How Startup Equity Works

A startup issues shares. Founders and employees typically hold common stock. Investors in priced rounds typically hold preferred stock, which carries rights common stock does not: liquidation preference, anti-dilution provisions, and often board or voting rights.

Ownership is expressed as a percentage of the fully diluted share count, which includes issued shares, options granted, options reserved in the pool, and securities that will convert later. A number quoted against issued shares only will overstate your position.

Those preferences matter most at exit. In a modest acquisition, preferred holders can be paid before common holders receive anything, which is why headline exit numbers often bear little relationship to what any specific holder receives.