Should I Buy My Equity? A Complete Guide for Venture-Backed Employees

You've been granted stock options at your venture-backed startup. The company is growing, the future looks bright, and you're wondering: should I exercise my options and buy my equity? It's one of the most important financial decisions you'll make as a startup employee, yet it's often shrouded in complexity and uncertainty and emotion.

You try to get information from the company.

CFO: - “No comment, I can't give you financial advice and the company's financials are confidential.”

Founder - “Listen, I think the company is great, we are in a good place, but I don’t know your specific financial situation. “

Work Bestie - “just don't ever leave. I don't want you to ever leave so stay and you don't have to buy your options yet.”

The simple answer is: it depends. The complete answer requires understanding of a lot of different elements, many of which you may never have perfect information for. Strike prices, liquidity preferences, tax implications, and your personal financial situation. This guide will walk you through every consideration to help you make an informed decision.

Understanding Your Equity: The Fundamentals

As an employee of a venture-backed company, you likely have stock options – Or RSU’s. Stock Options are the right to purchase shares at a predetermined price (your strike price) within a specific timeframe.

Your equity grant is the place this is usually laid out for you and typically includes:

• Number of shares: How many shares you can purchase
• ExerciseStrike price: The price per share you'll pay to exercise
• Vesting schedule: When you earn the right to exercise (usually 25% after one year, then monthly).
• Expiration date: When your options expire (typically 10 years from grant, but often shorter if you leave. Note this is really important: if you leave the company you then usually only have 90 days to buy the option and turn it into stock or it expires. The 10 year period is assuming you are still working for the company a decade later.)

Before diving into whether you should buy your equity, let's establish what you actually own. It is always worth starting to try and understand what a share is worth. You can try and aks the company but you can also jump onto our equity wealth valuation tool on our site here: https://aption.com/wealth/

The key insight many employees miss: having options doesn't mean you own equity. You only own equity after you exercise your options and purchase the shares. Once you purchase the shares it is similar to if you own equity of a company on the stock market, the only difference is you can’t sell them without the companies permission and there isn’t an open market for you to go to for pricing or liquidity. Any rights you have are usually handed over to the board by proxy. If you were granted your options under Section 102 in Israel, they are usually held by a trustee (think IBI, AltShare, Shareworks, etc..).

The Exercise Price: Your Starting Point

Your strike price is determined by the company and is usually listed in your option grant. It usually is designed to give a fair "fair market value" of the stock, when you join the company so that you are then rewarded for the increased value of the company during the time you worked there. It can be much lower than the preferred stock price investors pay especially if there is a round after you joined. Often at early stages the stock may even be further discounted below a recent investor round both as an incentive to employees and as it is common stock sits behind preferred stock in the liquidation waterfall – more on this critical point later. For many US employees or companies the fair market value of the company is determined by the 409A.

As you consider whether to exercise your options or not, it is worth trying to understand the current 409A price, or even get your hands on the 409A document.

🧨 Liquidity Preferences: The Hidden Catch in Startup Equity

Many startup employees assume that if the company is sold, their equity will automatically be worth a share of the exit price. But in venture-backed startups, liquidation preferences mean that investors get paid first—before any money goes to common shareholders (usually employees and founders). This can dramatically reduce the value of your stock in a low or moderate exit.

💡 Key Concept: What is a Liquidation Preference?

A 1x non-participating liquidation preference means investors get back what they invested—first—before common stockholders see anything. They don’t participate in the rest unless converting to common gives them more.

📉 Realistic Example

• Series B investors invested $50M at $10/share, valuing the company at $100M post-money.
• You joined after that round and were granted common stock options with a strike price of $2/share.
• Now the company is being acquired for $75M, below the last valuation.

What happens?

1. Investors come first: Series B investors get their $50M back due to the 1x liquidation preference.
2. What’s left? $75M - $50M = $25M remains for the remaining preferred shareholder (eg. Series A and Seed) common shareholders (employees + founders + early investors who may hold common).
3. How much do you get? If there are 10M total shares, and let’s say 2.5M are common and preferred A, that $25M gets split among common stockholders and preferred A holders. Your gain per share = $25M ÷ 2.5M = $10/share Subtract your $2 strike price, and your net gain is: → $8 per option (before taxes).

🔄 What if the exit was even lower?

If the company sold for $50M or less, the entire amount would go to preferred investors, and common stock (your options) would be worth $0.

Tax Implications:

Exercising equity in a venture-backed startup—whether you're an Israeli or American—can trigger significant tax implications that depend on the type of equity (e.g., options vs. RSUs), the stage of the company, and your personal tax residency. In the U.S., exercising incentive stock options (ISOs) may lead to alternative minimum tax (AMT), while non-qualified options are taxed as ordinary income. In Israel, exercising options under Section 102 may offer favorable tax treatment if structured correctly. In many cases, taxes can arise long before any actual cash is received—making it critical to understand the timing, valuation, and potential upside versus risk before making any moves. Consulting a cross-border tax advisor is often essential to avoid unintended consequences.

When Does Exercising Options Makes Sense

Exercising your stock options can make sense in several situations—but it depends on your risk tolerance, personal financial situation, and expectations for the company’s future. Here’s a breakdown of when it might make sense to exercise:

Early Exercise Benefits:

• Lock in financing demand now while it is available and the company may be seen as more attractive than it might be in the future
• Start long-term capital gains clock and minimize tax bill

Strong Company Performance:

• Consistent revenue growth
• Clear path to profitability
• Strong management team and board
• Favorable market conditions

Personal Financial Readiness:

• You can afford the exercise cost AND tax bill
• There is a large difference between your strike price and the “real” or fair market value of the shares.

When to Think Twice

Some red flags should make you pause:

Company Warning Signs and Personal Financial Constraints: For example:

Even when the math looks compelling—say you're paying $1 per share for equity that last priced at $20+—exercising your options isn’t always a no-brainer. If you're funding it yourself, you're locking up your own capital in a highly illiquid asset with no guaranteed path to liquidity and no control over when (or if) you can sell. Startups are inherently risky, and even by Series D, the odds of seeing a return are only around 40%. Moreover, exercising may leave you with an overconcentrated position that represents a significant portion of your net worth. That’s where tools like option financing and equity pooling come in—they can help you access the upside without taking on all the risk alone.

So What can I do to reduce the risk when buying my options?

• Use Option Financing

What is option financing and how does it work?

Option financing allows employees to exercise their stock options without using their own cash upfront. A financing company pays your exercise costs and taxes in exchange for a portion of your future equity value. This enables you to maintain larger equity positions without personal financial risk.

💡 How Else Can I Protect the Value of My Equity?

Equity in a startup can be a powerful asset—but also a concentrated, illiquid, and risky one. Here are several strategies to help protect and maximize its value:

• Diversification: Avoid having all your wealth tied to a single company. Tools like equity pooling (e.g., through Aption) allow you to share in the upside of multiple companies—spreading risk without giving up your own stake.
• Secondary Sales: If permitted, selling a portion of your vested equity can help you realize some value early—whether to fund your option exercise, reinvest, or simply de-risk your financial position.
• Option Financing: Specialized financing lets you exercise options without fronting the full cost, reducing your personal financial risk while still participating in future upside.

Each of these approaches carries trade-offs, so the right strategy depends on your personal goals, the company’s outlook, and the terms of your equity.

When should I consider secondary sales of my equity?

Secondary equity sales make sense when:

• You need liquidity for personal financial goals
• Your company equity represents >5-10%? of your net worth
• Secondary market offers attractive valuations
• You're leaving the company and facing option expiration

How do I evaluate my company's secondary market value?

Research secondary market valuations through:

• Secondary trading platforms: Hiive, Forge, EquityZen, etc.
• Recent transactions: Ask your company about recent secondary activity
• Comparable companies: Look at similar companies' secondary valuations
• Professional valuation: Ask us at Aption and we may be able to give an estimate.

Making Your Decision: A Framework

Here's a systematic approach to evaluate whether you should buy your equity:

Step 1: Assess Your Financial Situation

• Calculate total exercise costs including taxes
• Ensure you maintain adequate emergency savings
• Consider this investment's impact on your overall portfolio

Step 2: Evaluate Company Prospects

• Review recent financial performance and metrics
• Assess management team and board composition
• Consider market conditions and competitive landscape
• Understand liquidation preferences and equity structure
• Understand the current true fair market value of the equity, not just the last round value.

Step 3: Consider Alternative Strategies

• Partial exercise to reduce risk
• Option financing to maintain upside without personal capital
• Secondary sales to create liquidity
• Waiting for better information or market conditions
• The options for pooling the equity once purchased to give a high value diversified option.

Step 4: Model Different Scenarios

• Best case: What if the company succeeds beyond expectations?
• Base case: What if the company performs as expected?
• Worst case: What if your equity becomes worthless?

I would add an emotional aspect to this, you have worked for years at a company helping build it and there is something nice that if it does succeed you would like to see some reward for that hard work. I would always recommend keeping even a token amount for that success.

The Bottom Line

The decision to buy your equity isn't just about believing in your company – it's about making a smart financial decision that fits your personal situation. Many successful companies have made employees wealthy through equity participation, but many more have left employees with worthless options and unexpected tax bills.

Key takeaways:

• Only exercise options with money you can afford to lose
• Understand your company's liquidation preferences and equity structure
• Consider the tax implications carefully
• Don't let one equity position represent too large a portion of your net worth
• Seek professional advice for significant decisions

The most important thing is making an informed decision that aligns with your financial goals and risk tolerance. Whether you exercise your options or not, make sure you understand what you're signing up for.

Remember: the best equity decision is the one that helps you sleep well at night, regardless of what happens to your company's valuation.

This article is for educational purposes only and does not constitute financial, legal, or tax advice. Please consult with qualified professionals before making equity-related decisions.

Aption provides financing solutions and advisory services for employees of venture-backed companies. Learn more about our equity financing options at aption.com.