Equity Compensation Types
Equity compensation offers wealth-building potential beyond your salary. These ownership stakes align your success with company growth, providing unique tax advantages and potentially higher returns than traditional investments—especially in high-growth companies.
Types of Equity Compensation: A Quick Guide
Restricted Stock Units (RSUs)
- Shares of company stock granted to employees that vest over time
- No purchase required—you simply receive the shares when they vest
- Common at larger firms and well-funded startups valued over $1 billion
- A portion of shares is typically withheld for taxes at vesting
- Most straightforward form of equity compensation
Incentive Stock Options (ISOs)
- Rights to purchase company shares at a fixed price (strike price)
- Must be exercised to convert into actual shares
- Have specific holding requirements for tax advantages
- Must be exercised within 3 months post-termination
Non-Qualified Stock Options (NSOs)
- Similar to ISOs but available to contractors, consultants, and board members
- Must be exercised to convert into actual shares
- More flexible than ISOs but without the preferential tax treatment
Employee Stock Purchase Plans (ESPPs)
- Programs allowing employees to buy company stock at a discount
- Funded through regular payroll deductions (post-tax)
- Typically offer 10-15% discounts on market price
- Often include a "look-back" provision using the lower price between offering start and purchase date
- Annual contribution limit of $25,000
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