Equity compensation can represent a significant portion of your total compensation in tech—sometimes even exceeding your base salary. Yet many candidates accept offers without fully understanding what their equity is worth, how it works, or how to evaluate it properly.
This guide demystifies equity compensation, covering RSUs, stock options (ISOs and NSOs), vesting schedules, tax implications, and how to evaluate equity offers to make informed career decisions.
Understanding the Basics: Why Companies Offer Equity
Companies offer equity compensation for several strategic reasons:
- •Alignment: When you own part of the company, your interests align with shareholders—you benefit when the company succeeds
- •Retention: Vesting schedules incentivize you to stay long-term
- •Cash conservation: Especially for startups, equity allows competitive compensation without draining cash reserves
- •Upside potential: Equity can provide life-changing wealth if the company grows significantly
RSUs (Restricted Stock Units): The Standard at Public Companies
What are RSUs? RSUs are a promise from the company to give you shares of stock after you meet certain conditions (usually time-based vesting). You don't pay anything to receive them—they're granted to you.
How RSUs Work
1. Grant
You receive an offer stating you'll get X RSUs (or a dollar amount converted to RSUs at a specific price).
2. Vesting
Most common: 4-year vesting with 1-year cliff. This means 25% vests after 1 year, then the remaining 75% vests quarterly or monthly over the next 3 years.
3. Settlement
When RSUs vest, you receive actual shares (or cash equivalent). Taxes are withheld automatically (typically 22-37% federal, plus state).
4. Your Choice
After vesting, you can sell the shares immediately or hold them (subjecting you to stock price fluctuations).
RSU Example
Scenario: You're granted 1,000 RSUs at a company trading at $100/share
- • Total grant value: $100,000
- • After 1 year: 250 RSUs vest = 250 shares worth $25,000 (at $100/share)
- • Taxes withheld: ~$8,750 (35%), you receive ~190 shares
- • If stock rises to $150: Your 190 shares = $28,500
- • If stock drops to $50: Your 190 shares = $9,500
RSU Advantages
- ✓Guaranteed value (as long as stock price > $0)
- ✓No money required from you
- ✓Simple to understand
- ✓Automatic tax withholding
RSU Disadvantages
- ✗Taxed as ordinary income at vesting (higher rate than capital gains)
- ✗No control over timing of tax event
- ✗Value can decrease if stock price drops
Stock Options: ISOs and NSOs
What are Stock Options? Options give you the right (but not obligation) to purchase company stock at a predetermined price (strike price) within a certain timeframe. They're more common at startups and private companies.
Key Terms
Strike Price (Exercise Price)
The price you pay to buy the stock. Set at the fair market value when options are granted.
Exercise
The act of buying the stock at the strike price.
Spread
The difference between current stock price and strike price. This is your profit potential.
Expiration
Options typically expire 10 years from grant date, but most companies require exercise within 90 days of leaving.
ISO vs NSO: Critical Differences
ISOs (Incentive Stock Options)
- ✓Favorable tax treatment possible (long-term capital gains)
- ✓Only for employees
- ✗Subject to AMT (Alternative Minimum Tax)
- ✗Must hold 2 years from grant, 1 year from exercise
- ✗$100K annual exercise limit
NSOs (Non-Qualified Stock Options)
- ✓Can be granted to anyone (employees, contractors, advisors)
- ✓No AMT concerns
- ✓No exercise limits
- ✗Spread taxed as ordinary income at exercise
- ✗Less favorable tax treatment overall
Stock Options Example
Scenario: You're granted 10,000 stock options with a $10 strike price
- • After 1 year, 2,500 options vest
- • Company stock is now worth $50/share
- • To exercise: 2,500 × $10 = $25,000 (you pay this)
- • You receive stock worth: 2,500 × $50 = $125,000
- • Your profit (spread): $125,000 - $25,000 = $100,000
- • If ISOs and held properly: Taxed at ~20% capital gains = $20,000 tax
- • If NSOs: Taxed at ~35% ordinary income = $35,000 tax
Understanding Vesting Schedules
Vesting schedules determine when you actually own your equity. This is crucial for retention and planning.
Common Vesting Structures
4-Year with 1-Year Cliff (Standard)
Nothing vests for the first year. On your 1-year anniversary, 25% vests all at once. Then the remaining 75% vests monthly or quarterly over 3 years.
Example: 1,000 RSUs → 250 after year 1, then ~20.8/month for next 36 months
Monthly Vesting (No Cliff)
Equity vests in equal amounts each month from day one. More common at startups.
Back-Loaded Vesting
More equity vests in later years (e.g., 10%, 20%, 30%, 40%). Less common and less favorable for employees.
Red flag: This heavily favors the company for retention but may not be worth staying for.
Performance-Based Vesting
Vesting depends on hitting specific milestones or performance goals. Higher risk but potentially higher reward.
Pro Tip: Always clarify the exact vesting schedule in your offer. The difference between monthly and quarterly vesting can be significant if you leave mid-year.
Evaluating Equity Offers
Not all equity is created equal. Here's how to assess the real value of an equity offer:
For Public Companies
- 1.Calculate current value: Multiply number of RSUs by current stock price
- 2.Divide by vesting period: Annual equity value = Total value ÷ 4 years
- 3.Add to base salary: Total comp = Base + annual equity value + bonus
- 4.Compare to market: Check Levels.fyi for your role/level
- 5.Consider stock trajectory: Research analyst ratings and company growth prospects
For Private Companies/Startups
Much harder to value—equity might be worth millions or nothing. Ask these questions:
Company Stage & Valuation
- • What's the current company valuation (post-money)?
- • What funding stage? (Seed, Series A, B, C, etc.)
- • How much has been raised to date?
Equity Details
- • What percentage of the company do my shares represent?
- • How many shares outstanding?
- • What's the strike price (for options)?
- • What's the current 409A valuation?
Liquidity Path
- • What's the path to liquidity? (IPO timeline, acquisition potential)
- • Are there any secondary markets or tender offers?
- • What's the post-termination exercise window?
Reality Check for Startup Equity:
Most startup equity becomes worthless. Only value startup equity at 0-20% of its theoretical value when comparing offers. Higher cash salary is often the safer choice unless you're very early (employee #1-20) or deeply believe in the company's potential.
Tax Implications: What You Need to Know
Equity compensation has significant tax implications. Always consult a tax professional, but here are the basics:
RSU Taxation
- • Taxed as ordinary income when vested (based on stock's FMV)
- • Automatic withholding: ~22-37% federal + state
- • If you hold shares after vesting, future gains/losses are capital gains
- • Short-term capital gains (< 1 year hold): ordinary income rate
- • Long-term capital gains (1+ year hold): preferential 15-20% rate
ISO Taxation (If Held Properly)
- • No tax at exercise (but triggers AMT on the spread)
- • Must hold 2 years from grant, 1 year from exercise
- • When sold: entire gain taxed as long-term capital gains (~20%)
- • Disqualifying disposition (selling early): spread taxed as ordinary income
NSO Taxation
- • Spread at exercise taxed as ordinary income (~35-37%)
- • When sold: any additional gain taxed as capital gains
- • No AMT concerns
Tax Planning Tip: For ISOs, consider early exercise if available and you believe in the company. This starts your capital gains holding period early and minimizes AMT impact when the spread is small.
Common Equity Mistakes to Avoid
1. Not Understanding Your Equity Before Accepting
Ask all the questions before signing. Understand vesting, type of equity, and valuation.
2. Letting Options Expire
If you leave a company with vested options, you typically have only 90 days to exercise or lose them forever.
3. Over-Concentrating in Company Stock
Having too much wealth tied to your employer is risky. Consider diversifying by selling some vested equity.
4. Ignoring Tax Implications
Exercising options or selling stock can trigger massive tax bills. Plan ahead and consult professionals.
5. Valuing Startup Equity at Face Value
That $500K equity grant at a Series A startup is likely worth $0-$100K in reality. Be realistic.
Final Thoughts
Equity compensation can be incredibly valuable, but only if you understand it. Whether you're evaluating a new offer or managing existing equity, knowing the difference between RSUs and options, understanding tax implications, and realistically valuing startup equity are essential skills for tech professionals.
Remember: equity is part of your total compensation package, not a lottery ticket. Make decisions based on guaranteed compensation (cash) first, and treat equity as upside—especially at private companies.
Always ask questions, do your research, and consult with financial and tax professionals before making major equity decisions.
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Try SIA Free TodayFrequently Asked Questions
What's the difference between RSUs and stock options?
RSUs (Restricted Stock Units) are company shares granted to you that become yours after vesting—you don't pay to receive them. Stock options give you the right to buy shares at a set price (strike price) in the future. RSUs have guaranteed value (unless stock goes to $0), while options are only valuable if the stock price exceeds your strike price.
How do I know if my equity offer is good?
Compare the total compensation package (base + equity value) to market rates using sites like Levels.fyi. For public companies, calculate equity value using current stock price. For private companies, research the company's valuation, funding stage, and likelihood of liquidity event. Generally, equity should represent 10-30% of total comp at public companies, and potentially more at early-stage startups.
When should I exercise my stock options?
For ISOs, consider early exercise if you believe in the company and can afford the AMT implications—this starts your capital gains holding period. For NSOs, typically exercise only when selling or when the spread (current price - strike price) makes it worthwhile. Always consult a tax professional before exercising, as timing significantly impacts your tax bill.
What happens to my equity if I leave the company?
Vested RSUs are yours to keep. For stock options, you typically have 90 days to exercise vested options after leaving (some companies offer extended windows). Unvested equity is usually forfeited. This is why understanding your vesting schedule before accepting offers or leaving companies is crucial.
How are RSUs and stock options taxed?
RSUs are taxed as ordinary income when they vest based on the stock's fair market value. ISOs can receive favorable capital gains treatment if held properly, but trigger AMT. NSOs are taxed as ordinary income on the spread when exercised, plus capital gains on any additional appreciation when sold. Tax implications vary significantly, so consult a tax advisor.