminated or materially demoted within a period afterwards. Double-trigger is the standard for good reason — it protects employees without making the company unattractive to acquirers.

Founders and senior executives commonly negotiate acceleration explicitly. For everyone else it is set by the plan document, and it is worth reading which version applies before an acquisition is on the table rather than during one.

Garage to IPO abstracts individual grants into an option pool that dilutes the founder and improves hiring quality and retention. Larger pools attract stronger candidates and cost the founder ownership, which is the same trade real founders make every time they extend an offer.

At the exit, option holders are paid from the waterfall alongside common shareholders, so a run that under-funded the pool tends to show weaker execution throughout and a smaller payout at the end.