Equity compensation: RSUs, options, and ESPPs

Equity compensation is everywhere in tech, startups, and increasingly in mainstream industries. It's also widely misunderstood — leading to overconfident bets on employers and giant tax surprises. Here's the landscape.

Restricted Stock Units (RSUs)

RSUs are a promise from your employer to give you shares on a schedule. The most common vesting schedule is 4 years with a 1-year cliff (25% vest at year 1, then monthly or quarterly after). When shares vest, they're taxed as ordinary income on their market value that day. You owe taxes whether you hold the shares or sell them.

Stock options (ISOs and NQSOs)

Options give you the right — but not the obligation — to buy stock at a fixed 'strike' price. They're most common at startups. If the company succeeds, the difference between the strike and the market price is your upside. If the company fails, the options are worth zero. The tax treatment varies dramatically based on type (ISO vs. NQSO), whether you exercise early, and how long you hold.

Employee Stock Purchase Plans (ESPPs)

An ESPP lets you buy employer stock at a discount (usually 5–15%) via payroll deductions. Many plans include a 'lookback' feature where the price is set based on the lower of two reference dates, which can push the effective discount to 20%+. If your plan has these features, it's usually an unambiguously good deal — contribute the max, sell immediately, pocket the discount as near-guaranteed return.

The concentration risk

The biggest equity-comp mistake is ending up with your job AND most of your net worth tied to one company. When Enron collapsed, employees lost both. A simple rule: no single stock should exceed 10–15% of your investment portfolio. If you have more than that in your employer, trim until you don't.