Most startup employees never do this calculation. They accept equity because the company sounds exciting, because their colleagues did, or because the number of options looks impressive on the page. Then the company exits at a modest price, the preference stack absorbs most of it, and ordinary shareholders — including every employee — get nothing.
This is Part 3 of a three-part series. Part 1 covers the mechanics of options, vesting, and dilution. Part 2 covers Australian tax treatment. This part covers whether the maths actually works in your favour.
Why standard option pricing models are useless here
You may have heard of Black-Scholes — the model used to price financial options. It requires six inputs, including implied volatility, which is derived from market trading activity.
Private company shares have no market. There is no implied volatility to derive. You cannot apply Black-Scholes to your startup options in any meaningful way.
More importantly, Black-Scholes treats the underlying asset as having a continuous distribution of outcomes. Startup outcomes are binary or close to it: most companies fail, a small number succeed modestly, a smaller number produce large returns. The maths of a normally distributed variable does not describe this.
The right framework is expected value: the probability-weighted sum of all possible outcomes.
The expected value framework
Expected option value = (probability of exit) × (your share of exit proceeds) − exercise cost − estimated CGTThe hard part is the probability estimate. Global VC data is consistent: approximately 60–70% of startups return nothing to ordinary shareholders — either the company fails outright, or the exit price is too low to clear the preference stack. About 20–25% produce modest returns. About 8–12% produce strong returns. Roughly 1–3% produce the Atlassian/Canva-level outcomes that make the asset class interesting.
These are the numbers to stress-test your offer against.
A worked example
You’re offered a role at a pre-revenue startup: 18 months old, $3M raised, $10M post-money valuation, 10 million fully diluted shares.
The offer: $110,000 salary + 50,000 options at $0.10 exercise price. Market rate: $135,000. Foregone cash: $25,000/year × 4 years = $100,000 over the vesting period. Exercise cost: 50,000 × $0.10 = $5,000. Your ownership: 0.5% today, approximately 0.25–0.35% at exit after dilution from two more funding rounds.
| Scenario | Probability | Your net after CGT | Expected contribution |
|---|---|---|---|
| Company fails or nothing reaches ordinary shareholders | 65% | $0 | $0 |
| $30M exit | 25% | ~$65,000 | ~$16,300 |
| $150M exit | 8% | ~$340,000 | ~$27,200 |
| $500M exit | 2% | ~$1,144,000 | ~$22,900 |
| Total expected value | ~$66,400 |
Assumptions: ownership dilutes to 0.30% at exit after two further funding rounds (0.5% × 0.8 × 0.8). CGT at 47% marginal rate with the 50% CGT discount under the Australian ESS start-up concession — effective rate of 23.5% on the capital gain. Cost base is the $5,000 exercise cost. Net = (exit proceeds − $5,000) × 0.765. Figures are illustrative.
You gave up $100,000 in cash for approximately $66,400 in expected equity value. On these numbers, the equity still doesn’t win — but it’s closer than it first appears. The gap tightens further if your probability estimates on the larger exits are more optimistic.
That conclusion is sensitive to your probability assumptions. If you believe this company has a 5% chance of a $500M exit rather than 2%, the expected value shifts significantly. The exercise is not to get the number exactly right — it’s to make the trade-off explicit rather than leaving it as “equity is potentially worth a lot.”
The liquidation preference trap
The worked example above assumed proceeds flow proportionally to ordinary shareholders. They don’t always. This is the part of the cap table that startup equity guides rarely explain clearly.
Investors hold preference shares. Preference shares carry a contractual right to be paid back before ordinary shareholders receive anything.
The most common structure in early Australian rounds is a 1x non-participating liquidation preference: the investor recovers their original investment first, then chooses to either take that 1x amount or convert to ordinary shares and participate pro-rata — whichever gives more. At exits significantly above the investment price, investors convert and share equally. This is the employee-friendly version.
The less friendly version is participating liquidation preference: the investor takes their 1x back AND participates pro-rata in what’s left. They get paid twice. A company that has raised multiple rounds with participating preferences can produce an exit where ordinary shareholders get nothing at a price that looks like a success from the outside.
Concrete example: A VC invests $1M for 10% of the company. The company sells for $1.5M.
- With 1x non-participating: VC takes $1M, founders and employees split $500K.
- With 1x participating: VC takes $1M plus 10% of the remaining $500K = $1.05M. Founders and employees split $450K.
- With 2x participating: VC is owed $2M before anyone else sees anything. The company sold for $1.5M. Employees get zero.
These preferences stack across rounds. A company that has raised $20M across seed, Series A, and Series B has $20M in preferences that must be cleared before ordinary shareholders see a cent. At a $20M exit, employee options are worthless. At a $25M exit, employees share $5M. That may still not amount to much when divided across a large option pool.
Ask what the total preference stack is before you sign. It is a legitimate question and any company that won’t answer it is a red flag.
The 90-day window problem
One more mechanic that affects the real-world value of vested options: the post-termination exercise window.
Most Australian startup ESOP plans give you 90 days after leaving to exercise your vested options. After that, they lapse permanently. No extension.
| 90-day window (standard) | 5-year window (progressive) | |
|---|---|---|
| What it requires | Pay strike price in cash immediately for illiquid shares | Hold your vested rights until a real liquidity event |
| The risk | If the company fails later, you lose the cash you exercised | No upfront cash; your risk is deferred |
| The outcome | Most employees forfeit their vested options | Employees actually realise what they earned |
The 90-day default creates a situation where employees who leave on good terms — through redundancy, career progression, or a company pivot — routinely lose vested equity simply because they can’t find $20,000–$100,000 in cash within three months to buy illiquid shares they can’t sell.
This is a negotiating point. Ask for a longer window before you sign. Two to five years is reasonable. More progressive Australian startups are already moving in this direction.
When equity makes sense
Take the equity (or negotiate for more) when:
- You’re joining early — seed or pre-seed, low NTA-based strike price, large percentage grant
- The grant is meaningful: 0.5%+ for senior engineers at seed/Series A, not 0.05%
- The company has real product-market fit or demonstrated revenue, reducing the failure probability
- Your cash compensation is close to market rate — the equity is additive, not compensating for a large salary cut
- The sector has a history of large exits (B2B SaaS, enterprise infrastructure, health tech)
- You’re in a financial position where the foregone cash won’t hurt you
Be sceptical when:
- You’re joining Series C or later: high strike prices, most dilution already happened, large preference stack
- The grant is small (0.01–0.05%) and the company would need an exceptional exit to produce meaningful value
- The preference stack is large relative to likely exit scenarios
- The PTEW is 90 days with no negotiation room
- You need the cash (mortgage, family, financial obligations that require certainty)
- The company’s exit ambition is unclear — lifestyle businesses with no genuine exit path produce worthless options
What to ask before signing
Every employee receiving equity should get answers to these before accepting:
- How many options, and what’s the total fully diluted share count? (Calculate your real percentage.)
- What is the current strike price and how was it set? (NTA? CFO valuation? How recent?)
- What is the vesting schedule — start date, cliff, cadence?
- What is the post-termination exercise window?
- How are good leavers and bad leavers defined? Does voluntary resignation trigger bad leaver?
- Is there acceleration on acquisition — single trigger or double trigger?
- What is the total liquidation preference stack across all funding rounds?
- Can I see the full ESOP plan document and my grant letter before accepting?
Red flags: refusing to share the fully diluted cap table, verbal promises about equity that aren’t in the grant letter, options presented as a percentage of issued shares (not fully diluted), no mention of the ESS start-up concession, and bad leaver definitions that include normal resignation.
Watch also for clawback clauses — a specific variant of the bad leaver provision that applies retroactively. Some plans allow the company to claw back vested shares or options if you leave to join a competitor, even if you departed on good terms. You leave as a good leaver, collect your vested equity, then join a competitor six months later — and the company can force you to return or sell back your shares at strike price. If the plan document contains a non-compete-linked clawback, understand exactly what triggers it before accepting.
The honest summary
Startup equity is not compensation. It is a lottery ticket with a known expected value that is often less than the cash you give up to obtain it. Sometimes the ticket wins. Most of the time it doesn’t.
That doesn’t mean you should never take it. It means you should go in with open eyes, do the maths on your specific offer, ask the questions in the list above, and make a deliberate decision rather than defaulting to yes because the company sounds exciting.
If you’re evaluating an offer now — or building a team and trying to structure equity that will actually attract people — talk to us.
This article is for general information only and does not constitute financial or legal advice. Seek independent advice before making decisions about equity compensation.