What is the difference between an option and a share?

An option is the right to buy a share later at a fixed price, called the strike price. It is not a share yet, and it usually has no value until you exercise it and the company is worth more than the strike. A share is direct ownership. Most startups grant options to employees because options let people share in the upside without paying for equity on day one.

How large should an employee option pool be?

There is no single correct number, and it depends on how much hiring you plan to do before your next raise and how senior those hires are. Founders commonly set aside a single-digit to low double-digit percentage of the company and top it up at each round. The pool dilutes founders and existing investors, so size it against a hiring plan rather than a round figure, and take advice from your lawyers and investors.

Do employees pay tax on an option grant?

It depends on your country, the type of instrument, and when the event happens, so treat this as a concept rather than a rule. In many places nothing is taxed when the option is granted, something may be taxed when it is exercised, and something may be taxed again when the shares are sold. The rules and rates change and vary by jurisdiction, so confirm the specifics with a qualified tax adviser before you promise anyone a number.

Does Capstan replace my cap table or Carta?

No. Capstan tracks the grants and vesting schedules you have already agreed so each employee can see their own position in self-service, but it is not a cap-table product or a share registry and does not replace Carta or your legal record of ownership. Cap-table management, valuation display and tax advice are recorded non-goals of the module rather than features awaiting a release.

Should an employee equity screen show what the options are worth?

Be careful. A valuation shown next to a person's unvested options reads as a promise about a future outcome, and it is not one, because the price is a point-in-time estimate that can fall as easily as it rises. The safer design shows units and dates only: granted, vested, unvested, next vest date. Capstan takes that position deliberately and displays no valuation at all, leaving the worth of a share to your professionals and your actual funding events.

Startup equity and employee stock options guide

Startup equity is how early companies pay people in ownership rather than cash they do not yet have. For employees, that ownership almost always arrives as stock options: the right to buy shares later at a price fixed today, earned gradually over years. Get the mechanics right and equity becomes a real reason to join and stay. Get the communication wrong and it becomes a number on an offer letter that nobody trusts.

This guide covers why equity matters to hiring, the mechanics from option pool to vesting, how options differ from RSUs, how the tax question tends to work as a concept, and above all how to explain a grant so the person holding it actually understands it. It is not tax or legal advice, and the specifics below change by country and over time, so confirm anything load-bearing with a qualified professional.

Why equity matters to hiring

A startup competes for people against employers who can pay more in cash. Equity is the counterweight. It offers a share in an outcome that does not exist yet, in exchange for taking a risk on a company that might not exist in three years. That trade only works if both sides understand it honestly.

The failure mode is not stinginess. It is vagueness. A candidate is handed a percentage or a share count with no context, no strike price, no vesting schedule, and no sense of what it might be worth or when. They cannot compare it to a competing offer, so they either overweight it out of optimism or ignore it entirely. Both outcomes waste the equity you gave away.

Equity earns its keep as a hiring tool only when the person receiving it can hold an accurate picture of what they have. That makes clear communication a mechanical part of the process, not a nicety.

The mechanics, in order

Equity has a small vocabulary that trips people up because the words sound more complicated than the ideas.

The option pool. Before you grant anything, you carve out a slice of the company reserved for employees, called the option pool or ESOP pool. Grants come out of this pool. Setting it aside dilutes the founders and existing investors up front, which is why the size is negotiated at funding rounds rather than decided casually.

The grant. When you hire someone, you give them a grant: a specified number of options from the pool. This is the headline number on the offer, and on its own it means little without the four facts that follow.

The strike price. Each option lets the holder buy one share at a fixed price, the strike price, usually set at the fair value of a share on the grant date. The bet is simple: if the company grows, the shares become worth far more than the strike, and the holder buys low and owns something worth more. If the company does not grow past the strike, the options are worth nothing, which is the risk the employee is taking.

Vesting. Options are not handed over all at once. They vest, meaning they are earned over time as the person keeps working. The near-universal standard is four-year vesting with a one-year cliff, which the dedicated vesting guide walks through in plain terms.

The cliff. The cliff is a minimum stay before anything vests at all. With a one-year cliff, someone who leaves after eleven months earns nothing, and someone who stays past the twelve-month mark earns their first chunk in one step. It protects the company from giving away equity to people who do not stick.

Options versus RSUs, at a high level

Most early-stage startups grant options. Later-stage and larger companies often switch to restricted stock units, or RSUs. The difference is worth understanding even if you only ever use one.

An option is the right to buy a share at the strike price. It has value only if the share is worth more than the strike, and the holder has to pay to exercise. An RSU is a promise of an actual share once it vests, with nothing to buy: when it vests, the person receives the share itself.

At a rough level, options suit early companies where the share price is low and the upside is the whole point, while RSUs suit later companies where the shares already have real, stable value. The tax treatment of the two also differs, which is the next point and the one to be most careful about.

Taxation as a concept, not a number

Tax is where founders most often say something confidently wrong, so treat everything here as a shape rather than a figure.

Broadly, an equity instrument can create a tax event at up to three moments: when it is granted, when an option is exercised or an RSU vests, and when the underlying shares are eventually sold. Which of those moments is taxed, at what kind of rate, and in whose hands depends entirely on the country, the specific instrument, and sometimes on elections the employee has to make within tight deadlines.

Because of that, do not put a tax outcome in an offer letter, and do not let a manager reassure a candidate with a rate they half-remember. Point people to a qualified tax adviser for their own situation. Capstan reflects this deliberately: the Compensation and Equity module tracks grants and vesting, gives no tax advice, and displays no valuation at all, because those are judgements that belong with your professionals rather than with your HR record.

How to communicate a grant so it lands

This is the part most companies skip, and it is the part that decides whether equity does any work at all. A grant is understood when the holder can answer five questions without asking you:

How many options do I have, and out of what?
What is my strike price?
What is my vesting schedule, and when is my cliff?
How much have I vested so far, and how much is still to come?
Where can I see all of this whenever I want, without emailing HR?

The last one matters more than it looks. Equity that lives in a signed PDF filed somewhere is equity nobody can check, so questions pile up at review time and at exit, which are the worst moments to be reconstructing a schedule from memory. Give people a live view of their own position instead. It matters again when you are running a compensation review, because a refresh grant is a decision nobody can make sensibly without knowing what a person has already vested and what is still ahead of them.

That is the narrow, useful thing Capstan does here, and it is worth stating precisely rather than as a feature bullet.

You record an ESOP plan with its pool. Pool utilisation is derived from the live grants every time it is read, never stored, so the number of options left cannot drift away from the grants that consumed them. You issue a grant with its units, grant date, price reference and vesting template, and the schedule is written down as individual tranches at that moment. The facts of a grant are immutable and a database trigger enforces it, so a correction is a new grant rather than a quiet edit to the old one. Exercise, lapse and cancellation are recorded as dated events with a reference; the table holding them has no amount or currency column at all, which is a stronger statement than a policy promising no money moves.

Each employee sees their own position in self-service: granted, vested, unvested, next vest date. Units, never value. The module deliberately does not display a valuation, because a number on that screen reads as a promise about a future outcome and nobody can make that promise honestly. For you, there are two gated reports, pool utilisation and a vesting forecast, and both refuse to render to anyone without compensation clearance.

What it is not: a cap table or a share registry. It does not replace Carta or your legal record of ownership; a grant here references the legal instrument rather than being it. It gives no tax advice and does not value a perquisite. And it moves no money on an exercise. Those are recorded non-goals rather than a roadmap. There is also a free ESOP vesting calculator, with no email wall, that you can point candidates to before they have even signed.

One packaging note while you are planning: Compensation and Equity is a paid module and, like every module, needs a paid plan under it before you can enable it. The pricing page carries the figures.

Where to go next

If you want the vesting mechanics on their own, in worked examples rather than definitions, read ESOP vesting explained. If you are setting up the wider people function around all of this, the guide to HR software for startups covers the system of record that equity tracking sits inside. And if you want to see how the equity tracking works in the product, the Compensation and Equity module page shows what employees see, with the pricing laid out in public.