# Equity 101 for Software Engineers at Big Tech and Startups  ## Metadata - Author: [[Gergely Orosz]] - Full Title: Equity 101 for Software Engineers at Big Tech and Startups - Category: #articles - Published: 2021-02-16 - Document Tags: #career #finance #startup #technology - Source: reader - Last Highlighted: 2025-03-12 07:27:04.359093+00:00 - URL: https://blog.pragmaticengineer.com/equity-for-software-engineers/ ## Summary 💎 Equity compensation can significantly enhance software engineers' earnings but is fraught with risks; key factors include vesting, cliffs, stock options, RSUs, ESPPs, dilution, and taxation. ## Highlights - **$10M in equity gains** for 4 years' of equity vested for the first 10 engineers at Amplitude, an analytics startup ([source: the founder](https://news.ycombinator.com/item?id=28701568&ref=blog.pragmaticengineer.com)). The startup was the first to put [extremely employee-friendly equity policies](https://amplitude.com/blog/employee-equity-is-broken-heres-our-fix?ref=blog.pragmaticengineer.com) in-place, like a 10-year post-termination exercise window. This meant that even if any of these first 10 employees left after 4 years, they still made $10M or more without having to exercise their options, and could do so, years after, on the IPO. ([View Highlight](https://read.readwise.io/read/01jp4kqs99dy32dwz8mzn7qz8p)) - Tags: #👻 ai highlighted - **Non-senior software engineer making €250K/year in Germany** thanks to equity. A software engineer received 4,000 RSUs vesting over 4 years when joining Airbnb. At the time, the internal stock price was at $60, valuing this package at $60K/year (1,000RSUs/year), on top of their €90K/year salary. Following the IPO and the increase in share price, the equity is worth around $180K/year (at a share price of $180/share and 1,000 shares/year - €150K/year), bringing their total liquid compensation to around €250K (including an annual €10K bonus). ([View Highlight](https://read.readwise.io/read/01jp4kqsb0g4r1965qg2rj8pd4)) - Tags: #👻 ai highlighted - **Equity refreshers** are something that many Big Tech companies award to either a wide population or to people perceived as top performers. They are typically awarded annually and can have a different vesting schedule from your original equity awards. ([View Highlight](https://read.readwise.io/read/01jp4ktj6ren41p2ngtbbwmgav)) - **Clawbacks** are a term where you need to pay back money or benefits if you leave within a certain amount of time. They are most often used for upfront cash bonuses, like the one with Amazon. They might also be used for relocation expenses. ([View Highlight](https://read.readwise.io/read/01jp4ktv4hmbdka3f7qmzfpbkd)) - **Expected company growth** that is realistic/conservative / optimistic from your perspective. Future growth is both the biggest opportunity for your equity package to grow in value: but it's equally the biggest risk. ([View Highlight](https://read.readwise.io/read/01jp4kwcghndcz4080h4x708a2)) - **Exit scenarios**. Options are only worth anything if there will be a financial event - IPO or acquisition - where the shares will become liquid. IPOs are typically a lot cleaner from a financial perspective than acquisitions, where [ratchet clauses](https://www.investopedia.com/terms/f/fullratchet.asp?ref=blog.pragmaticengineer.com) will protect early investors' interests. See cautionary examples for examples where employees were left with little to nothing after company acquisitions. ([View Highlight](https://read.readwise.io/read/01jp4kqsmj2h0c8h7jjpf9y4eh)) - Tags: #👻 ai highlighted - **Not having the funds** to cover exercising options and the tax is the main reason many engineers shy away from this option. This is where financing solutions providers might help: they can offer no-downside funds to exercise, and then take a fair cut at the IPO, often resulting in more profit than if you would have exercised options later. ([View Highlight](https://read.readwise.io/read/01jp4kww6z329za69fhp97aggv)) - **RSUs** - Restricted Stock Units - are a form of stock compensation that publicly traded companies often offer to software engineers. You'd typically get awarded a specific *amount* of stock that *vests* over a *given time period*. ([View Highlight](https://read.readwise.io/read/01jp4kxdmd0tfwhkwcn10pmb78)) - **You get awarded a dollar value of shares** that get converted to shares on vesting. Say you get awarded the same **$120,500** in stocks to vest over 4 years. Regardless of the stock performance, you'd receive **$30,125 per year** in stocks. Once you get these stocks, you can sell or keep holding them. ([View Highlight](https://read.readwise.io/read/01jp4ky74gbkb3eg36b06ptmvg)) - **ESPP lookback provision** is a key part of ESPPs. You will purchase stock at the lower or either the offering date or the purchase date share price. Basically, if the stock rises significantly during the period, you might be able to purchase the stock with far more than a 15% discount. See [an example here](https://www.plancorp.com/blog/the-untold-advantages-of-your-employee-stock-purchase-plan-espp?ref=blog.pragmaticengineer.com). ([View Highlight](https://read.readwise.io/read/01jp4kynnntacfb1ghj3gzemnd)) - You joined a startup when it was valued at $100M and received options that you calculated to be worth $100,000 over four years. Four years later, the company is worth 20x that, at $2B. Is your equity also worth 20x that, or about $2M? ([View Highlight](https://read.readwise.io/read/01jp4kqtfb70q932vnrcye2dmg)) - Tags: #👻 ai highlighted - **Taxes on top of exercising options are often a huge surprise factor,** especially for late-stage unicorn employees. [Secfi](https://www.secfi.com/?utm_source=pragmaticengineer) collected data from individuals in more than 700 late-stage unicorn companies in the US and found taxes to account for more than 6x the exercise price [in this study](https://www.secfi.com/2020?ref=blog.pragmaticengineer.com): ([View Highlight](https://read.readwise.io/read/01jp4kz9zv5n75hpwj8vp12kq1)) - **Equity being worth nothing** is the most common outcome with startups. The company might never go public. It might be sold at a price where common stock - and options - are worth nothing [thanks to ratchet causes](https://www.investopedia.com/terms/f/fullratchet.asp?ref=blog.pragmaticengineer.com) protecting the early investors. The company might never have a financial event. ([View Highlight](https://read.readwise.io/read/01jp4kqvh9v9s2v8f1329pvkd6)) - Tags: #👻 ai highlighted - As another story, one of my friends worked at five startups, over five years, exercising options in each. Only one of the startups ever had an exit: it got sold to another company. My friend had stock worth around $50,000 on paper when he left. He received $215 as proceeds from the sale. ([View Highlight](https://read.readwise.io/read/01jp4kqwm3bb8asp2pmjtk1wty)) - Tags: #👻 ai highlighted - The takeaway from this story is that company share prices can go down as much as up, and when a company is sold, common shareholders might end up nearly empty-handed. ([View Highlight](https://read.readwise.io/read/01jp4kzw25n78xrkpm4w8834bd))