For many people in tech, equity is one of the largest and least understood parts of their pay. An offer letter says "$200,000 in RSUs over four years," or "50,000 options," and it can be hard to know what that means, what it's worth, and what could go wrong.
This article explains the main types of equity in plain language, what to ask before accepting an offer or leaving a job, and the tax basics that most often catch people off guard. It's general education, not tax or investment advice, and the details of your own grant always come from your plan documents.
Equity is a promise with conditions. Read the conditions.
The main types of equity
| Type | What it is | When it's usually taxed | Common at |
|---|---|---|---|
| RSUs (restricted stock units) | A promise of company shares, delivered as they vest | As ordinary income when they vest and are delivered | Public companies and late-stage private companies |
| Stock options (ISOs or NSOs) | The right to buy shares at a fixed price (the strike price) | NSOs: ordinary income at exercise, on the spread. ISOs: generally no regular income tax at exercise, but may trigger AMT | Startups and growth-stage companies |
| ESPP (employee stock purchase plan) | A program to buy company stock, often at a discount, through payroll | Depends on the plan and how long you hold the shares | Many public companies |
Each of these follows its own rules, and your plan documents decide the specifics.
Vesting: when it becomes yours
Most equity vests over time. A common schedule is four years with a one-year "cliff": nothing vests in the first year, then a portion vests at the one-year mark, and the rest vests monthly or quarterly. Schedules vary, so check yours.
- Unvested equity is generally forfeited if you leave before it vests.
- Vested RSUs are shares you own.
- Vested options are a right to buy, often with a deadline to exercise after you leave.
What it's really worth
The number in an offer letter is not money in your account. Four questions shape its real value.
- Will you stay long enough to vest it? Value only what you're likely to vest.
- What will the shares be worth? Public company prices change daily. Private company values are estimates.
- When can you sell? Public shares can usually be sold after vesting, subject to trading windows. Private shares often can't be sold until an acquisition, an IPO, or a company-approved sale.
- What will you owe in taxes? Taxes reduce what you keep, and with options they can come due before you can sell.
A practical approach many people use: count RSUs at public companies at a discount to today's price for planning purposes, and treat private company equity as a potential upside rather than part of the income you need.
RSU taxes: the surprise at vesting
RSUs are generally taxed as ordinary income when they vest and are delivered, based on their value at that time, and they appear on your W-2. Employers usually withhold taxes, often by keeping back some shares. The amount withheld isn't always enough to cover what you'll owe, especially at higher incomes, so it's worth checking with a tax professional before you file.
After vesting, your cost basis is generally the value on the vesting date. If you hold the shares and they rise or fall, that change is a capital gain or loss when you sell. Shares held more than a year generally qualify for long-term capital gains rates.
Stock option taxes: know which kind you have
- NSOs (nonqualified stock options). When you exercise, the difference between the share value and your strike price is generally taxed as ordinary income.
- ISOs (incentive stock options). When you exercise, there's generally no regular income tax, but the exercise can trigger the alternative minimum tax (AMT). If you hold the shares at least two years from the grant date and more than one year from exercise, the gain when you sell is generally taxed as a long-term capital gain. Selling earlier changes the treatment.
Options can create a tax bill before you have any way to sell the shares, particularly at private companies. This is the area where professional advice is most worth paying for.
Before you leave a job
Leaving, whether by choice or a layoff, can trigger deadlines that are easy to miss.
Your option exercise window. Many plans give you a limited period after leaving, often 90 days, to exercise vested options before they expire. Some companies offer longer windows.
ISO status. Under federal tax rules, ISOs generally keep their tax treatment only if exercised within three months of leaving employment (longer for disability). After that, they're generally treated as NSOs.
Unvested equity. Check exactly what you'll forfeit, and whether any vesting is close enough to factor into your timing or a severance conversation.
"Before my last day, could you confirm in writing how many of my options and RSUs are vested, the exercise deadline for my vested options, and whether any of my options are ISOs?"
Questions to ask about an equity offer
- What type of equity is it: RSUs, ISOs, or NSOs?
- What's the vesting schedule, and is there a cliff?
- For options: what's the strike price, and how long is the exercise window after leaving?
- For a private company: what was the most recent valuation, how many shares are outstanding, and what percentage of the company does my grant represent?
- Are there refresh grants, and how are they decided?
- What happens to unvested equity if the company is acquired?
The offer negotiation guide and compensation calculator can help you compare offers on total compensation.
A worked example
Simone is choosing between two offers. Offer A has a $170,000 base salary and $160,000 in RSUs at a public company, vesting over four years: about $40,000 a year at today's price. Offer B has a $160,000 base salary and options at a private startup that a recruiter describes as "potentially worth $400,000."
For planning, Simone values Offer A's RSUs at a 20% discount, about $32,000 a year, giving roughly $202,000 a year. She treats Offer B's options as upside only, so she plans around $160,000. She asks Offer B for the strike price, the latest valuation, and the exercise window, and learns the window is 90 days, which means she'd need cash to exercise if she ever left.
The startup may still be the right choice for her. Now she's choosing with clear eyes.
Simone is an illustration, and the figures are hypothetical. The 20% discount is one planning assumption, not a rule.
How you'll know you've got it handled
- You can say how much of your equity is vested and when the next vesting date is.
- You know which type of options you have, and your exercise window if you left.
- You plan your budget around salary, and treat equity as a bonus or long-term goal.
- You've talked with a tax professional before exercising options or selling a large amount.
Concentration risk
When much of your net worth sits in your employer's stock, your paycheck and your savings depend on the same company. Many people choose to diversify over time as shares vest. What's right for you depends on your goals, taxes, and situation, which is a good conversation for a financial advisor.
Equity can change your financial life, or turn out to be worth far less than the offer letter suggests. Knowing which, as early as possible, is the point.
The offer negotiation guide
If you're weighing an offer with equity, this walks through how to evaluate and negotiate the full package.
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