Why Equity Compensation Can Make or Break a Deal
When you’re gearing up for a funding round, there’s a lot at stake. Investors are scrutinizing every line item, every agreement, every assumption. And one area that can make or break a deal is equity compensation.
For many tech startups, equity is more than just a way to pay early employees. It’s a growth lever, a negotiation tool, and a signal to investors that your house is in order. Done well, it shows you’re strategic and disciplined. Done poorly, it can create delays, reduce valuations, or even scare investors away.
At Shay CPA, we’ve seen founders come to us in panic because an oversight in their option plan or a missed valuation update nearly derailed their fundraising. The good news is, these mistakes are preventable. Let’s walk through the most common ones and how to avoid them.
Mistake #1: Failing to Update 409A Valuations
What Is a 409A Valuation and Why It Matters
A 409A valuation determines the fair market value (FMV) of your company’s common stock, which sets the strike price for stock options.
The Risks of Skipping Updates
If your valuation is outdated, you expose yourself to:
- Legal liability – The IRS requires options to be issued at or above FMV.
- Employee tax exposure – Undervalued options may trigger extra taxes under Section 409A.
How Often Should Startups Update Their 409A?
At a minimum, every 12 months. But in reality, you need an update whenever you experience a “material event” – a funding round, revenue spike, or business model change. Skipping updates is one of the fastest ways to raise investor red flags.
Mistake #2: Overcomplicating Stock Option Plans
Common Pitfalls in Startup Option Plans
- Too many share classes – Creates unnecessary complexity.
- Unclear vesting terms – Confuses employees and undermines trust.
Impact on Employee Morale and Investor Confidence
Overcomplication doesn’t impress investors, it scares them. And if employees don’t understand their equity, they won’t value it. Clean, transparent structures build confidence across the board.
Mistake #3: Not Accounting for Tax Implications
The AMT Trap with Incentive Stock Options (ISOs)
Employees exercising ISOs can trigger the Alternative Minimum Tax (AMT). Without proper planning, this leads to unexpected, outsized tax bills.
Withholding Requirements for Restricted Stock Units (RSUs)
RSUs are taxable as ordinary income when they vest. Without proper withholding systems, employees may owe large tax bills with no cash on hand and your company could face compliance problems.
Why Taxes Should Be Part of Equity Strategy
These aren’t minor details. They directly impact whether employees view equity as a reward or a liability and investors will notice if tax risks are being ignored.
Mistake #4: Ignoring International Employees
The Risks of One-Size-Fits-All Equity Plans
Remote and distributed teams are the norm, but many startups issue equity as if everyone were U.S.-based. That’s a mistake.
Global Compliance Pitfalls
- Some countries tax equity at grant, not exercise.
- Others require special filings to avoid penalties.
- What’s tax-advantaged in the U.S. may not translate abroad.
Tailoring Equity for Distributed Teams
The fix isn’t avoiding equity, it’s customizing plans for each jurisdiction. This requires coordination between your legal, HR, and accounting advisors. Using platforms like Carta and Pulley can certainly help here.
Preparing Your Cap Table for Investor Due Diligence
Why Investors Care About Equity Documentation
When investors dig in, they want clarity. They’ll look at your cap table, option agreements, and employee records closely.
Common Investor Red Flags
- Disorganized cap tables
- Missing or inconsistent agreements
- Unexercised or expired options poorly tracked
How to Organize Equity Before Fundraising
Clean cap tables, consistent agreements, and updated valuations help your company move smoothly through diligence and prevent delays in closing.
Building an Equity Strategy That Scales
Why Proactive Equity Planning Saves Time and Money
Equity compensation is not a “set it and forget it” exercise. It must evolve with your business and funding stages.
How Shay CPA Helps Tech Startups Navigate Equity
We’ve guided countless founders through structuring equity, updating 409As, managing tax issues, and preparing for diligence. Our goal is to build equity plans that scale with your business and inspire confidence from both employees and investors.
Review Your Equity Plan Before Your Next Round
Don’t let equity compensation mistakes stand between you and your next funding milestone. Proactive planning reduces risk, keeps investors confident, and ensures your employees see equity as a true benefit.
Reach out to our team at Shay CPA, and let’s review your equity strategy together – before you go to market.
Disclaimer:
The content provided on this blog is for general informational purposes only and does not constitute professional accounting, tax, or legal advice. Reading or accessing this material does not create a CPA-client relationship, nor should it be construed as a substitute for individualized guidance from a qualified professional. While we strive for accuracy, Shay CPA PC makes no warranties—express or implied—about the completeness, reliability, or timeliness of the information, and we expressly disclaim liability for any errors or omissions. You should not act or refrain from acting based on any blog content without seeking the advice of a qualified CPA or other professional who can address your specific circumstances. Links to external resources are provided for convenience only and do not imply endorsement. Shay CPA PC is under no obligation to update this content and disclaims responsibility for decisions made in reliance on it.