Equity & Total Compensation
Equity is where the gap between "what your offer says" and "what you actually take home" becomes enormous. A 200K in your bank account in year one or $350K, depending entirely on how the equity is structured. Understanding equity is not optional — at most tech companies, it is the largest single component of compensation.
Stock Options vs. RSUs
There are two primary forms of equity compensation in tech. They work differently, have different risk profiles, and require different evaluation approaches.
Restricted Stock Units (RSUs)
RSUs are a promise to give you actual shares of company stock on a vesting schedule. When they vest, you receive shares (or the cash equivalent). There is no purchase required.
How RSUs work:
1. Company grants you 1,000 RSUs worth $200 each ($200K total)
2. RSUs vest over 4 years on a schedule
3. When shares vest, you receive them (or cash equivalent)
4. You owe income tax on the value at vesting
5. You can sell immediately or hold
RSU value at vesting = number of shares x stock price at vesting
If the stock goes up 50%:
Your $200K grant is now worth $300K over 4 years
If the stock goes down 30%:
Your $200K grant is now worth $140K over 4 years
RSUs are never worth $0 (unless the company goes to $0).
This is the critical difference from options.
Stock Options
Stock options give you the right to buy shares at a set price (the strike price). You profit only if the stock price rises above the strike price.
How stock options work:
1. Company grants you 10,000 options at $10 strike price
2. Options vest over 4 years
3. After vesting, you can "exercise" (buy shares at $10 each)
4. If stock is at $30, you pay $10 and get a share worth $30
- Your profit per share: $20
- Total cost to exercise all: $100,000
5. You owe taxes on the spread ($20 x 10,000 = $200,000 gain)
If the stock goes to $50:
Profit per share: $40
Total profit: $400,000 (minus exercise cost and taxes)
If the stock stays at $10 or drops below:
Your options are "underwater" and worth $0
You spent 4 years vesting worthless paper
Options can be worth a fortune or worth nothing.
Vesting Schedules
Vesting is the process by which your equity becomes yours over time. It exists to retain employees — if you leave early, you forfeit unvested equity.
The Standard 4-Year Schedule
Most common vesting schedule:
4-year total vest with 1-year cliff
Month 0-11: Nothing vests (the cliff period)
Month 12: 25% vests all at once
Month 13-48: Remaining 75% vests monthly or quarterly
Example: 1,000 RSUs on standard schedule
Month 12: 250 shares vest
Month 13: ~21 shares vest
Month 14: ~21 shares vest
...
Month 48: Final shares vest, grant is fully vested
Company-Specific Vesting
Not all companies use the standard schedule. The differences can dramatically affect your year-by-year compensation.
Amazon vesting:
Year 1: 5%
Year 2: 15%
Year 3: 40%
Year 4: 40%
(Heavily back-loaded; compensated with sign-on bonus in years 1-2)
Google/Meta/Apple vesting:
Year 1: 25%
Year 2: 25%
Year 3: 25%
Year 4: 25%
(Standard even split)
Some startups:
Year 1: 25% (cliff)
Then monthly over remaining 3 years
(Standard, but options instead of RSUs)
Amazon's back-loaded schedule means your year-1 cash compensation looks very different from year-3. The sign-on bonus bridges the gap, but it disappears after year 2. Many Amazon employees leave at the 2-year mark when their effective compensation drops before the large year-3 vest kicks in.
The Cliff
The one-year cliff means you get nothing if you leave before 12 months. This is a retention mechanism.
Cliff implications:
- Leave at month 11: you get $0 in equity
- Leave at month 12: you get 25% of your grant
- This creates a strong incentive to stay at least one year
- For options, you typically have 90 days after leaving to
exercise vested options (or you lose them)
- Some companies offer extended exercise windows (1-10 years)
Valuing Equity at Different Stages
The way you evaluate equity depends entirely on the company stage.
Public Companies
Public company equity valuation:
RSU grant: 1,000 shares
Current stock price: $150
Nominal value: $150,000
Adjustments to consider:
- Stock could go up or down
- For large stable companies, use current price as estimate
- For volatile companies, discount 10-20%
- Vesting schedule affects when you actually receive value
- Tax on vesting reduces effective value by 30-40%
Rough after-tax value over 4 years:
$150,000 x 0.65 (after tax) = ~$97,500
Per year: ~$24,375
Public RSUs are relatively safe. The stock has a known price,
you can sell immediately on vest, and the value is predictable
within a reasonable range.
Late-Stage Private Companies (Series C+)
Late-stage private equity valuation:
RSU or option grant based on 409A valuation or preferred price
Key questions:
- What is the latest 409A valuation?
- What was the last funding round price per share?
- What is the fully diluted share count?
- When is the expected IPO or liquidity event?
- What are the liquidation preferences?
Example:
10,000 options at $5 strike
Last round: $15 per share
Paper value: ($15 - $5) x 10,000 = $100,000
Reality discount factors:
- No liquidity (you cannot sell until IPO or acquisition)
- Liquidation preferences may eat your value in a down exit
- Dilution from future rounds
- The company might never go public
- Discount 50-70% from paper value for planning purposes
Early-Stage Startups (Seed to Series B)
Early-stage equity valuation:
Honest answer: assume it is worth $0 for financial planning
Why:
- 75% of venture-backed startups fail
- Of the 25% that survive, most return modest amounts
- Only 1-2% become the outlier successes
- You cannot sell, you cannot predict the outcome
- The 409A valuation is a tax fiction, not a market price
How to think about it:
- It is a lottery ticket with better-than-lottery odds
- Do not take a role with below-market cash compensation
just because the equity "could be worth millions"
- If the equity does pay off, treat it as a bonus
- Make sure you can live comfortably on just the cash components
Refresher Grants
Initial grants vest over 4 years. What happens in year 5? Without refresher grants, your compensation drops dramatically.
Without refreshers:
Year 1-4: $180K base + $75K/year equity = $255K total
Year 5: $180K base + $0 equity = $180K total
(You just took a $75K pay cut by staying)
With refreshers:
Companies grant additional RSUs each year (refreshers)
The goal is to keep your total comp roughly constant
Year 1: Initial grant vests $75K
Year 2: Initial $75K + Refresher 1 starts vesting
Year 3: Initial $75K + Refresher 1 + Refresher 2
Year 4: All layers overlap, total equity is maintained
Good companies give refreshers that maintain or grow comp.
Bad companies give minimal refreshers and rely on new hires
staying for the initial grant only.
Ask about refresher policies during negotiation. Key questions: what is the typical refresher size relative to the initial grant, are they performance-based or standard, and what percentage of employees receive them. Companies that cannot clearly explain their refresher policy are a red flag.
Sign-On Bonuses
Sign-on bonuses are one-time cash payments that compensate for unvested equity you forfeit, bridge back-loaded vesting schedules, or close the gap with competing offers. Most sign-on bonuses have a clawback clause: leave within 1-2 years and you repay some or all of it. Read the clawback terms carefully — some require repayment of the gross amount before taxes, meaning you repay more than you actually received.
The Gap Between Total Comp & Cash in Your Pocket
Offer letters show gross compensation. Your bank account receives net compensation. The gap is significant.
Example total comp: $350,000
Base salary: $185,000
Bonus (15%): $27,750
RSU vesting: $75,000
Sign-on: $50,000
Benefits value: $12,250
What you actually take home (approximate):
Base after tax: $120,000
Bonus after tax: $18,000
RSU after tax: $48,750 (taxed at vesting, often at supplemental rate)
Sign-on after tax: $32,500
Benefits: used, not cashed
Approximate take-home: $219,250
Effective tax rate: ~37%
The $350K offer puts roughly $220K in your pocket.
Still excellent, but very different from $350K.
Tax Considerations
Key tax facts for equity:
RSUs: taxed as ordinary income at vesting
- Your company withholds taxes, usually at 22% federal supplemental rate
- This is often insufficient; you may owe more at tax time
- State taxes add 0-13% depending on location
ISOs: no tax at exercise (but AMT may apply)
- Taxed as capital gains when you sell (if holding period met)
- AMT trap: you may owe taxes on paper gains you cannot sell
NSOs: taxed as ordinary income at exercise
- Spread between strike and market price is taxable
- Must have cash to exercise AND pay taxes
Sign-on bonus: taxed as ordinary income
- Usually withheld at supplemental rate (22% federal)
Common Pitfalls
- Treating equity at face value — a 200K in your pocket; account for taxes, vesting, and stock price risk
- Ignoring vesting schedules — back-loaded schedules like Amazon's dramatically change year-by-year compensation
- Valuing startup options at current valuation — most startup equity will be worth zero; plan your finances on cash compensation alone
- Not asking about refresher grants — your compensation in year 5 depends entirely on the refresher policy
- Forgetting the 90-day exercise window — if you leave a startup, you typically have 90 days to buy your vested options or lose them
- Comparing gross total comp across offers — the tax treatment of different equity structures means equal gross offers can have very different net values
- Not understanding liquidation preferences — in a startup acquisition, preferred shareholders (investors) get paid before common shareholders (you)
Key Takeaways
- RSUs are simpler and safer than stock options; options can be worth nothing if the stock price does not exceed the strike price
- The standard 4-year vesting schedule with a 1-year cliff is the norm, but company-specific variations significantly affect year-by-year pay
- Value public company equity at current stock price minus taxes; discount late-stage private equity 50-70%; treat early-stage equity as worth zero for planning
- Refresher grants determine whether your compensation holds steady after year 4 or drops sharply
- Sign-on bonuses bridge gaps but come with clawback clauses — read the terms
- The gap between offer-letter total comp and cash in your pocket is typically 30-40% due to taxes
- Always evaluate equity by asking: what is it worth after tax, when can I actually access it, and what is the realistic downside