Beyond salary and bonuses, many companies — especially in tech — offer equity compensation: a stake in the company itself. This can represent a significant portion of your total pay, but it comes with rules about when you actually receive it, how it's taxed, and what risks you're taking on.

Restricted Stock Units (RSUs)

Restricted stock units are a promise from your employer: "We'll give you shares of company stock, but not all at once." The shares are released to you on a vesting schedule. You don't pay anything to receive RSUs — they're granted as part of your compensation package.

How RSUs work

  1. Grant — Your employer grants you a number of RSUs (e.g., 1,000 units). No shares change hands yet.
  2. Vest — Over time, portions of the grant vest on a schedule. When shares vest, they become yours.
  3. Tax — At each vest, the fair market value of the shares is added to your W-2 as ordinary income.
  4. Sell or hold — Once vested, you can sell immediately or hold. Any gain after vest is a capital gain.

Dana's RSU grant

Dana receives 800 RSUs at a company where shares trade at $125. The grant is worth $100,000 at the time. Dana's schedule is a 4-year equal vest: 200 shares per year. After year 1, if the stock is $140, that first tranche is worth $28,000 — and it's taxable as ordinary income on Dana's W-2. The employer typically withholds taxes by automatically selling some of the shares (called "sell-to-cover").

Common vesting schedules

  • Equal (25% per year) — The most common. 25% vests each anniversary.
  • 1-year cliff, then equal — Nothing for the first year, then 25% at the cliff, and equal installments after.
  • Backloaded (5/15/40/40) — Amazon's model. Most value vests in years 3 and 4, creating a strong retention incentive.

Myth: RSU grants lock in a dollar value

When your offer says "$200,000 in RSUs," that's calculated using the stock price at grant. If the stock drops 30% by the time your shares vest, those RSUs deliver $140,000 — not $200,000. The reverse is also true: if the stock rises, you get more. RSU value fluctuates with the stock price.

Try it

Enter your RSU grant in the RSU Calculator to see the tax impact at each vesting tranche and how stock price changes affect your net value.

Stock Options

A stock option gives you the right to buy shares at a fixed price — the strike price (also called the exercise price) — regardless of what the stock trades for later. If the stock price rises above your strike, the difference is your profit. If it stays below, the options are "underwater" and have no value.

ISO vs NSO

There are two types of stock options, and the tax treatment is different for each:

  • Incentive stock options (ISOs) — Available only to employees. No regular income tax at exercise, but the spread may trigger the alternative minimum tax (AMT). If you hold the shares long enough (1 year from exercise, 2 years from grant), the gain qualifies for the lower long-term capital gains rate.
  • Non-qualified stock options (NSOs) — Available to employees, contractors, and board members. The spread at exercise is immediately taxed as ordinary income (W-2 wages), including Social Security and Medicare taxes.

Kai's startup options

Kai joins a startup and receives 20,000 ISOs with a $5 strike price. After 3 years, the company goes public at $40 per share. Kai's options are worth $35 × 20,000 = $700,000 in spread value. But exercising all at once could trigger six figures in AMT. Kai's tax advisor recommends exercising in batches across multiple tax years to stay below AMT thresholds.

When options have no value

If the stock price is below your strike price, your options are "underwater" — exercising would mean paying more than market price for the shares. Underwater options aren't worthless forever (the stock might recover), but they have no current exercisable value. Options also have an expiration date, typically 10 years from grant. If you leave the company, the exercise window usually shrinks to 90 days for ISOs.

Try it

Use the Stock Options Calculator to compare ISO vs NSO outcomes and model what happens at different stock prices.

Employee Stock Purchase Plans (ESPPs)

An ESPP lets you buy company stock at a discount — typically 15% below market price — through automatic payroll deductions. It's one of the most reliable returns available to employees because you're buying at a guaranteed discount.

How an ESPP works

  1. Enroll — Choose a contribution rate (up to 15% of salary, capped at $25,000 in purchases per year by the IRS).
  2. Accumulate — During an offering period (usually 6 months), payroll deductions build up.
  3. Purchase — At the end of the period, the accumulated funds buy shares at a 15% discount.
  4. Sell or hold — You can sell immediately (disqualifying disposition) or hold for favorable tax treatment (qualifying disposition).

The lookback provision

Many ESPPs set the purchase price based on the lower of the stock price at the offering start or at the purchase date, then apply the 15% discount. If the stock was $100 at the start and $130 at purchase, you buy at $85 (15% off $100) — a 53% effective discount. Plans with a lookback are significantly more valuable than plans without.

Jordan's ESPP math

Jordan earns $150,000 and contributes 10% to the ESPP ($7,500 per 6-month period). The stock was $100 at offering start and $120 at purchase. With lookback and 15% discount, Jordan buys at $85 per share — getting about 88 shares worth $10,560 for $7,500 contributed. That's a $3,060 gain, or a 41% return in 6 months — before taxes.

Try it

Plug your plan details into the ESPP Calculator to see your expected return with discount and lookback, and compare qualifying vs disqualifying disposition tax outcomes.

Concentration Risk

Equity compensation creates a specific danger: too much of your financial life tied to one company. Your salary, your career growth, and now your investment portfolio are all linked to the same employer. If the company struggles, you face a triple hit: stock price decline, potential layoffs, and reduced future equity grants.

Myth: Holding company stock shows loyalty

Selling vested shares isn't disloyal — it's diversification. You're already heavily exposed to your employer through your salary and career. Most financial advisors recommend keeping any single stock below 10–15% of your total portfolio. Selling at vest and investing in a diversified index fund is the standard advice for managing concentration risk.

🤔

What percentage of your total portfolio (including retirement accounts) is in your employer's stock? If it's above 15%, what's your plan to diversify over time?

Key takeaways

  • RSUs deliver shares for free on a vesting schedule. They're taxed as ordinary income at vest.
  • Stock options let you buy shares at a fixed price. ISOs may qualify for capital gains rates; NSOs are taxed as ordinary income at exercise.
  • ESPPs let you buy stock at a 15% discount. Plans with a lookback provision can have even larger effective discounts.
  • All three types create concentration risk — diversifying out of company stock is standard financial advice.