Combining strike prices with time based vesting
A typical package states a number of shares or stock options, a strike price if applicable, and a vesting schedule. The employee earns the right to the shares gradually rather than all at once, which protects the company if someone leaves early.
For example, a grant of 40,000 options with a four-year vesting schedule and a one-year cliff means the employee vests 10,000 options (25%) after the first year, then the remaining 30,000 vest monthly (about 625 per month) over the following three years, before equity tax by country is even considered.
Measuring pre tax gains from option exercise
For options, the value at exercise is the current share price minus the strike price, multiplied by the number of shares. If an employee holds 10,000 options with a 1.00 strike price and the company's shares are later valued at 6.00, the pre-tax gain is 10,000 x (6.00 - 1.00) = 50,000, assuming the options have already cleared their vesting schedule.
This gain is only realised if there is a liquidity event, such as an acquisition or IPO, or a secondary sale. Private company shares are usually illiquid until then.
Equity compensation versus cash
| Factor | Cash salary | Equity compensation |
|---|---|---|
| Timing of value | Immediate | Delayed, usually years |
| Certainty | High | Low, depends on company outcome |
| Tax timing | On payment | Often on exercise or sale, varies by country |
| Cost to company | Reduces cash runway | Dilutes existing shareholders instead |
National tax variations for European equity schemes
- UK: EMI options can qualify for 10% Capital Gains Tax under Business Asset Disposal Relief if conditions are met
- Germany: Section 19a EStG can defer income tax on employee share grants at qualifying startups
- France: BSPCE gains benefit from a reduced flat tax rate compared to salary income
- Netherlands: 2023 rules allow taxing options at sale rather than exercise for private companies, easing cash flow for employees
Where equity pay confusion tends to begin
- Is equity compensation guaranteed to be worth something?
- No. It only has value if the company's shares are worth more than the strike price (for options) at a liquidity event. Many startups do not reach that point.
- When is equity compensation taxed?
- This varies by country and instrument. It is often taxed at exercise, at sale, or at vesting, so employees should check the rules for their specific scheme before assuming a net figure.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.