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.

The three instruments side by side

A worked example: reading a real offer

Suppose a public-company offer includes $120,000 of RSUs vesting over four years with a one-year cliff. That's $30,000 a year of extra compensation — but not exactly. The grant is denominated in shares at today's price, so if the stock drops 30% before your first vest, your first year of equity is worth $21,000; if it doubles, $60,000. Treat the grant as roughly its face value discounted 10% for volatility when comparing offers, and never plan your budget around the optimistic case. When shares vest, the company withholds some for taxes (often at a flat 22% federal rate that may under-withhold for high earners — a common April surprise worth checking with a calculator in December).

Common equity mistakes, ranked by expense

• Exercising ISOs without modeling AMT. Exercising a large ISO grant at a high paper spread can trigger a five- or six-figure Alternative Minimum Tax bill on gains you haven't sold. Model it (or pay a CPA a few hundred dollars) before exercising, never after.
• Holding vested RSUs out of loyalty or inertia. Every vested share you keep is an active decision to buy your employer's stock with that day's paycheck. Most people would never do that with cash — don't do it with shares.
• Letting options expire in the 90-day post-departure window. People forfeit real money because exercising required cash they didn't have ready. Know your window and your exercise cost before you resign.
• Ignoring the ESPP entirely because it feels complicated. It's often the highest risk-adjusted return available to you anywhere.
• Valuing startup options at face value when comparing offers. Apply a probability haircut — most startups exit below their paper valuations or not at all.

1. 1
   Inventory what you hold

   List every grant: type, share count, strike price, vesting schedule, and vested/unvested split. Most people can't answer these from memory, and every decision depends on them.

2. 2
   Set a standing sell policy

   Decide once — for example 'sell all RSUs at vest, sell ESPP at purchase' — and automate it. A policy made calmly beats a decision made watching the ticker.

3. 3
   Check your concentration quarterly

   Employer stock above 10–15% of your portfolio means trimming, regardless of how promising the company feels. Your salary is already a giant bet on this company.

4. 4
   Get tax help before big moves

   Before exercising options, leaving a company with equity, or selling large appreciated positions, a one-hour session with an equity-savvy CPA routinely saves multiples of its cost.

The bottom line

Equity compensation rewards the boring virtues: read the grant documents, know your vesting dates, sell RSUs as they vest, max a good ESPP, model option exercises before signing anything, and keep employer stock below 15% of your portfolio no matter how bright the future looks from inside the building. The employees who do well with equity are rarely the ones who predicted their company's stock price — they're the ones who treated shares like salary, diversified on schedule, and let three decades of ordinary compounding do the extraordinary work. Paper wealth becomes real wealth through process, not conviction.

If you take one action from this article, make it this: open your equity portal today and write down what you hold, what has vested, and when the next tranche lands. Most equity mistakes begin with simply not knowing — and the fix costs ten minutes.