You Were Offered 10% of a Startup. What Does That Actually Mean?

Someone offers you 10% of a startup. Before you can judge the offer, you need to know what you are receiving, how the percentage is calculated, when you earn it, and what it takes to keep it.

The percentage matters. But it is only one part of the deal.

A founder and a prospective co-founder can agree on “10%” while imagining different arrangements. One expects ownership immediately. The other expects four years of work. One calculates the percentage before the next financing. The other assumes it will survive the financing unchanged.

Those differences become harder to resolve after someone has started working.

The instrument changes the deal

“Equity” can mean ownership today, a right to buy ownership later, or a promise of a future payment.

Common stock is ownership in a corporation. When issued subject to vesting, it is often called restricted stock: you receive the shares now, but the company may have the right to repurchase the unvested portion if you leave.

Stock options give you a right to purchase shares at an exercise price, subject to the award’s terms. You generally become a stockholder when you exercise and the shares are issued. An offer of options therefore includes a future purchasing decision, not just a percentage.

Restricted stock units, or RSUs, generally promise stock or cash later, subject to specified conditions. You do not receive shares simply because the RSUs have been granted. IRS equity-compensation guidance.

An LLC interest requires a different review. In an LLC taxed as a partnership, a profits interest can give you participation in future profits and appreciation without a share of the company’s existing liquidation value at grant. The operating agreement and distribution terms matter as much as the stated percentage. IRS guidance on profits interests.

The label tells you where to start. The documents tell you what you have.

Ten percent of what?

The next question is the denominator.

Suppose a company has one million shares outstanding and offers you 100,000 newly issued shares. After that issuance, you would hold approximately 9.1% of the outstanding shares: 100,000 divided by 1.1 million.

That calculation does not yet account for options, an unissued option pool, or securities that may convert into shares.

“Fully diluted” is useful shorthand, but the parties still need to agree what it includes. Does the calculation count the entire option pool? Outstanding SAFEs and convertible notes? Other promised awards? Is the percentage measured before or after your grant and the planned financing?

SAFEs deserve particular attention because their conversion can change the capitalization. They generally provide contractual rights to future shares rather than issuing common stock when signed. The relevant conversion assumptions need to be understood. Y Combinator SAFE materials.

The offer should translate the percentage into a specific award using a defined calculation. It should also make clear that later issuances can dilute that percentage.

You cannot sensibly compare two percentages until you know what each measures.

Vesting determines what you keep

Ten percent fully vested today and 10% vesting over four years are different bargains.

Under a typical four-year schedule with a one-year cliff, nothing vests before the first anniversary. If the arrangement provides for 25% to vest at that point, leaving shortly before it can produce a very different result from leaving shortly afterward.

The details deserve attention: when vesting starts, whether earlier service receives credit, what happens on termination, and whether an acquisition accelerates any vesting.

Milestones require the same care. “Help grow the business” leaves room for disagreement. A defined deliverable, measurement period, and acceptance process give both sides something they can administer.

For options, vesting is only part of the picture. Check the deadline to exercise after leaving, the exercise cost, and whether you could afford the associated tax. A vested option can expire under its terms before you use it.

The promise needs to be implemented

An offer letter, email, or conversation may record an equity commitment. The next question is whether the company has taken the steps necessary to implement it.

For a Delaware corporation, stock and option issuances involve statutory authorization requirements, including board action or properly delegated authority. The precise approvals depend on the instrument and the company’s documents. Delaware corporate law, §§ 152 and 157.

The practical review should connect the approved award, signed agreements, any required payment, vesting terms, and company records. A stock issuance should be reflected in the stock ledger; an option grant should be reflected in the appropriate award records.

A missing document is a reason to investigate. It is not a basis for casually dismissing someone’s claim.

The cap table should tell the same story as the contracts. If it does not, the discrepancy needs to be resolved before a financing, departure, or sale forces the issue.

Ownership percentage is not a payout calculation

Even a properly issued, fully vested award leaves economic questions.

Preferred stock may entitle investors to receive proceeds before common stockholders. Debt and other obligations can also affect what remains for equity. Owning 10% of the shares does not necessarily mean receiving 10% of a sale price. The percentage also does not establish your voting power or guarantee a board seat. Those rights require a separate review of the governing documents. Delaware corporate law, § 151.

Exercise costs, transfer restrictions, and repurchase rights matter too. An award can have substantial paper value while leaving you unable to sell it or needing cash to exercise it.

Tax timing can create another cash requirement. Different option types receive different treatment, and an exercise can have tax consequences before there is a sale. IRS guidance on stock options.

Restricted stock presents an early deadline: whether to make an 83(b) election generally needs to be addressed within 30 days after the property is transferred. That decision belongs alongside the issuance, with advice on the particular facts. IRS Form 15620 instructions.

For companies using equity as compensation, applicable wage obligations still need separate attention. An equity package does not make those requirements disappear. U.S. Department of Labor guidance.

Seven questions before agreeing

1. What instrument am I receiving, and how many shares or units does it cover?
2. How is the percentage calculated, and as of what date?
3. What must happen for the award to vest?
4. What happens if I leave, am terminated, or the company is sold?
5. What must I pay, by when, and what tax could arise before I receive cash?
6. How could future financing and other holders’ rights affect my ownership and proceeds?
7. What approvals, signed documents, and company records support the award?

These questions help both sides. The recipient can evaluate the offer. The company can make a promise it knows how to deliver.

The percentage is the beginning of the conversation. The useful next question is: ten percent of what, in what form, on what terms?

Working through a startup equity offer or documenting an equity arrangement? Get in touch.

This article provides general information, not legal or tax advice. The appropriate treatment depends on the entity, instrument, governing documents, and facts.