Equity Compensation Explained: RSUs, Stock Options, and What Tech Company Compensation Really Means
Equity compensation — receiving company stock or the right to purchase it — is a central feature of compensation at technology companies, startups, and many financial services firms. It's also the compensation component that candidates least understand and most frequently fail to negotiate effectively. Here is the honest guide to what equity compensation actually means and how to evaluate it.
RSUs (Restricted Stock Units): The Most Common Tech Equity
RSUs are grants of company stock that vest over time — typically a 4-year schedule with a 1-year cliff. If you're granted $400,000 in RSUs vesting over 4 years, you receive $100,000 worth of stock each year (valued at grant date price, though actual value depends on stock price at vesting). The 1-year cliff means: if you leave before 12 months, you receive no RSUs. After 12 months, 25% vests at once. After that, most schedules vest monthly or quarterly. RSUs from public companies can be sold after vesting — they're real money. RSUs from private companies are subject to lock-up periods and may have no liquidity until the company IPOs or is acquired.
Stock Options: Rights to Purchase at a Fixed Price
Stock options give you the right to buy company stock at the "strike price" or "exercise price" set at the time of the grant. If you're granted options at a $10 strike price and the stock is later worth $30, you can exercise (buy) at $10 and immediately have $20 per share in gain. If the stock never exceeds $10, your options are worthless ("underwater"). ISOs (Incentive Stock Options) have favorable tax treatment for qualifying employees; NSOs (Non-Qualified Stock Options) are taxed as ordinary income on exercise. The tax implications of option exercise are complex and important — exercising options can trigger significant tax liability even if you can't immediately sell the shares (especially for ISOs at private companies).
How to Evaluate an Equity Offer
For public company RSUs: calculate the annual vesting value at current stock price and add to base salary. For startup equity: valuation is speculative — the "paper value" of options or RSUs at the company's current valuation may not reflect what they're ultimately worth. Questions to ask for startup equity: What is the current valuation? What is the total funding raised (dilution affects your percentage)? What's the company's preferred liquidation preference (this determines how much goes to preferred investors before common stock holders in an exit)? What is the strike price for options relative to the 409A fair market value (if the strike price is at or near the 409A, you have potential upside; if it's significantly below, you may have tax complications on exercise).
Honest Bottom Line: RSUs vest over time (typically 4-year schedule, 1-year cliff) and are worth current stock price at vesting — public company RSUs are real money; private company RSUs have no liquidity until IPO or acquisition. Options give rights to buy at a fixed strike price — only valuable if the stock price exceeds the strike price at exercise. ISOs have favorable tax treatment; NSOs are taxed as ordinary income on exercise; exercising options at private companies can create tax liability without liquidity. For startup equity, ask about current valuation, total funding (dilution), liquidation preference, and strike price relative to 409A — these determine whether the equity is actually valuable.