Fundraising & Equity
Definition
Equity compensation is a non-cash payment to employees or contractors that grants ownership in the company — typically in the form of stock options, restricted stock units (RSUs), or direct stock grants. It aligns employee incentives with company value creation.
The most common forms of equity compensation are stock options (the right to buy shares at a fixed price), RSUs (shares granted after meeting time or performance conditions), and direct stock grants. Incentive Stock Options (ISOs) are available only to employees and carry potential tax advantages; Non-Qualified Stock Options (NSOs/NQSOs) can be granted to employees and contractors but are taxed as ordinary income upon exercise. RSUs are typically taxed as ordinary income when they vest. The 83(b) election allows recipients of restricted stock to pay taxes at grant rather than at vesting — often significantly reducing tax liability if the stock appreciates. All equity compensation is subject to a vesting schedule, usually 4 years with a 1-year cliff. The 409A valuation determines the fair market value of common stock and sets the exercise price for options.
Equity compensation decisions — whether you are a founder setting up an option pool, a startup employee evaluating a job offer, or an executive negotiating equity terms — have major tax and financial implications. A finance advisor or tax expert can help you model the after-tax value of different equity structures and timing decisions before you commit.