Equity Compensation: The Stuff Nobody Explained in Your Offer Letter
June 2026 · 12 min read
Here's a story I've seen play out dozens of times.
Someone gets a job at a big tech company. The offer letter has a base salary, a signing bonus, and a section labeled "Equity" with a bunch of acronyms. They nod along, sign it, and start working.
Fast forward four years. Their initial RSU grant just finished vesting. They look at their brokerage account and realize — between the stock appreciation and the refresher grants that stacked up — their equity is worth more than their base salary. And they never really understood how it worked.
Or worse: they exercised a pile of startup ISOs, triggered a six-figure AMT bill, and now owe the IRS money on stock they can't even sell.
This guide exists so you end up in the first group, not the second.
The four things in your offer letter
If you work at a public tech company, your equity comp is probably two or three of these. If you're at a startup, it's mostly #3.
| Type | What you actually get | Who gets these |
|---|---|---|
| RSUs | Free shares. They vest over time, then they're yours. Like a cash bonus that happens to be denominated in stock. | Nearly everyone at FAANG and public tech companies. This is the standard now. |
| ESPP | The right to buy company stock at a 15% discount through payroll deductions. Some plans have a lookback feature that makes this wildly profitable. | Available to most employees at public companies. You have to opt in — it's not automatic. |
| ISOs | The right to buy stock at a fixed price later. If the stock goes up a lot, you make a lot. But there's a nasty tax trap called AMT. | Startup employees, pre-IPO companies. Some public companies still grant them too. |
| NSOs | Like ISOs but worse tax treatment. The spread gets taxed as ordinary income the moment you exercise. | Contractors, advisors, sometimes later-stage startup employees. |
ESPP: the closest thing to guaranteed free money
If your company offers a 15% discount ESPP with no mandatory holding period, there is exactly one correct move: enroll and max it out, then sell immediately.
Here's the math that makes this a no-brainer:
Company buys $10,000 worth of stock with your $8,500.
You sell immediately. Your $8,500 turned into $10,000.
That's a 17.6% return in 6 months, guaranteed (minus taxes on the $1,500).
Annualized: roughly 35%. No stock risk. Just free money.
If your plan has a lookback provision — which buys at the lower of the start or end price of the offering period — the returns can be absurd. I've seen 6-month ESPP periods return 80%+ when the stock was ripping. That's not an exaggeration.
Some people hold ESPP shares for the qualifying disposition (lower tax rate). I don't recommend this for most people. The tax savings maybe net you $3-5 per share. The stock risk over the 18-month holding period could wipe out 10x that. The juice isn't worth the squeeze unless your company is a cash-printing machine and you've already got a diversified portfolio.
RSUs: sell at vest, or don't
RSUs are simple. They vest, the company withholds some shares for taxes (usually at 22%), and the remainder lands in your brokerage account. Now you have a choice.
I tell almost everyone to sell at vest. Here's why:
- Your salary is already tied to this company. If things go south, you could lose your job and watch your stock tank simultaneously. That's not diversification — that's doubling down on a single point of failure.
- Selling immediately means your cost basis = vest price = virtually zero capital gain. Tax headache: none.
- Take the cash and buy VTI. Or pay off your mortgage. Or fund your kid's 529. The point is: you're probably over-concentrated without realizing it.
If you're at a company you truly believe in and you already have meaningful assets outside of company stock, holding 30-50% is fine. But I've never met anyone who regretted selling RSUs and diversifying. I have met people who held everything through a 60% drawdown. Different conversation.
Stock options at startups: the thing nobody tells you
Your 20,000 ISOs with a $2 strike price feel like a lottery ticket. And they might be. But know this:
Common stock is not preferred stock. The investors who put $50M into your Series C have liquidation preferences — sometimes 2x or 3x. That means in any exit under $150M, they get paid first. Your common stock might be worth zero even if the company sells for a decent number. Ask your CFO what the liquidation preference stack looks like.
AMT can bankrupt you. If you exercise ISOs when the spread between your strike price and the 409A valuation is large, you could trigger Alternative Minimum Tax. You'd owe real money to the IRS on paper gains — for shares that aren't liquid. This has literally bankrupted people. Don't exercise a large ISO position without calculating the AMT impact first.
The 83(b) election is the closest thing to a tax cheat code. If your company lets you early-exercise (buy shares before they vest) and file an 83(b) within 30 days, you can lock in zero tax on future appreciation. The catch: you're paying real money for shares that could go to zero. Only do this if you can afford to lose the exercise cost.
One rule to remember
Whenever you have an equity comp decision — sell? hold? exercise? — ask one question:
"If I had this amount in cash right now, would I use it to buy my company's stock?"
If the answer is no, sell. You're just anchoring on the form it came in. Equity is cash that happens to be wearing a different outfit.