How to Evaluate Equity Compensation: RSUs, Options, and What They're Really Worth

Evaluating equity compensation means converting an illiquid, uncertain promise into a comparable dollar value so you can make a rational trade-off against cash. The five steps are:

1. Identify the equity type: RSUs (taxed at vest), ISOs (favorable tax treatment), NQSOs (ordinary income on exercise), or LTIP (performance-based)
2. Calculate the current fair market value of the grant
3. Apply the vesting schedule to determine when you actually own each tranche
4. Estimate the post-tax value using your marginal rate (RSUs are ordinary income at vest)
5. Compare the risk-adjusted equity value to equivalent cash compensation

How to evaluate equity compensation

The core challenge with equity is that the number in an offer letter is a gross pre-tax grant value, not a take-home number, and it assumes the stock stays exactly where it is today. To evaluate it properly, work through: grant value at current stock price, then vesting timeline, then post-tax proceeds, then a liquidity or risk discount if the company is private.

1. Convert shares to dollars at the current stock price (or 409A valuation for private companies)
2. Divide by the vesting period to get an annual economic value
3. Multiply by (1 − your marginal tax rate) to get the post-tax annual value
4. Apply a liquidity discount (0% for public RSUs, 30–80% for pre-IPO grants)
5. Compare to the cash offer's post-tax annual value

The Four Types of Equity — and How Each Is Taxed

The practical translation: Most tech employees with RSUs at a public company are in the simplest case — taxed as ordinary income when shares vest, same as a cash bonus. ISOs at a startup are the most complex and valuable if the company exits, but carry total loss risk. NQSOs sit in the middle: more flexibility than RSUs (you choose when to exercise), but require upfront capital and careful tax planning.

RSUs — The Most Common Case

A grant of 1,000 RSUs at a $50 stock price equals a $50,000 grant value. But you do not own those shares yet — they vest over a schedule, typically 4 years with a 1-year cliff. The diagram above shows what happens to that $50,000 RSU grant compared to a $50,000 cash bonus across three stock scenarios. At flat stock, both are equal in gross value — but the RSU is spread across four years while the cash arrives immediately.

The 1-year cliff: You receive zero shares if you leave before 12 months. At 12 months, 25% vest (250 shares in a 1,000-share grant). The remaining 750 shares vest monthly or quarterly over the following 36 months. Most competitive offers use exactly this structure — a cliff longer than 12 months is a red flag.

What you actually net on a $50,000 RSU grant (flat stock):

• Year 1 tranche: $12,500 gross (250 shares at $50)
• Federal withholding at 22%: −$2,750
• State income tax (~5% average): −$625
• FICA (Social Security + Medicare, ~7.65%): −$956
• Approximate net year 1: ~$8,169 in shares (before any sale)

Important: your employer withholds tax by selling shares on your behalf (called sell-to-cover). You receive only the after-withholding shares. If withholding is insufficient — because the flat 22% federal rate is below your actual marginal rate — you will owe the balance at tax time.

Hold vs sell decision: Unless you have strong conviction about your company's near-term stock performance, financial planners generally recommend selling RSUs at vest and diversifying. RSUs already represent concentrated risk — you work there AND own the stock. Holding concentrates the bet further. The one exception: shares held 12+ months after the vest date qualify for long-term capital gains rates (0–20%) on any price appreciation above the vest-date price, which can justify holding if you have conviction and can absorb the concentration risk.

How to Calculate the Real Value of an Equity Offer

Step-by-step walkthrough for a job offer that includes RSUs:

Step 1 — Get the current stock price and grant size. Offer: "200,000 RSUs over 4 years." Stock at $25. Grant value = $5,000,000. Annual value = $1,250,000. Monthly value = ~$104,000. That is the gross number before any adjustments.

Step 2 — Apply the vesting schedule. Most offers: 25% cliff at 12 months, then monthly or quarterly vesting. If you leave at month 11, you receive $0. If you stay 2 years: 50% = $2,500,000 gross. Vesting risk is real — model the value at 1, 2, 3, and 4 years based on your actual probability of staying.

Step 3 — Tax the vested amount. At 37% federal (highest bracket) plus ~10% state: effective ~47% tax on vest. $1,250,000 gross year 1 = approximately $662,500 net. At 32% federal + 5% state: ~$787,500 net. Know your bracket before modeling.

Step 4 — Apply a liquidity discount. Public company RSUs: 0% discount (you can sell on the day of vest). Private company RSUs: 30–80% discount depending on exit likelihood, timeline to liquidity, and preferred stock overhang. A $1M private company RSU grant at a Series B startup might be worth $200,000–$700,000 in risk-adjusted expected value, depending on the company's trajectory.

Step 5 — Compare to the cash equivalent. If the equity offer nets $662,500 per year post-tax (at flat stock) and the all-cash competing offer is $600,000 per year post-tax, equity wins — assuming the stock stays flat. If the stock drops 40%, the RSUs net approximately $398,000 — cash wins by $202,000. Build a three-scenario model (bull/flat/bear) before negotiating.

Stock Options (NQSOs and ISOs) — What's Different

Options give you the right to buy shares at a fixed "strike price" set at grant. The spread is the difference between the current stock price and your strike price — that is your gain. Options are fundamentally different from RSUs: they require active action (exercise), they expire, and they can become worthless.

NQSO example:

• Grant: 10,000 options at $10 strike (current price at grant date)
• Current stock price 5 years later: $35
• Spread: $25 × 10,000 = $250,000 ordinary income at exercise
• Tax (32% federal bracket): $80,000
• Net: $170,000 — plus you now own shares that may continue to appreciate

ISO advantage: If you hold ISO shares for 2 years from grant date AND 1 year from exercise date, the gain qualifies for long-term capital gains treatment at 0–20% rather than ordinary income rates. Same $250,000 gain at a 20% long-term capital gains rate = $50,000 tax versus $80,000 — a $30,000 saving. The catch: the ISO exercise spread triggers Alternative Minimum Tax (AMT) in the year of exercise. Consult a tax advisor before exercising a large ISO position.

Critical difference from RSUs: Options expire — typically 10 years from grant, or 90 days after leaving the company. RSUs do not require action; they vest automatically and shares are delivered to you. Options require you to actively exercise, fund the share purchase out of pocket, and manage the timing. Leaving a company with unvested options means losing them. Leaving with vested options means deciding within 90 days whether to pay the exercise cost and the tax — or let them expire worthless.

Evaluating Startup Equity — the Hard Version

Pre-IPO or pre-acquisition equity requires additional analysis beyond stock price scenarios. Four things to model:

1. Liquidation preference. If the company has multiple rounds of preferred stock with 1x–2x liquidation preferences, common stockholders (employees) may receive $0 even in a moderate acquisition. A company acquired for $100M that has $80M in preferred liquidation preferences leaves only $20M for common — spread across the entire option pool. Request the cap table or 409A valuation document and ask specifically about the preferred liquidation stack.
2. Strike price vs 409A value. ISOs must be granted at the current 409A fair market value. Options granted early — when the 409A is low — carry high intrinsic value if the company grows. Options granted near a recent funding round carry a strike close to the current 409A, meaning little immediate value and significant risk of being underwater if the stock declines.
3. Exit probability. Most VC-backed startups do not achieve a liquidity event that returns capital above the preferred liquidation stack to common shareholders. Empirically, fewer than 20% of Series A companies generate meaningful returns for common stockholders. Weigh that probability honestly when modeling the grant's expected value.
4. Timeline and liquidity discount. Startup equity is typically illiquid for 7–10 years. A dollar received in 10 years is worth less than a dollar today due to both time value and opportunity cost. Applying a 30–50% discount rate to time and liquidity risk is standard when comparing startup equity to a public company cash offer.

Red Flags in Equity Offers

• Cliff longer than 12 months. Non-standard. Most competitive offers use a 12-month cliff. An 18- or 24-month cliff dramatically increases the risk you leave with nothing.
• No acceleration on acquisition. Double-trigger acceleration — unvested shares vest if you are acquired AND your role is eliminated — is standard at top-tier companies. Single-trigger (vest on acquisition alone) is rare but favorable. No acceleration clause leaves you dependent on the acquirer's goodwill.
• Post-termination exercise window of 90 days. This is the industry default, but it forces departing employees to make an expensive tax decision under time pressure. Some companies now offer 5-year or lifetime post-termination exercise windows for ISOs — this is a legitimate negotiating point that costs the employer nothing upfront.
• Strike price at or near 409A value with no clear path to exit. Options at a company where no IPO or acquisition is visible in the next 3–5 years have a high probability of expiring worthless. If the strike is close to the current 409A, the option has no intrinsic value today and requires the company to grow significantly before it pays off.

Key Takeaways

• RSUs are the simplest equity type — taxed as ordinary income at vest, the same mechanism as a cash bonus, with no action required on your part.
• A $50,000 RSU grant at a flat stock price nets approximately $34,000–$38,500 after federal, state, and FICA withholding — model the post-tax number, not the grant headline.
• Private company equity requires a 30–80% liquidity discount — the grant value in the offer letter is not the expected value; the risk-adjusted value is far lower.
• Sell RSUs at vest unless you have a specific investment thesis for your company's stock — concentration risk is real when both your salary and your portfolio depend on the same company's performance.
• Negotiate for double-trigger acceleration and an extended post-termination exercise window — both are often grantable without cash cost to the employer, and both provide meaningful protection if your situation changes.

Compare Your Equity vs Cash Offer

Frequently Asked Questions

Are RSUs better than stock options?

RSUs are lower risk and simpler. They have value as long as the stock price is above zero — options only have value if the stock price exceeds your strike price. RSUs are preferred by most employees at established public companies because the vesting event delivers shares of known value. You do not need to pay anything, make a timing decision, or worry about expiration. Options are more valuable if the company grows dramatically from a low valuation, which is why they are common at early-stage startups where the potential upside is high but the current valuation is low. For a public company with moderate growth expectations, RSUs are almost always the better employee choice — more predictable, simpler to understand, and taxed at a known point.

Do I have to sell RSUs when they vest?

No — you can hold shares indefinitely after vesting. But most financial planners recommend selling at vest and diversifying for a straightforward reason: you already have concentrated exposure to your employer because your salary depends on them. Holding additional RSU shares doubles the concentration. If your company's stock drops 40%, your financial position is hit twice — by the share value decline and by the employment risk that a struggling company creates. The exception: if you have strong conviction about the stock's near-term appreciation and can absorb the concentration risk, holding shares for 12+ months from the vest date converts future appreciation into long-term capital gains taxed at 0–20% rather than your ordinary income rate — a meaningful tax saving on any upside above the vest-date price.

How are RSUs taxed when they vest?

RSUs are taxed as ordinary income at vest — the same as your salary. Your company withholds a flat 22% federal (or 37% for supplemental wages above $1 million in a year) plus state income tax where applicable, plus FICA. The fair market value of shares on the vest date is added to your W-2 income. If you sell immediately after vesting, there is minimal additional capital gain (usually a few dollars based on same-day price movement). If you hold and the stock rises, you owe capital gains tax — short-term at ordinary income rates if sold within 12 months of vest, long-term at 0–20% if sold after 12 months — on the appreciation from the vest-date price to the eventual sale price. The flat 22% withholding often under-withholds for employees in the 32% or 37% brackets, so model a tax bill at April due if your marginal rate exceeds the withholding rate.

What is a 409A valuation and why does it matter for options?

A 409A valuation is an independent appraisal of a private company's common stock fair market value, required by IRS regulations. The IRS mandates that stock options must be granted at or above this appraised value to avoid immediate ordinary income taxation of the entire grant under IRC Section 409A — a severe penalty. For employees, the 409A matters because it sets your strike price. Options granted at a very low 409A — early in a company's life when the valuation is minimal — carry high intrinsic value if the company grows, because your strike is far below the eventual exit price. Options granted near a recent funding round carry a 409A close to that round's implied common value, meaning little current intrinsic value. When evaluating an option grant, ask when the 409A was last updated and how close it is to the most recent preferred stock round price — a large gap between preferred price and 409A value indicates significant dilution between common and preferred shareholders.

How do I negotiate equity compensation?

Four levers are available in most equity negotiations, and all four can be adjusted without the employer spending additional cash today. First, grant size: expressed as shares or dollar value, this is the most visible lever — push for a higher share count or a dollar-value refresh commitment. Second, vesting schedule: a standard 4-year vesting with a 12-month cliff is the baseline; any cliff longer than 12 months should be negotiated down. Third, acceleration provisions: push explicitly for double-trigger acceleration so that unvested shares vest if the company is acquired and your role is eliminated — employers often add this without objection because single-trigger is rarely needed. Fourth, post-termination exercise window: for ISOs especially, negotiate for a 5-year or lifetime exercise window rather than the standard 90 days, so that departure does not force an immediate tax decision. These provisions cost the employer nothing upfront and come from the same option pool regardless — negotiate them alongside grant size.

For the tax side of equity income, see our W-2 vs 1099 guide — relevant if option income pushes you into self-employment reporting scenarios — or our RSU taxes guide for the full withholding and W-2 reporting walkthrough.