Equity Compensation

Main types of equity compensation

• Restricted stock units (RSUs): a promise to give the employee shares once vesting conditions are met. They have value as long as the share price is above zero. Common at public companies and later-stage private companies.
• Stock options: the right to buy shares at a fixed exercise (strike) price. They are only worth something if the share price rises above that price. US options are either incentive stock options (ISOs), which can get favorable tax treatment if holding rules are met, or non-qualified stock options (NSOs).
• Restricted stock awards: actual shares granted upfront, subject to forfeiture until they vest.
• Employee stock purchase plans (ESPPs): employees buy company stock through payroll, often at a discount of up to 15% under a qualified Section 423 plan.
• Performance shares: units that vest only if company targets are met, typical for executives.

These are the most common forms of long-term incentives, alongside multi-year cash plans.

Vesting and what happens at exit

Most grants follow a vesting schedule. A four-year schedule with a one-year cliff is common: nothing vests in the first year, 25% vests at the one-year anniversary, then the rest monthly or quarterly. Employees who leave forfeit unvested equity. Vested options usually must be exercised within a set window after leaving, often 90 days, or they expire. Candidates leaving a job often ask about this when weighing an offer.

Explaining an equity offer to a candidate

Recruiters lose candidates when they present equity as a big headline number nobody can interpret. A clearer way: state the grant, the vesting schedule and an annualized value.

Example: an offer includes 2,000 RSUs vesting over four years, and the stock trades at $45. That is $90,000 at today's price, or about $22,500 a year. Present it as part of total compensation: $110,000 base, a 10% target bonus and about $22,500 a year in RSUs, for an annual target of roughly $143,500. Say plainly that the value moves with the share price.

For options at a private company, avoid quoting a dollar value based on a hoped-for exit. Give the number of options, the strike price, the latest 409A valuation and the total shares outstanding so the candidate can work out their ownership percentage.

Common mistakes

• Comparing an RSU grant and an option grant by share count alone. 1,000 RSUs and 1,000 options at the same share price are worth very different amounts.
• Ignoring tax timing. RSUs are generally taxed as ordinary income when they vest; option taxes depend on type and timing. Point candidates to a tax advisor rather than giving advice.
• Leaving out refresh grants. Without annual refreshers, pay drops sharply once the initial grant vests, which drives attrition in year four and often forces a costly retention bonus.
• Promising specific outcomes. Equity values can fall; communications should say so.