Equity is one of the most powerful tools you have for attracting and retaining great people. Founders don’t need to be experts on all of the terms and tax implications, but should be well-versed enough to be strategic about early grants. Here’s how we advise founders to get ahead of the most common mistakes and protect the cap table long-term.
Key Takeaways:
- Benchmark before you offer to avoid overgranting: Anything above 1% is typically reserved for your first 1-2 hires or C-Level seniority. 5%+ is co-founder territory (not standard early hire.) Default to four year vesting with a one-year cliff.
- Grant ISOs to employees and NSOs to everyone else: Help your team to understand the tax benefits — and implications.
- Get a 409A before you grant anything: As soon as you have dollars raised, revenue, or material product progress, you need an independent valuation.
Don’t overgrant early
In the excitement of building out a team post-raise, early equity decisions can compound. A useful rule of thumb: Anything approaching 5% gets you into co-founder territory rather than a standard early hire. Before finalizing any offer, benchmark it against market data:
- Datasets like Carta and Pave publish equity compensation data by stage, role, and geography.
- Model the cumulative impact: A grant that looks reasonable in isolation can look very different across 10 hires.
Standardize vesting as much as possible
Four years with a one-year cliff remains the market standard, and you should only go below this in exceptional circumstances. An increasing number of voices in the startup ecosystem are arguing that six years should become the new standard.
If a candidate pushes for a larger grant you can consider structuring the incremental portion to vest over a longer time horizon or tie it to specific milestones, rather than simply increasing the upfront award. But talk to your board if you have one, as they may prefer consistency across hires.
Understand the key terms and tax basics
Founders should not provide tax advice (and neither do we, for that matter), but you’ll need enough fluency to make solid decisions and have informed conversations with your team.
In short: ISOs are usually right for early employees who are likely to stay long term. NSOs are used for contractors, advisors, or grant amounts above the ISO cap.
More on Incentive Stock Options (ISOs)…
- The most tax-advantaged option for employees: There is no taxable event at award or exercise, only at sale.
- Limitations: ISOs can only be granted to employees and typically must be exercised within 90 days of leaving the company. There is also a $100K annual vesting cap; anything above that converts to NSO treatment automatically.
More on Non-Qualified Stock Options (NSOs)….
- NSOs are more flexible, but less tax-advantaged: they create taxable income when exercised, to the extent current fair market value exceeds the exercise price. That gain is taxed as ordinary income, even though the underlying shares may not be liquid for years, if at all.
- The tradeoff: Flexibility. NSOs can be issued to employees, contractors, and advisors* and aren’t subject to the same limitations on exercise windows or vesting amounts.
* NSOs must be awarded to people, not companies, in order to comply with SEC rule 701.
Keep your 409A current
The 409A is an independent valuation of your company’s common stock. That value sets the exercise price for any options you grant, so it must be current before issuing equity.
What to do
- Get a 409A once your company has actual value: This typically means after raising capital, generating revenue, or making material product progress.
- Refresh it regularly: A new valuation is required at least every 12 months, or sooner after a material event. The most common trigger is fundraising, but significant revenue changes or M&A activity can also require an update.
- Set the strike price appropriately: In almost all cases, the exercise price should be set equal to the 409A valuation. Setting it below fair market value is not permitted and can create adverse tax consequences for employees.
How it typically works
If you’ve recently raised a priced round, you should request a new 409A via your equity platform (e.g., Carta, Pulley) or another licensed independent valuations provider. The 409A must be approved by the board prior to or concurrently with issuing any new options.
That said, it’s not automatic. If no grants are being issued, some companies delay updating their 409A. Similarly, SAFEs or convertible notes do not always trigger a new valuation unless they represent a clear material event.
Take advantage of the post-raise window
The post-raise window is a great time to reset and put the right structures in place, and equity is an important part of that. Taking a bit of time now to be deliberate will make future hiring, fundraising, and decision-making easier down the road.
Further reading
Carta: Equity Compensation — https://carta.com/learn/equity/compensation
Pave: Compensation Data for Startups — https://www.pave.com
IRS: Incentive Stock Options — https://www.irs.gov/taxtopics/tc427
IRS: Non-Qualified Stock Options — https://www.irs.gov/taxtopics/tc429
Last updated: May 29, 2026
This article provides general information and should not be considered tax or legal advice. Seek qualified professional advice specific to your circumstances.