Equity Compensation 101: RSUs, Options and What They Are Actually Worth

Equity is the part of an offer people understand least and value most. A grant "worth $80,000" sounds like $80,000. Usually it is not, or not yet, or not to you. This article explains the two common forms, how vesting works, how to value equity honestly when comparing offers, and the one risk nobody mentions in the offer letter. It does not tell you whether to hold or sell; that depends on your situation and, often, on a tax professional.

Restricted stock units

A restricted stock unit is a promise to give you a share of the company on a future date, provided you are still employed. You pay nothing for it. When a unit vests, you receive the share, and its market value on that day is taxed as ordinary income, like salary. Many employers withhold shares to cover the tax.

For example, a grant of 1,000 units when the share price is $50 has a headline value of $50,000. If 250 units vest a year later and the price is $60, you receive shares worth $15,000 and pay income tax on $15,000. If the price is $40, you receive $10,000 of shares and pay tax on $10,000. The value moves with the price, but a vested unit is always worth something as long as the company has a share price.

Stock options

An option is the right to buy a share at a fixed price, the strike price, for a set period. It is worth only the difference between the market price and the strike price, and only if the market price is higher.

For example, 2,000 options with a $20 strike are worth $10,000 if the shares trade at $25: a $5 spread on each of 2,000 shares. If the shares trade at $18, the options are worth nothing, because you would be paying $20 for something worth $18. Options can expire worthless, and exercising them usually requires cash and creates a tax event. At a private company, there may be no market to sell into for years.

Two rules of thumb follow. Options carry more upside than restricted stock and much more risk of being worth zero. And a private-company option grant is a hope with a number attached, not compensation you can plan around.

Vesting, cliffs and refresh grants

Equity arrives over time. A common schedule is four years with a one-year cliff: nothing vests in the first year, a quarter vests at the anniversary, and the rest vests monthly or quarterly over the following three years. Leave before the cliff and you leave with nothing.

Many companies make additional grants, often called refresh grants, to people they want to keep. Each has its own schedule. After a few years an employee can have several overlapping grants, which is why the "unvested value" line on a total rewards statement can be large while the amount you could actually walk away with is small.

Always ask for the vesting schedule, the cliff, and what happens to unvested equity if you leave or are laid off. The answers change the value more than the headline number does.

Valuing equity in an offer

A method that keeps you honest:

1. Take the grant's current value. For restricted stock, units times today's price. For public-company options, the current spread times the number of options. For private-company options, use a heavy discount or zero for planning.
2. Divide by the vesting years. A $60,000 grant vesting over four years is $15,000 a year of expected value.
3. Discount for uncertainty: the chance you leave before the cliff, the chance the price falls, the chance a private company never lists.
4. Compare that annual figure to the other offer's equity line, and put both into the total compensation comparison rather than looking at equity alone.

An offer with $30,000 more in headline equity and $8,000 less in base can easily be the weaker offer on this method, because base is certain and compounds while equity is neither.

The risk nobody mentions: concentration

Equity ties your investments to the company that already pays your salary. If it struggles, your income and your portfolio fall at the same time. As grants vest, it is common for a large share of someone's net worth to end up in one employer's stock without anyone deciding that on purpose.

There is no universal right percentage, and the decision involves taxes, your view of the company and your other assets. But the question deserves a deliberate answer once a year: how much of what I own depends on one employer, and am I comfortable with that? People with significant vested equity often benefit from a tax professional's help with the timing of any sale.

Key takeaways

• Restricted stock is taxed as income when it vests and is worth the share price on that day; options are worth only the spread over the strike price and can be worth nothing.
• Vesting schedules, cliffs and leaver terms change the real value more than the headline number.
• Value equity as annual expected value: grant value divided by vesting years, discounted for risk, then compared inside total compensation.
• Private-company options are a hope; plan as if they were zero.
• Once equity vests, concentration in one employer is a risk to review deliberately, ideally with tax help.

What to do next

• Roadmap stage: EARN for the offer, OWN for what to do with vested shares.
• Enter each offer's equity as annual expected value in the Job Offer Comparison Worksheet.
• Read "What Your Total Rewards Statement Is Really Telling You" to see where unvested equity sits in the employer's view of your pay.

Educational content. Not personalized financial, investment, tax or legal advice.