What Is Equity?

You got the offer. The salary's fine. The team seems sharp. And there's one line in the offer letter that jumps out: "You'll receive 20,000 shares of equity."

Sounds exciting. But what exactly is equity? And more importantly, how do you know if it’s worth anything?

This guide walks through what equity means when you join a company, the types you might get, how it works in public vs. private companies, and what you need to understand if you're evaluating a job offer or already sitting on a pile of paper shares.

Equity, defined

In plain English: equity is ownership.

When a company gives you equity, they’re giving you a piece of the business. That might mean shares of stock, a future claim on profits, or the right to get paid if the company exits. But at its core, equity means you have a stake in the company’s success—and sometimes, failure.

Think of it as a slice of the pie. If the pie gets bigger, your slice could be worth more. If the pie burns, well...

Equity = Ownership stake in a business.

It shows up in lots of ways:

• Common stock
• Preferred stock
• Stock options (ISO/NSO)
• Restricted stock units (RSUs)
• Restricted stock awards (RSAs)
• Profits interests (LLCs)
• Phantom equity (synthetic equity)

Which one you get depends on what kind of company you're at, and how far along they are.

The difference between public vs. private equity

Let's break down how equity differs depending on whether the company is public or private:

Public equity

This is the version most people know. Buy Apple stock? Congrats, you're now an Apple shareholder. Public companies trade on stock exchanges, so anyone can buy in.

The upside:

• Transparent valuations
• Easy to buy and sell (liquid)
• Real-time pricing

But most startup equity? It's private.

Private equity

Not the PE firm kind—we’re talking about equity in private companies. That includes startups, early-stage growth companies, and any business that hasn't IPO'd.

Unlike public equity:

• Valuations are set behind closed doors, typically by investors during funding rounds every 12 to 24 months. In between, the value of your equity might not change on paper, even if the business does.
• You can’t sell your shares easily
• There may be long waits for liquidity (an IPO, acquisition, or secondary sale)

Private equity is where most startup employees build meaningful ownership. But turning that paper into real value takes time, company growth, and a path to liquidity.

7 Common types of equity

The structure of your equity grant can look very different, whether you’re joining a fast-growing startup or a large public company.

Common stock

Common stock is the foundation of company ownership. It’s what founders, early employees, and advisors typically receive, and what employees get when they exercise their stock options. Common shareholders usually:

• Get voting rights
• Sit last in line for payouts if the company exits
• Receive equity with the most upside and risk

Preferred stock

Preferred stock is mostly reserved for investors (VCs, angels). Preferred shareholders:

• Get paid before common shareholders in a sale
• Often have extra rights (like board seats or anti-dilution protections)

Preferred stock is rarely granted to employees, but in some late-stage startups, senior hires may negotiate for it as part of a custom package.

Stock options (ISOs & NSOs)

Stock options are contracts that let you buy shares later, at a set price (called the strike price). You don’t own anything until you exercise them.

Stock options come in two forms:

• ISOs (Incentive Stock Options): Offer favorable tax treatment, but are only available to employees
• NSOs (Non-qualified Stock Options): More flexible but less favorable tax treatment

Options can be lucrative, but they require:

• Upfront cash to exercise
• Risk that the shares end up worthless

RSUs (Restricted stock units)

RSUs are grants of actual shares, but you don’t get them right away. You need to vest first, usually over time or based on certain events.

Some RSUs are single-trigger: they vest based on your time at the company. 

Others are double-trigger: they require both time-based vesting and a liquidity event (like an IPO or acquisition). 

You won’t receive shares and owe taxes until both conditions are met.

RSAs (Restricted stock awards)

RSAs mean that you get shares upfront, but they can be clawed back if you leave too early. Typical for very early-stage startups where share prices are low.

Profits interests (for LLCs)

If you work at an LLC instead of a corporation, you might receive a share of future profits instead of stock. 

This is a form of equity used in LLCs—limited liability companies—where traditional shares don’t exist. Instead, profits interests give you a right to a portion of future growth.

Profits interests are designed so you only benefit from growth above a predefined threshold, typically the company’s value at the time you’re granted equity. You’re not entitled to past profits, only future upside.

Phantom equity

Phantom equity—sometimes called synthetic equity or phantom stock—isn’t real stock, but it mimics the benefits. It offers employees a cash payout based on the company's value at the time of an exit event.

You can think of phantom equity as a promise to pay you a bonus if the company hits certain milestones (like getting acquired). Think of it like monopoly money that becomes real at exit.

Vesting: The gatekeeper of ownership

Vesting is how your equity goes from “just a promise” to “actually yours.” Nearly every type of equity comes with a vesting schedule: a timeline that defines when you earn ownership.

A typical schedule might vest equity over four years with a one-year cliff, nothing vests for the first year, then you earn a portion each month after that.

There are three flavors of vesting:

• Time-based: You stay, you earn. The longer you’re in the seat, the more equity you get.
• Milestone-based: You hit a goal (like launching a product or IPO), and boom—your shares vest.
• Hybrid: A mix of both. Think “stay three years and ship the thing.”

Some plans even let you exercise early, buying your shares before they vest. That can lower your tax burden, but it’s a move for the confident or cash-rich. Either way, the clock on long-term capital gains starts sooner.

Before you start dreaming of a private island (or budgeting for just taxes), use our Equity Calculator to get a realistic estimate of what your equity could be worth.

Liquidity: How you actually make money

Even if your equity looks valuable on paper, turning that value into actual money depends on one key factor: liquidity.

Liquidity refers to how easily your equity can be converted into cash. Until there’s a path to sell or cash out, equity is just a promise, not a paycheck.

So, how do you actually make money from your equity? There are three main scenarios that can unlock liquidity:

1. Acquisition (M&A)

If the company gets bought, shareholders might get paid based on their ownership. Preferred shareholders get paid first. Common shareholders get what’s left.

2. IPO

The company goes public, and your equity can be traded on the open market. Often comes with a lock-up period (usually 90-180 days) where you can’t sell.

3. Secondary Sale

You sell your shares to another buyer before the company exits. This usually requires company approval and only happens at later-stage startups ($1B+ in valuation).

Without one of these events? You might be sitting on equity that looks good on paper but is hard to turn into anything useful.

How do you know what equity is worth?

Valuing equity in a private company isn’t as straightforward as checking a stock price. So how do you figure out what your equity is worth?

Here’s the truth: startup equity doesn’t come with a price tag attached. You can’t just open an app and see what your shares are worth like you would with Apple or Tesla stock. That’s because private companies don’t trade on public markets. There’s no open bidding, no daily price swings. 

The best way to understand your equity’s real value is to model it. Prospect lets you upload your grant, project different exit outcomes, and plan for taxes.

There’s also a separate valuation for tax purposes: the 409A, a third-party appraisal of your company’s fair market value. It’s what sets your strike price and determines whether you’re “in the money” when exercising options.

Common equity pitfalls and how to dodge them

Equity can be rewarding, but it’s easy to misunderstand. 

Here are some of the most common mistakes people make when evaluating equity ownership—and how to avoid them.

Mistake 1: Confusing grant date with ownership
A grant is a starting point. You own nothing until you vest (and exercise, if options).

Mistake 2: Ignoring tax implications
Equity can create tax surprises, especially if you don’t plan for exercise costs or RSU settlements.

Mistake 3: Overestimating liquidity
Equity sounds nice until you realize you can’t sell it. Make sure you understand the company’s plans (or lack thereof) for liquidity.

Mistake 4: Not reading your grant documents
That fine print? It’s what decides whether you actually get anything.

The bottom line with equity ownership

Equity is one of the most powerful parts of working at a startup. It can also be one of the most misunderstood.

To get the most out of it:

• Know what kind you have
• Understand how it vests
• Plan ahead to minimize your tax burden
• Understand when and how you’ll actually be able to sell

At Prospect, we model what your equity could actually be worth. Because a good offer isn't just about salary. It's about owning what you help build.