You got the grant. Maybe it's a chunk of RSUs that vest over four years, or options with a strike price and an expiration date you haven't thought hard about yet. Either way, a meaningful slice of your net worth now lives in your employer's stock, and the rules governing that slice are nothing like the rules governing your paycheck.
You're not alone in finding this murky. Equity comp hides its most expensive decisions inside language that sounds simple until you're deciding when to exercise, how much to sell, and what the tax bill will be.
This is the guide I'd hand a new client who wants the whole board in one sitting: what each type of equity is, when it gets taxed, and where the real decisions live. Once you have the foundation, the deeper posts linked throughout take each piece apart.
What Equity Compensation Is
It's part of your pay package, like salary, except instead of cash, you get some form of ownership (or the right to buy ownership) in the company. Companies hand it out for a reason that has nothing to do with generosity: equity ties your financial outcome to theirs, which keeps good people from leaving right before the interesting part.
The type of equity you hold decides everything downstream: when you owe tax, how much, and which strategies are even on the table. So that's where we start.
The Six Types, and Why the Distinction Matters
Most equity comp falls into one of these buckets:
Restricted Stock Awards (RSAs)
Stock Appreciation Rights (SARs)
Restricted Stock Units / Performance Stock Units (RSUs / PSUs)
The reason the labels matter: two employees can hold equity worth the same on paper and owe wildly different taxes depending on which letters are on the grant. An ISO and an NSO with identical spreads are taxed under completely separate rules. Knowing which you hold is the entire game.
RSAs and SARs get no section of their own below, because they're rare in senior tech comp. An RSA is actual stock granted up front and subject to forfeiture until it vests, which is the reason the 83(b) election exists. A SAR pays you the increase in share value without your ever buying shares. The other four are where the money and the mistakes are.
Grants: The Promise, Not the Payoff
When a company makes a grant, it's promising to deliver a defined benefit once you hit certain conditions. The day you receive it is the grant date (or issue date).
A grant is exciting, but you don't own anything yet. That's exactly why grants usually aren't taxed when issued. The company wants you to stick around before you collect, so the grant comes with strings. Those strings are called vesting.
Vesting: The Event That Starts the Clock (and Sometimes the Tax)
Vesting is the most important equity event, full stop. It's the moment you take ownership of all or part of the grant, and for some equity types, it's the moment tax kicks in.
Two flavors:
Time-based vesting requires you to stay employed across a schedule. A common one: a one-year cliff (nothing vests until your first anniversary, then a year's worth lands at once), followed by monthly or quarterly vesting after that. Some private companies issue double-trigger RSUs, which only vest when two things happen: you hit the time requirement and the company has a liquidity event like an IPO or tender offer.
Performance-based vesting ties the grant to hitting a metric: team sales, company revenue, an EBITDA target. These are usually Performance Stock Units (PSUs). Beat the target and you might receive a multiple of the original grant; miss it and the grant can vanish entirely.
Knowing your exact vesting criteria isn't paperwork trivia. It's how you project cash flow, taxes, and liquidity: the three things that determine whether a vesting event is a windfall or a scramble.
What Happens When It Vests
Once vested, you own whatever the company promised. What that means splits cleanly along type.
RSUs and PSUs: you immediately own the shares. The value vested is taxed as ordinary income: same as salary. The math:
ISOs and NSOs: vesting gives you an option: the right, but not the obligation, to buy shares at a fixed price. You don't own shares yet, so there's no tax at vesting. The tax conversation happens later, at exercise.
That difference, own-it-now versus right-to-buy-it-later, is why options carry a second decision RSUs don't: when, and whether, to exercise.
Exercising Options: The Decision That Earns Its Own Strategy
When you exercise, you buy shares at your strike price (also called the exercise price), which usually equals the stock's fair market value on the grant date.
A few terms worth locking in:
An option is in-the-money when the current FMV is above your strike.
It's underwater when FMV is below your strike (exercising would mean overpaying, so you don't).
The gap between FMV and strike is the bargain element (or spread). The math:
So if you hold an option with a $30 strike and the stock trades at $50, you buy at $30 and capture a $20-per-share spread. That spread is where the tax lives.
When to exercise an in-the-money option depends on your option type, your overall tax picture, the size of the spread, your liquidity options, and how much time you have before expiration. Which brings us to the part most people underestimate.
Tax at Exercise
This is where ISOs and NSOs split hard.
An NSO spread is taxed at exercise like a paycheck. Straightforward. Not cheap. The full mechanics are in The Executive's Guide to Non-Qualified Stock Options.
An ISO is the complicated one. Exercising doesn't trigger ordinary income tax, but the spread becomes a preference item for the Alternative Minimum Tax, which can generate a tax bill on income you haven't received in cash. What you end up owing turns on the size of the spread, the rest of your return, and when you sell the shares afterward. Those pieces interact in ways this guide can't do justice, and getting them wrong is expensive. The full treatment is in Incentive Stock Option Taxation, From Exercise to Sale.
The phrase to sit with there is "income you haven't received in cash." That gap, between what you owe and what you have, is the thing that catches people.
Withholding: Where the Math Quietly Breaks
Here's the one almost nobody sees coming.
Equity comp (RSUs especially) counts as supplemental income: taxed at your ordinary rates, same as salary. But your employer withholds on supplemental income under different rules than on your regular paycheck. The first $1 million of supplemental income gets withheld at a flat 22%; anything above $1 million at 37%.
Spot the trap: if you're a high earner in the 35% bracket, your equity gets withheld at 22% but taxed at 35%. That 13-point gap is real money you'll owe at filing, and won't have set aside unless you planned for it.
Run the numbers. Say $200,000 of RSUs vest and you're in the 35% bracket:
Nobody hands you a bill for that $26,000 at vesting. It just sits there until April reminds you. Multiply it across several vesting events and a concentrated position, and "I got hit with a surprise tax bill" stops being a surprise and starts being a pattern, one a little coordination would have caught.
Liquidity: Where Will the Cash Come From?
A lot of people miss that you are on the hook for cash at the worst possible moments:
RSUs/PSUs: cash for tax withholding at vesting
ISOs: cash to buy the shares at exercise
NSOs: cash for both the shares and the withholding
If you don't have the cash sitting around, the usual move is a cashless exercise ("sell-to-cover"): you sell just enough shares to cover the cost and withholding, and keep the net. Clean, simple, and almost always limited to publicly traded companies.
If your company is still private, it gets harder. Depending on your plan documents, you might have access to stock swaps, self-financing, outside financing, or employer financing. These are more sophisticated, more situation-specific, and exactly the kind of thing to model with someone before you commit, because the wrong choice here can lock up cash you needed elsewhere.
Options Expire: Don't Let Yours Die
Your options have an expiration date, typically 10 years from the grant date. Miss it and they expire worthless, regardless of how in-the-money they were the day before. Depending on the stock price, that's not a rounding error.
This is the kind of deadline that's invisible until it isn't. It belongs on a calendar the same way an estimated tax payment does.
ESPPs: A Different Set of Rules Entirely
An ESPP isn't a grant at all. You opt in, payroll deducts money across an offering period (usually six months), and at the end the plan buys shares on your behalf at a discount.
The lookback provision does the heavy lifting. If your plan has one, the discount applies to the lower of the price on the offering date or the price on the purchase date, not just the price the day you buy. In a rising market that's worth considerably more than the headline discount.
Where ESPPs get complicated is the tax treatment, which turns on two holding-period clocks running from two different dates. The mechanics, including the sell-immediately-versus-hold math, are in The Free Money in Your Employee Stock Purchase Plan.
The Part That Doesn't Fit on a Grant Sheet
Everything above is the mechanics: what you can read about, model, and mostly handle on your own. Here's the part that doesn't show up on any grant sheet at all.
Equity comp doesn't happen in isolation. An ISO exercise interacts with your AMT exposure, which interacts with your cash flow, which interacts with whether you're also selling RSUs that year, which interacts with your state's tax treatment, which interacts with how concentrated your net worth has become in one company's stock. Each decision moves the others. Handle one well and trip on the next, and you've lost the gains you thought you were protecting.
That coordination (sequencing exercises, managing brackets across multiple years, deciding when concentration becomes risk instead of upside, timing it all against the rest of your financial life) is the work. It's what turns equity from a series of events that happen to you into decisions you actually make.
What the grant becomes depends less on the grant itself than on the decisions stacked on top of it.
This guide is the map. The terrain (which exercise to make first, how to keep an ISO from detonating your AMT, when to sell into a concentrated position) is where the real decisions live, and they're rarely as clean as a single post makes them look.