How does startup equity work for employees?

Employee startup equity: what it is (and what it isn’t)

Employee equity is a way for a startup to share ownership upside with the team. In practice, it’s usually stock options (the right to buy shares later at a fixed price) or RSUs (restricted stock units—shares delivered later if you meet vesting conditions). Equity is not the same as cash compensation, and it’s not guaranteed money: its value depends on whether the company has a successful liquidity event (acquisition or IPO) and on the terms of the company’s capitalization (the “cap table,” i.e., who owns what).

In medtech, equity can be especially meaningful because timelines can be long (clinical evidence, FDA clearance/approval, reimbursement, hospital procurement), and cash is often tight. That also means equity can take longer to become valuable than in some software startups.

• Equity grant: what you’re offered (e.g., X options or X RSUs).
• Vesting: when you earn it over time (commonly 4 years with a 1-year cliff).
• Exercise: for options, paying to buy shares at the strike price.
• Liquidity: when shares can be sold (often only at acquisition/IPO, not anytime).

The two common forms: stock options vs RSUs

Stock options (most common in early-stage medtech)

Options give you the right to buy shares later at a fixed exercise (strike) price. If the company’s value rises, your option can be “in the money” (valuable). If it doesn’t, the option may be worth nothing.

Two main tax categories exist in the U.S. (your offer letter will specify):

• ISOs (Incentive Stock Options): typically only for employees; can have favorable tax treatment if you meet holding requirements, but may trigger AMT (Alternative Minimum Tax). Rules vary.
• NSOs (Nonqualified Stock Options): can be granted to employees or contractors; taxation is generally less favorable than ISOs, but simpler to administer.

Medtech note: early-stage companies often use options because they preserve cash and align incentives through long R&D cycles (design controls, verification/validation, clinical studies, regulatory submissions).

RSUs (more common later-stage)

RSUs are a promise to deliver shares once vesting conditions are met. They’re often used when a company’s share price is higher and options become less attractive (because the strike price would be high). RSUs can create a tax bill when they vest (because you’re receiving value), even if you can’t sell yet—companies sometimes add “sell-to-cover” mechanisms after IPO, but pre-IPO liquidity is limited.

In medtech, RSUs show up more often in later-stage private companies approaching IPO, or in public medtech companies hiring talent from startups.

Vesting, cliffs, and what happens if you leave

Vesting is the schedule by which you earn equity. The most common structure is 4-year vesting with a 1-year cliff: you earn nothing if you leave before 12 months; at 12 months you vest a chunk (often 25%), then the rest vests monthly or quarterly.

Key terms to understand and ask about:

• Cliff: the initial period before any equity vests.
• Acceleration: vesting speeds up under certain events. “Single-trigger” acceleration happens on acquisition; “double-trigger” requires acquisition and termination/role change. Double-trigger is more common and investor-friendly.
• Post-termination exercise window (PTE): how long you have to exercise vested options after leaving (commonly 90 days for ISOs, but companies can offer longer windows; terms vary). If you miss the window, you can lose the options.

Medtech reality: because regulatory and reimbursement milestones can take years, leaving after 18–24 months can mean you’ve vested some equity but may still be far from a liquidity event. That makes the PTE window and your ability to afford exercise (and potential taxes) unusually important.

How much is it worth? A practical way to think about value

Equity value is not just “number of shares × latest valuation.” You need to understand percentage ownership, dilution, and the company’s liquidation preference (investor payout terms).

Ask for percentage, not just number of options

Companies often quote “10,000 options,” but without context that’s meaningless. The meaningful question is: What percent of the company is this on a fully diluted basis? (“Fully diluted” means counting all shares that could exist if options/convertibles were exercised/converted.)

Dilution: why your percentage usually goes down

When the company raises a priced round (Seed, Series A, etc.), it issues new shares to investors and often expands the option pool. That typically reduces everyone else’s percentage ownership. Dilution isn’t automatically bad if the company’s value increases, but it changes the math.

Medtech-specific dilution pressure can be higher because capital needs can be larger (quality system, clinical evidence, manufacturing scale-up, regulatory work). A company pursuing a PMA pathway (more rigorous) may require more funding than a low-risk 510(k) device, and that can mean more rounds and more dilution. (Exact amounts vary widely.)

Liquidation preferences: who gets paid first in an exit

Most venture rounds include a liquidation preference, meaning investors may get their money back (sometimes with a multiple, depending on terms) before common shareholders (employees/founders) receive proceeds. This matters most in a modest acquisition: the headline exit price may not translate into much for common stock if preferences stack up.

You don’t need to be a finance expert, but you should know whether the company has standard “1× non-participating” preferences or more complex structures. If you’re senior (VP/Director) it’s reasonable to ask for a high-level cap table and preference summary under NDA.

Medtech specifics: regulatory, reimbursement, and hospital procurement affect equity timelines

In medtech, equity outcomes are tightly linked to milestone risk. A few examples of why timelines and probability matter:

• FDA pathway: A 510(k) clearance timeline can be shorter than De Novo or PMA in many cases, but it depends on device risk, predicates, and evidence requirements. Longer pathways can delay revenue and exits.
• Clinical evidence & IRB: If the product needs prospective clinical data, IRB approvals, site contracting, and enrollment can extend timelines. That affects when the company can raise at higher valuations (and when equity becomes valuable).
• Reimbursement: Without a clear reimbursement route (existing CPT codes, new CPT application, or alternative payment arrangements), adoption can stall even after clearance. That can reduce exit likelihood or push it out.
• Hospital procurement: Selling into hospitals involves value analysis committees, security reviews (for digital health), integration work, and long sales cycles. That can slow growth compared to direct-to-consumer health.

Translation: when evaluating equity, don’t just ask “What’s the valuation?” Ask “What are the next 2–3 de-risking milestones, and how does the company get paid?”

What to negotiate (and what to ask before signing)

Most employees can’t rewrite the entire equity plan, but you can often improve clarity and reduce downside risk by asking targeted questions.

1. Grant details: How many options/RSUs, what is the vesting schedule, and what is the percentage on a fully diluted basis?
2. Strike price and current fair market value (FMV): For options, what is the strike price and when was the last 409A valuation (U.S.)? (You’re not asking for the report—just the date and context.)
3. Post-termination exercise window: Is it 90 days or longer? If longer, does it change ISO status (often it can convert to NSO after certain periods; details vary)?
4. Acceleration: Is there double-trigger acceleration on change of control? If you’re joining pre-Series A or taking a high-risk role, this can matter.
5. Early exercise and 83(b): Does the plan allow early exercise? If so, you may be able to file an 83(b) election (U.S.) within a strict deadline after exercising to potentially reduce future tax burden. This is technical—talk to a tax professional.

If the company is very early, also ask: How big is the option pool today, and is there an expected increase at the next round? Option pool increases are a common source of dilution for employees.

What to do next

1. Request the equity plan summary (and your grant agreement) and highlight: vesting, PTE window, acceleration, and whether early exercise is allowed.
2. Ask for fully diluted percentage and the latest 409A date (or equivalent FMV process) so you can interpret the strike price.
3. Map the company’s next 3 milestones (e.g., design freeze, FDA submission, clearance/approval, first reimbursed claims, first hospital system contract) and estimate how long each takes; sanity-check whether your vesting horizon matches reality.
4. Run a simple exit scenario: assume dilution across future rounds and consider liquidation preferences; if you can’t get details, model a range and focus on downside protection (PTE window, acceleration).
5. Get a tax consult before exercising options or filing an 83(b); the right move depends on your jurisdiction, cash, and risk tolerance.

If you want, share your stage (pre-seed/seed/Series A+), role, and the equity terms you were offered (numbers can be anonymized). I can help you interpret what’s standard and what’s a red flag in medtech.