Equity Compensation

Non-cash pay that gives employees an ownership stake in the company — most commonly stock options, RSUs, or ESPP shares.

Equity compensation refers to any form of non-cash pay that represents an ownership interest in the company. It's used to align employee incentives with company performance, retain talent over multi-year vesting periods, and allow companies — especially early-stage startups — to conserve cash while offering competitive total compensation.

The most common forms are stock options (ISOs and NSOs), restricted stock units (RSUs), and employee stock purchase plans (ESPPs). Each has different tax treatment, vesting mechanics, and risk profiles. The value of equity at private companies is speculative until a liquidity event — an IPO or acquisition — occurs.

Types of Equity Compensation

  • Incentive Stock Options (ISOs) — employee-only; favorable tax treatment if holding period requirements are met; subject to AMT.
  • Non-Qualified Stock Options (NSOs) — can be granted to employees, contractors, and board members; taxed as ordinary income at exercise.
  • Restricted Stock Units (RSUs) — grants of actual shares that vest over time; taxed as ordinary income when they vest; most common at public companies.
  • Employee Stock Purchase Plans (ESPPs) — allow employees to buy company stock at a discount, often 10–15%.
  • Restricted Stock Awards (RSAs) — actual shares granted upfront with vesting conditions; common at very early-stage startups.

Key Terms to Understand

  • Strike price / exercise price — the price at which you can buy shares under a stock option grant.
  • 409A valuation — independent appraisal of a private company's fair market value, used to set option strike prices.
  • Vesting schedule — the timeline over which you earn your equity.
  • Cliff — the minimum tenure required before any equity vests.
  • Liquidity event — IPO, acquisition, or tender offer that converts equity to cash.
  • Post-termination exercise window — how long after leaving you have to exercise vested options (often 90 days).

Evaluating Equity in an Offer

Percentage ownership is more meaningful than share count at a private company. Ask for your grant as a percentage of fully diluted shares outstanding. Then consider the 409A valuation, recent funding round valuation, and the company's stage. Always model multiple scenarios: what is this worth if the company sells for 2× its current valuation? 10×? What if it fails?

Example

A startup engineer receives 80,000 stock options vesting over four years with a one-year cliff, at a $0.50 strike price. If the company's shares are worth $10 at exit, the equity is worth $760,000 gross — but $0 if the company fails.