Equity Compensation: Stock Options, RSUs, and What They're Worth

Direct Answer

Equity compensation is ownership in a company given to employees as part of their pay package. Instead of just receiving a salary, you get stock options, RSUs, or other equity instruments that represent a stake in the company’s future value. This is especially common in tech startups and growth companies where cash may be limited but future potential is high. If the company grows and becomes more valuable, your equity becomes worth more. However, equity is not guaranteed money—its value depends entirely on the company’s performance and can be worth millions or nothing at all.

Definition

Equity compensation is a non-cash form of payment that grants employees ownership interest in their employer. This compensation comes in various forms—most commonly stock options or restricted stock units (RSUs)—and gives employees the opportunity to benefit financially from the company’s growth and success. Unlike salary, which is guaranteed and immediate, equity value is realized over time through vesting schedules and depends on the company’s valuation and performance.

Key Facts

Vesting schedules determine when you actually own your equity, typically over 3-4 years with a one-year cliff (meaning you get nothing if you leave before one year)
Equity value is speculative until the company goes public (IPO) or gets acquired—private company stock is often illiquid and difficult to sell
Tax implications vary dramatically by equity type and country, with some scenarios creating tax bills before you can sell the stock
Early-stage startup equity carries higher risk but potentially higher rewards compared to public company RSUs which have clear, immediate value
Strike price and valuation matter more than the number of shares—always ask what percentage of the company your equity represents

Types of Equity

Incentive Stock Options (ISOs)

ISOs are stock options available only to employees (not contractors) and offer favorable tax treatment in the US. You pay nothing when granted, and if held correctly, gains can be taxed as long-term capital gains rather than ordinary income. However, they can trigger Alternative Minimum Tax (AMT) when exercised, creating a tax bill even before you sell. ISOs have a $100,000 annual vesting limit and must be exercised within 90 days of leaving the company.

Non-Qualified Stock Options (NSOs)

NSOs can be granted to employees, contractors, advisors, or board members. They’re taxed as ordinary income on the difference between strike price and fair market value when exercised, then capital gains on any subsequent appreciation. NSOs are more flexible than ISOs but lack the preferential tax treatment. They’re common in situations where ISOs don’t apply or when equity grants exceed ISO limits.

Restricted Stock Units (RSUs)

RSUs are promises to give you actual stock once it vests. Common at public companies and late-stage startups, RSUs are simpler than options—you don’t pay anything to receive them. When they vest, you’re taxed on their full value as ordinary income, and the company typically withholds shares to cover taxes. RSUs at public companies have immediate, liquid value, making them more like cash bonuses than traditional startup equity.

Phantom Stock and Stock Appreciation Rights (SARs)

These equity alternatives don’t give actual ownership but pay cash equivalent to stock value appreciation. Phantom stock mimics real shares and pays out based on company value at specified events (like acquisition). SARs pay the increase in stock value between grant and exercise. Both avoid dilution and ownership complexity while still tying compensation to company performance, making them popular for international employees or complex corporate structures.

Evaluating Equity Offers

When evaluating an equity offer, focus on ownership percentage, not share count. A million shares of a billion-share company (0.1%) is far less valuable than 10,000 shares of a million-share company (1%). Ask about the company’s total shares outstanding (fully diluted) and current valuation (409A valuation for private companies).

Understand the vesting schedule and cliff period. Standard is 4-year vesting with a 1-year cliff, meaning 25% vests after year one, then monthly or quarterly thereafter. Some companies offer acceleration clauses that speed up vesting in acquisition scenarios.

Consider liquidity timeline. Public company RSUs can be sold immediately upon vesting. Private company equity might be locked up for years with no guaranteed exit. Some late-stage startups offer secondary sales or tender offers, but these are not guaranteed. Early-stage equity is essentially a lottery ticket—high potential, high risk.

Calculate the exercise cost for options. If you have 10,000 options with a $5 strike price, you’ll need $50,000 to exercise them, plus potential tax obligations. Some companies offer early exercise programs or cashless exercise options, but these come with their own complexities.

Research the company’s trajectory and funding history. Companies with strong revenue growth, path to profitability, and reputable investors have better odds of successful exits. Use sites like Crunchbase or PitchBook to research funding rounds and valuations.

International Considerations

Equity compensation becomes significantly more complex for international remote workers. Each country has different tax treatment of stock options and RSUs, and some create tax obligations in both the country where you work and where the company is based.

Many countries tax equity at grant, vest, or exercise—not just at sale like in the US. This can create “phantom income” situations where you owe taxes on equity you cannot sell. Some countries don’t recognize the distinction between ISOs and NSOs, eliminating potential tax benefits.

Currency fluctuations add another layer of complexity. If you’re paid in a local currency but your equity is denominated in USD or another currency, exchange rate changes can significantly impact value and tax calculations.

Some countries restrict or prohibit certain types of equity compensation entirely. Companies may need to create special equity programs, use phantom stock alternatives, or provide cash equivalents for international employees. Always consult with a tax professional in your country before accepting or exercising equity compensation.

Double taxation treaties may provide relief, but navigating them requires expertise. Some remote workers end up paying taxes on the same equity in multiple jurisdictions, significantly reducing actual take-home value.

FAQ

How much equity should I expect at a startup vs. an established company?

Early-stage startups (pre-Series A) might offer 0.5-2% for senior roles, 0.1-0.5% for mid-level, but with high risk. Series A-C companies typically offer 0.1-1% for senior roles. Public companies offer RSUs with clear dollar values, typically representing 10-50% of total compensation depending on level and company. Focus on the total compensation package value rather than equity percentage alone.

What happens to my equity if I leave the company?

Unvested equity is typically forfeited when you leave. Vested stock options usually must be exercised within 90 days (for ISOs) or you lose them—this can create a difficult decision if exercise costs are high. Some companies offer extended exercise windows (up to 10 years). RSUs that have vested are yours to keep. Always review your stock option agreement and consider the exercise decision carefully before leaving.

Should I exercise my options early?

Early exercise can reduce taxes by starting the capital gains clock and avoiding higher future valuations, but it requires upfront cash and carries significant risk if the company fails. For ISOs, early exercise can help avoid AMT issues. However, you’re betting on the company with real money you could lose entirely. Only consider early exercise with money you can afford to lose completely, and consult a tax professional first.

How do I know if my equity is actually valuable?

For public companies, check the stock price—it’s that simple. For private companies, look at revenue growth, path to profitability, burn rate, funding runway, and investor quality. Ask about the most recent 409A valuation and compare it to the strike price. Research comparable company exits in the same space. Ultimately, private company equity is speculative—assume it’s worth zero when evaluating offers and treat any actual value as a bonus.

Last Updated: 2026-01-20