How to Get Equity in a Company: Grants, Taxes, and Lock-Ups

There are four common ways to get equity in a company: found it, receive it as employee compensation, invest cash directly, or earn it through professional services. Each route uses different documents, triggers taxes at different moments, and comes with its own limits on when you can actually sell what you own. The route matters as much as the number of shares, because a grant you can’t exercise, can’t afford the tax on, or can’t transfer is worth less than it looks on paper.

Founding the Company

If you’re starting the company, your equity begins with the articles of incorporation, filed with a secretary of state to create the corporation and set the total number of shares it’s authorized to issue.¹ State filing fees run from roughly $35 to $500 depending on the state and the number of authorized shares.

Once the corporation exists, founders formalize ownership through a stock purchase agreement. This contract sets how many shares each founder gets, what they’re paying with (usually cash or intellectual property), and the par value of the shares, often as low as $0.0001 per share.² Par value is a nominal floor written into the charter and doesn’t reflect what the shares are actually worth.

Expect to sign a restricted stock purchase agreement with a vesting schedule. Vesting requires each founder to keep contributing before fully owning their shares. The common structure is four years with a one-year cliff: nothing vests in year one, 25% vests on the first anniversary, and the rest vests monthly or quarterly across the next three years.

The 83(b) Election and Why 30 Days Matters

When founders receive shares subject to vesting, the IRS treats those shares as property transferred for services. Under Internal Revenue Code Section 83(a), you owe income tax on the difference between fair market value and what you paid, calculated at each vesting date rather than at grant.³ For a startup rising in value, that default creates a growing tax bill on shares you may not be able to sell.

An 83(b) election lets you pay tax immediately based on the value at grant instead. When founders buy at par value, the taxable amount at grant is close to zero. Wait, and you’ll owe ordinary income tax on a much larger value as each tranche vests.

You must file the 83(b) election within 30 days of receiving the shares. No exceptions, no extensions.⁴ The IRS provides Form 15620, which asks for your name, taxpayer identification number, a description of the property and any restrictions, the fair market value, the amount paid, and the resulting taxable amount.⁵ You mail the form to the IRS office where you file your federal return and give a copy to the company. Because missing the window is irreversible, many attorneys recommend certified mail with a retained receipt.

Getting Equity as an Employee

If you’re joining a company rather than starting one, equity typically arrives in one of three forms. Which one you’re getting determines when you pay tax and what you have to do to convert the grant into shares.

Incentive Stock Options (ISOs) go only to employees, not contractors or advisors. They offer favorable tax treatment if you meet holding period requirements, and the option price must be at least the fair market value of the stock on the grant date.⁶

Non-Qualified Stock Options (NSOs) can go to employees, contractors, and advisors. They lack the ISO tax advantages but give the company more flexibility in how it structures grants.

Restricted Stock Units (RSUs) are a promise to deliver actual shares at a future date once vesting conditions are met. There’s no exercise price to pay; you receive the shares (or cash equivalent) when they vest.

Private companies grant this equity under Rule 701 of the Securities Act, an exemption that lets them issue securities to employees, directors, consultants, and advisors without registering with the SEC.⁷

What to Read in the Grant Agreement

Your grant agreement contains the numbers that decide what your equity is really worth.

The exercise price, sometimes called the strike price, is what you’ll pay per share to buy the stock underlying your options. For private companies, this is set by a 409A valuation, an independent appraisal of the common stock required by Section 409A of the Internal Revenue Code. For ISOs, the statute requires that the exercise price be at least fair market value on the grant date.⁶ Pricing below fair market value can trigger a 20% penalty tax under Section 409A on top of regular income tax.

The vesting schedule tells you when you actually earn the equity. Most startups use four years with a one-year cliff. Leave before the cliff and you walk away with nothing.

Expiration and the post-termination exercise period determine how long your options last. ISOs cannot be exercisable more than 10 years after grant.⁶ If you leave the company, a much shorter clock starts. Most companies give departing employees just 90 days to decide whether to exercise their vested options.⁸ Miss that window and the vested options disappear back into the company’s option pool. The 90-day standard exists because ISOs lose their favorable tax treatment if exercised more than three months after employment ends.

Acceleration provisions speed up vesting if the company is acquired. Single-trigger acceleration vests everything when the deal closes. Double-trigger acceleration requires two events, usually an acquisition plus your involuntary termination afterward, before unvested shares accelerate. Double-trigger is more common. If your agreement is silent, unvested shares are generally left to the acquirer’s discretion.

How Employee Equity Is Taxed

Different grant types create taxable events at different moments. Knowing the sequence helps you avoid owing tax on shares you can’t sell.

ISOs

ISOs generate no regular income tax at exercise. However, the spread between exercise price and fair market value at exercise is picked up in the Alternative Minimum Tax calculation. For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly.

The tax treatment on sale depends on holding period. A qualifying disposition (holding for at least two years after grant and at least one year after exercise) taxes the entire gain at long-term capital gains rates.⁶ For 2026, those rates are 0%, 15%, or 20% depending on income, with the 15% rate starting at $49,450 for single filers and $98,900 for joint filers.⁹ Selling before meeting both holding periods is a disqualifying disposition, and the spread at exercise is taxed as ordinary income.

NSOs

NSOs trigger ordinary income tax at exercise on the full spread between the exercise price and fair market value. Your employer will withhold federal, payroll, and applicable state taxes. When you later sell, any additional gain above the fair market value at exercise is a capital gain: short-term if you held for a year or less, long-term after that.

Equity Received for Services

Consultants, advisors, and contractors who receive equity as compensation owe income tax on the fair market value of the shares minus any amount paid, measured when the shares are no longer subject to a substantial risk of forfeiture.³ That can create a cash flow problem: tax owed on shares you can’t yet sell. Service providers receiving restricted shares can file an 83(b) election under the same 30-day deadline and same Form 15620.⁵

Investing Cash for Equity

If you’re buying equity as an outside investor rather than earning it, private company shares come with extra federal rules.

Accredited Investor Status

Most private investment opportunities are limited to accredited investors. The SEC defines an accredited investor as someone who meets at least one of the following:¹⁰

Individual income above $200,000 (or $300,000 jointly with a spouse or partner) in each of the two most recent years, with a reasonable expectation of the same in the current year.¹¹
Individual or joint net worth above $1 million, excluding the value of a primary residence.¹¹
Holding a Series 7, Series 65, or Series 82 securities license in good standing.¹⁰

How the Offering Is Structured

The verification you’ll face depends on which exemption the company relies on. Under Rule 506(b), the company cannot publicly advertise the deal and must have a reasonable belief that you’re accredited, but the process tends to be less formal.¹² Under Rule 506(c), the company can advertise generally but must take reasonable steps to verify accredited status, which may include reviewing tax returns, W-2s, or bank statements, or obtaining written confirmation from a broker-dealer, attorney, or CPA.¹³ Simply checking a box on a form is not sufficient under either rule.

Documents You’ll Sign

In a private placement, you’ll receive a Private Placement Memorandum (PPM) covering the risks, terms, and financial projections. You then sign a subscription agreement, the formal application to purchase a specified number of shares at the stated price. The company may also require a right of first refusal agreement and an investor rights agreement covering information access and voting.

Buying public company stock is simpler: open a brokerage account and clear the firm’s Know Your Customer checks, which require verifying essential facts about each customer.¹⁴

Earning Equity Through Services

Consultants and advisors sometimes receive equity, often called sweat equity, instead of or alongside cash. These arrangements need careful paperwork.

An advisor or consulting agreement sets the scope of work and the milestones that trigger the equity. A technical advisor might earn shares only after delivering a working prototype or filing a patent. Tying equity to specific deliverables keeps the grant tied to real contributions.

If the provider creates any work product, such as software code, designs, inventions, or written materials, an intellectual property assignment agreement is essential. It transfers ownership of everything the provider creates to the company in exchange for the grant. Without it, the provider may retain rights to work built for the company, which becomes an expensive dispute later.

The agreement should state the number of shares or options, the vesting terms tied to the service period, and what happens to unvested equity if the relationship ends early. The tax rules above apply: equity received for services is taxable income under Section 83(a), and an 83(b) election may reduce future tax.³

Restrictions on Selling Your Shares

Owning equity is not the same as being able to sell it. Private company shares carry heavy transfer restrictions, and even public company shares may be locked up after an IPO.

Right of First Refusal

Most private company equity agreements include a right of first refusal (ROFR), giving the company (and sometimes existing investors) the right to buy your shares before you sell to anyone else. If you want to sell, you send a written notice with the proposed price, buyer, and closing date. The company then has a set period, commonly 15 to 45 days, to buy the shares on those same terms. If it declines, you can proceed with the outside sale, but only on terms no more favorable to the buyer than what you offered the company.

Post-IPO Lock-Up

When a private company goes public, early shareholders are typically prohibited from selling for a period after the IPO, usually 90 to 180 days. This lock-up is a contractual term in the underwriting agreement, not an SEC-imposed requirement. Selling during it breaches your agreement with the underwriters.

Company Repurchase Rights

Some agreements let the company buy back your shares if you leave, including vested shares. The repurchase price varies. Some companies pay fair market value based on the most recent 409A valuation. Others use a formula-based price, such as book value, that may be lower than fair market value. Read the repurchase provisions before assuming vested shares are yours to keep indefinitely.

Dilution: What Happens to Your Percentage Over Time

Your ownership percentage shrinks as the company issues new shares to raise money, hire employees, or convert debt into stock. That’s dilution. It doesn’t necessarily mean your shares lose value; a funding round at a higher valuation increases the dollar value of your stake even as your percentage drops. But it does reduce your proportional ownership, voting power, and claim on future proceeds.

Investors in preferred stock rounds often negotiate anti-dilution protections that adjust their ownership if the company later raises at a lower valuation, known as a down round. These protections, typically weighted-average adjustments, give investors additional shares to offset the lost value, which further dilutes founders and employees who don’t have similar protections. Knowing how dilution works before you accept a grant sets realistic expectations about what your stake will look like at a sale or IPO.

Whichever route you take, keep copies of your signed agreements, any 83(b) election filing with proof of mailing, exercise confirmations, and correspondence about your grant. Those documents are your proof of ownership and your basis for calculating tax when you sell.

1
Globalfy. Articles of Incorporation Filing: What It Is and How to Do It
2
SEC.gov. Founder Stock Purchase Agreement
3
Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services
4
Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
5
IRS.gov. Form 15620 Section 83(b) Election
6
Office of the Law Revision Counsel. 26 U.S. Code 422 – Incentive Stock Options
7
U.S. Securities and Exchange Commission. Rule 701 – Exempt Offerings Pursuant to Compensatory Arrangements
8
Carta. Post-Termination Exercise Period (PTEP)
9
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
10
U.S. Securities and Exchange Commission. Accredited Investors
11
eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
12
U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
13
U.S. Securities and Exchange Commission. Assessing Accredited Investors Under Regulation D
14
FINRA. 2090 Know Your Customer