Your 0.25% Startup Stake Is Probably Worth Far Less Than $250,000

Picture joining a startup as employee number 10. The salary is a little under market, but you get 0.25% of the company. If it sells for $100 million, that is $250,000. Simple enough.

It is also wrong. Several mechanisms sit between the grant letter and the payout, and nearly all of them shrink what you actually keep.

Start with vesting. Most grants vest over four years with a one-year cliff, so leave before month twelve and you walk away with nothing. Then comes dilution. Each funding round issues new shares, with typical cuts of about 20% at Series A, 15% at Series B and 10% for later rounds. Two rounds turn 0.25% into roughly 0.17%, or $170,000 on a $100 million sale. Liquidation preferences can shrink the pool further, because investors often get their money back before common shareholders see a cent in a modest sale.

Next, the bills. Options have to be exercised, which costs cash, and the gain at exercise is taxed before you can sell anything. Assume $7,500 in exercise costs and a 40% tax rate, and the $170,000 becomes about $97,500, roughly 61% below the headline figure. Leave the company and you typically have just 90 days to exercise, which can mean tens of thousands of dollars tied up in shares that may never be liquid. Carta data from late 2024 showed employees exercised only 32% of their vested, in-the-money options.

Then there is the question of whether an exit happens at all. CB Insights found only 30% of tracked U.S. seed companies had an exit, and one working paper found more than 80% of U.S. tech startups acquired between 2002 and 2020 sold for under $50 million. Using a rough split of 70% no exit, 25% small exit, 4% big exit and 1% unicorn, the author estimates the expected payout for that employee number 10 at about $35,820. That is less than the $48,000 after-tax value of a $20,000-a-year salary discount over four years, and it arrives much later. The chance of a six-figure result is roughly 5%.

Later hires fare worse. Larger companies employ more people and exit more often, so about 73% of employees see some exit even though 70% of companies do not. But the median employee, say number 35 at a 70-person company with a 0.05% grant, nets only around $11,100 in the small-exit case.

None of this makes startup equity worthless. The long right tail is real, and the experience and network can be valuable, particularly for younger workers with low expenses. But the pay is concentrated, illiquid and tied to the same employer that signs the paycheck.

The practical advice is to push for a longer post-termination exercise window of five to ten years, ask about past funding rounds and liquidation preferences, check whether Qualified Small Business Stock rules could cut the capital gains tax, and be honest about whether you trust the founders. Treat the grant as a lottery ticket with decent odds of a small prize, not a deferred bonus.