{"course":{"slug":"ai-careers","title":"Working in AI","url":"https://addaly.com/learn/ai-careers","level":"beginner","track":"work"},"lesson":{"slug":"equity-without-the-hype","title":"Options, RSUs, and why most equity is worth nothing","url":"https://addaly.com/learn/ai-careers/equity-without-the-hype","position":62,"of":85,"minutes":10,"answer":"An option is only worth the share value minus its strike, and the liquidation preference and the ninety-day exercise window decide most real outcomes long before the share price does.","keyIdea":"An option is only worth the share value minus its strike, and the liquidation preference and the ninety-day exercise window decide most real outcomes long before the share price does."},"body":{"format":"markdown","text":"## Start from the base rate\n\nMost start-ups do not produce a payout for employees. Most employee equity in private companies ends up worth zero, and this is the ordinary outcome rather than the sad exception.\n\nThat is not an argument against ever taking equity. It is the reason for one rule: **do not accept below-market cash for equity unless you can afford for the equity to be worth nothing.** If the grant is a lottery ticket you can afford, take it happily. If it is load-bearing for your rent, it is not compensation.\n\n## The four instruments\n\n- **Share options (ISOs and NSOs in the US, ESOPs in India and much of Asia).** The right to buy shares at a fixed **strike price**. You pay to convert them.\n- **Restricted stock units (RSUs).** Shares given to you when they vest. No purchase, and at a large public company they are close to cash on a delay.\n- **Phantom shares and share appreciation rights.** A cash payment tracking share value, with no shares involved. Common where issuing real shares is legally awkward.\n- **Direct shares**, occasionally, in very early companies.\n\n## The arithmetic\n\nAn option's value today is:\n\n```\n(current share value - strike price) * number of options\n```\n\n10,000 options at a strike of ₹250, when the company's current fair value per share is ₹250, are worth **zero today**. They are worth something only if the value rises. People hear \"10,000 shares\" and imagine a number; the strike is half the equation and is frequently omitted from the conversation.\n\n> Figure: Ten thousand options at a 250-rupee strike. Line chart of Value of the grant, lakh rupees against Share value, rupees: 10,000 options, strike 250 (150, 0) (250, 0) (300, 5) (400, 15) (500, 25); 10,000 restricted stock units, for comparison (150, 15) (250, 25) (300, 30) (400, 40) (500, 50). At today's fair value of 250 the options are worth zero, and they stay at zero until the share value passes the strike. The strike is half the equation and is the half most often left out of the conversation.\n\n**Vesting** is the schedule on which they become yours. Four years with a one-year cliff is the common shape: nothing for twelve months, then a quarter, then monthly or quarterly. Leave at month eleven and you have nothing.\n\n**Dilution** is the reduction in your percentage every time new shares are issued in a funding round. Your number of shares does not change; the denominator grows. Two more rounds can halve a percentage.\n\n## The two clauses that decide the outcome\n\n**Liquidation preference.** Investors typically get their money back before common shareholders get anything. If a company has raised $50 million with a 1× preference and sells for $60 million, the investors take $50 million and $10 million is divided among everybody else. The press release says the company sold for sixty million dollars. Employees discover their share is small, and they were never told the preference stack.\n\nAsk: *\"What is the total liquidation preference, and is any of it participating?\"*\n\n**The post-termination exercise window.** In most option plans you have **90 days after leaving** to buy your vested options or lose them. If you have 10,000 vested options at a ₹250 strike, exercising costs ₹25,00,000 in cash, and in many countries you owe tax on the paper gain in the same year, for shares you cannot sell. This is how people leave a company having vested four years of equity and walk away with nothing, and it is entirely legal and disclosed in a document nobody read.\n\nSome companies extend the window to seven or ten years. It is worth asking, and the answer tells you a great deal about how the company thinks about the people who leave.\n\n## Tax, in outline only\n\nGenuinely differs by country and you should take advice. The shape:\n\n- **India:** ESOPs are taxed as a perquisite at exercise, on the difference between fair market value and strike, whether or not you can sell. Eligible start-ups have a deferral. This catches people badly.\n- **United States:** incentive stock options can trigger alternative minimum tax at exercise; RSUs are taxed as income at vest.\n- **Most places:** a second tax event on eventual sale.\n\nThe pattern to notice is that tax is often due **before** any money arrives. Plan for that or do not exercise.\n\n## The four questions to ask\n\n1. How many shares are outstanding on a fully diluted basis? (Without this you cannot compute a percentage, and a number of shares alone is meaningless.)\n2. What is the strike price and the most recent valuation per share?\n3. What is the total liquidation preference?\n4. How long do I have to exercise after leaving?\n\nA company that will not answer the first has told you the grant cannot be valued, and an unvaluable grant should be treated as worth zero in your comparison. Some well-run private companies decline on confidentiality grounds; you still cannot value it, and the arithmetic does not care about their reasons.\n\n## The limitation\n\nPublic-company RSUs are the exception to almost everything above: they are close to deferred cash with market risk, and they are straightforward to value. Nearly all the complexity here belongs to private companies, and nearly all the disappointment does too."},"check":{"question":"A start-up has raised $50m with a 1x non-participating liquidation preference and is acquired for $60m. An employee holds 0.5% of common shares. What do they receive, roughly, before tax?","options":[{"text":"About $300,000, being 0.5% of the $60m sale price.","correct":false,"tempting":"Applies the percentage to the headline price, which is exactly how these announcements are read and exactly what the preference stack prevents."},{"text":"About $50,000, because investors recover their $50m first and only the remaining $10m is divided among common shareholders.","correct":true},{"text":"Nothing, because a liquidation preference means common shareholders are paid only if the sale exceeds twice the amount raised.","correct":false,"tempting":"Overstates the mechanism; a 1x non-participating preference takes the invested amount, not a multiple of it."},{"text":"About $300,000, but only after a further four years of vesting following the acquisition.","correct":false,"tempting":"Correctly notes that acquisitions often impose retention terms while still valuing the stake against the headline price."}]},"prev":{"slug":"what-is-actually-in-an-offer","title":"The headline number is the least useful one","url":"https://addaly.com/learn/ai-careers/what-is-actually-in-an-offer"},"next":{"slug":"the-contract-you-sign","title":"Notice, bonds, IP and the clauses that follow you","url":"https://addaly.com/learn/ai-careers/the-contract-you-sign"},"authorship":"Founder and series editor: Dr Mustafa Mun. Written by AI models to a written standard. Exam keys checked blind by a second model: 3,665 of 3,666 agreed. Academic review invited.","review":{"status":"Draft, open for academic review"},"cite":"Addaly (2026) 'Options, RSUs, and why most equity is worth nothing', in Working in AI. Edited by M. Mun. Addaly. Available at: https://addaly.com/learn/ai-careers/equity-without-the-hype (Accessed: 13 October 2026).","licence":{"name":"CC BY-NC-SA 4.0","url":"https://creativecommons.org/licenses/by-nc-sa/4.0/"},"reader":{"schema":1,"title":"Options, RSUs, and why most equity is worth nothing","courseTitle":"Working in AI","module":{"index":7,"slug":"the-money-and-the-paperwork","title":"The money, and the paperwork underneath it"},"answer":null,"keyIdea":"An option is only worth the share value minus its strike, and the liquidation preference and the ninety-day exercise window decide most real outcomes long before the share price does.","hero":{"kind":"figure","figure":{"t":"figure","label":"Figure","figure":{"type":"line","title":"Ten thousand options at a 250-rupee strike","series":[{"label":"10,000 options, strike 250","points":[[150,0],[250,0],[300,5],[400,15],[500,25]]},{"label":"10,000 restricted stock units, for comparison","points":[[150,15],[250,25],[300,30],[400,40],[500,50]]}],"xLabel":"Share value, rupees","yLabel":"Value of the grant, lakh rupees","caption":"At today’s fair value of 250 the options are worth zero, and they stay at zero until the share value passes the strike. The strike is half the equation and is the half most often left out of the conversation."},"alt":"Figure: Ten thousand options at a 250-rupee strike. Line chart of Value of the grant, lakh rupees against Share value, rupees: 10,000 options, strike 250 (150, 0) (250, 0) (300, 5) (400, 15) (500, 25); 10,000 restricted stock units, for comparison (150, 15) (250, 25) (300, 30) (400, 40) (500, 50). At today’s fair value of 250 the options are worth zero, and they stay at zero until the share value passes the strike. The strike is half the equation and is the half most often left out of the conversation."}},"blocks":[{"t":"h2","id":"start-from-the-base-rate","runs":[{"text":"Start from the base rate"}]},{"t":"p","runs":[{"text":"Most start-ups do not produce a payout for employees. Most employee equity in private companies ends up worth zero, and this is the ordinary outcome rather than the sad exception."}]},{"t":"p","runs":[{"text":"That is not an argument against ever taking equity. It is the reason for one rule: "},{"text":"do not accept below-market cash for equity unless you can afford for the equity to be worth nothing.","b":true},{"text":" If the grant is a lottery ticket you can afford, take it happily. If it is load-bearing for your rent, it is not compensation."}]},{"t":"h2","id":"the-four-instruments","runs":[{"text":"The four instruments"}]},{"t":"ul","items":[[{"text":"Share options (ISOs and NSOs in the US, ESOPs in India and much of Asia).","b":true},{"text":" The right to buy shares at a fixed "},{"text":"strike price","b":true},{"text":". You pay to convert them."}],[{"text":"Restricted stock units (RSUs).","b":true},{"text":" Shares given to you when they vest. No purchase, and at a large public company they are close to cash on a delay."}],[{"text":"Phantom shares and share appreciation rights.","b":true},{"text":" A cash payment tracking share value, with no shares involved. Common where issuing real shares is legally awkward."}],[{"text":"Direct shares","b":true},{"text":", occasionally, in very early companies."}]]},{"t":"h2","id":"the-arithmetic","runs":[{"text":"The arithmetic"}]},{"t":"p","runs":[{"text":"An option’s value today is:"}]},{"t":"code","lang":"","label":"Text","text":"(current share value - strike price) * number of options"},{"t":"p","runs":[{"text":"10,000 options at a strike of ₹250, when the company’s current fair value per share is ₹250, are worth "},{"text":"zero today","b":true},{"text":". They are worth something only if the value rises. People hear “10,000 shares” and imagine a number; the strike is half the equation and is frequently omitted from the conversation."}]},{"t":"p","runs":[{"text":"Vesting","b":true},{"text":" is the schedule on which they become yours. Four years with a one-year cliff is the common shape: nothing for twelve months, then a quarter, then monthly or quarterly. Leave at month eleven and you have nothing."}]},{"t":"p","runs":[{"text":"Dilution","b":true},{"text":" is the reduction in your percentage every time new shares are issued in a funding round. Your number of shares does not change; the denominator grows. Two more rounds can halve a percentage."}]},{"t":"h2","id":"the-two-clauses-that-decide-the-outcome","runs":[{"text":"The two clauses that decide the outcome"}]},{"t":"p","runs":[{"text":"Liquidation preference.","b":true},{"text":" Investors typically get their money back before common shareholders get anything. If a company has raised $50 million with a 1× preference and sells for $60 million, the investors take $50 million and $10 million is divided among everybody else. The press release says the company sold for sixty million dollars. Employees discover their share is small, and they were never told the preference stack."}]},{"t":"p","runs":[{"text":"Ask: "},{"text":"”What is the total liquidation preference, and is any of it participating?”","i":true}]},{"t":"p","runs":[{"text":"The post-termination exercise window.","b":true},{"text":" In most option plans you have "},{"text":"90 days after leaving","b":true},{"text":" to buy your vested options or lose them. If you have 10,000 vested options at a ₹250 strike, exercising costs ₹25,00,000 in cash, and in many countries you owe tax on the paper gain in the same year, for shares you cannot sell. This is how people leave a company having vested four years of equity and walk away with nothing, and it is entirely legal and disclosed in a document nobody read."}]},{"t":"p","runs":[{"text":"Some companies extend the window to seven or ten years. It is worth asking, and the answer tells you a great deal about how the company thinks about the people who leave."}]},{"t":"h2","id":"tax-in-outline-only","runs":[{"text":"Tax, in outline only"}]},{"t":"p","runs":[{"text":"Genuinely differs by country and you should take advice. The shape:"}]},{"t":"ul","items":[[{"text":"India:","b":true},{"text":" ESOPs are taxed as a perquisite at exercise, on the difference between fair market value and strike, whether or not you can sell. Eligible start-ups have a deferral. This catches people badly."}],[{"text":"United States:","b":true},{"text":" incentive stock options can trigger alternative minimum tax at exercise; RSUs are taxed as income at vest."}],[{"text":"Most places:","b":true},{"text":" a second tax event on eventual sale."}]]},{"t":"p","runs":[{"text":"The pattern to notice is that tax is often due "},{"text":"before","b":true},{"text":" any money arrives. Plan for that or do not exercise."}]},{"t":"h2","id":"the-four-questions-to-ask","runs":[{"text":"The four questions to ask"}]},{"t":"ol","start":1,"items":[[{"text":"How many shares are outstanding on a fully diluted basis? (Without this you cannot compute a percentage, and a number of shares alone is meaningless.)"}],[{"text":"What is the strike price and the most recent valuation per share?"}],[{"text":"What is the total liquidation preference?"}],[{"text":"How long do I have to exercise after leaving?"}]]},{"t":"p","runs":[{"text":"A company that will not answer the first has told you the grant cannot be valued, and an unvaluable grant should be treated as worth zero in your comparison. Some well-run private companies decline on confidentiality grounds; you still cannot value it, and the arithmetic does not care about their reasons."}]},{"t":"h2","id":"the-limitation","runs":[{"text":"The limitation"}],"role":"limit"},{"t":"p","runs":[{"text":"Public-company RSUs are the exception to almost everything above: they are close to deferred cash with market risk, and they are straightforward to value. Nearly all the complexity here belongs to private companies, and nearly all the disappointment does too."}]}],"check":{"question":[{"text":"A start-up has raised $50m with a 1x non-participating liquidation preference and is acquired for $60m. An employee holds 0.5% of common shares. What do they receive, roughly, before tax?"}],"options":[{"text":[{"text":"About $300,000, being 0.5% of the $60m sale price."}],"correct":false,"tempting":[{"text":"Applies the percentage to the headline price, which is exactly how these announcements are read and exactly what the preference stack prevents."}]},{"text":[{"text":"About $50,000, because investors recover their $50m first and only the remaining $10m is divided among common shareholders."}],"correct":true,"tempting":null},{"text":[{"text":"Nothing, because a liquidation preference means common shareholders are paid only if the sale exceeds twice the amount raised."}],"correct":false,"tempting":[{"text":"Overstates the mechanism; a 1x non-participating preference takes the invested amount, not a multiple of it."}]},{"text":[{"text":"About $300,000, but only after a further four years of vesting following the acquisition."}],"correct":false,"tempting":[{"text":"Correctly notes that acquisitions often impose retention terms while still valuing the stake against the headline price."}]}],"order":[3,1,0,2],"why":null},"prev":{"slug":"what-is-actually-in-an-offer","title":"The headline number is the least useful one","minutes":9},"next":{"slug":"the-contract-you-sign","title":"Notice, bonds, IP and the clauses that follow you","minutes":10}}}