Chapter 1: Equity is salary in a costume
Wei is 26, three weeks out of his final interview loop, and holding an offer letter that says $140,000 in salary plus "$200,000 in restricted stock units, vesting over four years." He understands the first number completely. The second number might as well be written in a different language, and it is worth more than the first over the life of the offer.
That second number is equity compensation: pay delivered as ownership in the company instead of cash. About $50,000 a year of Wei's pay will arrive as stock, which makes his real offer closer to $190,000 a year than $140,000. The costume makes equity look like a bonus, a perk, or a lottery ticket. Underneath, it is salary. The company counts it as compensation expense, your recruiter counts it in your offer, and the IRS will absolutely count it as income. This guide exists to help you count it too, correctly, instrument by instrument.
Why companies pay you in stock
Companies pay in equity for three practical reasons, and none of them is generosity.
Alignment. If part of your pay rises and falls with the share price, the company hopes you will think like an owner. Whether that works is debatable. The accounting works either way.
Cash preservation. A startup with 18 months of runway would rather promise you future shares than spend scarce dollars today. Stock is the one thing a young company can print.
Retention. Equity arrives on a schedule, and leaving means walking away from the unvested part. Chapter 2 covers this machinery in detail, because it is the engine behind almost every equity decision you will face.
Notice what all three reasons have in common: each one transfers risk from the company to you. That transfer is the honest price of equity pay, and it lands twice. Your paycheck already depends on your employer staying healthy. When part of your pay is employer stock, your savings depend on the same company too. If the stock falls 30% during Wei's first year, the remaining $150,000 of his grant becomes $105,000, in the same season his team's budget gets cut. The Finvest Personal Finance Guide calls this concentration, and chapter 10 of this guide returns to it with tools. For now, hold one idea: you are underwriting your employer's risk twice, so the rest of your money should not make it a third time.
The instrument zoo
Five instruments cover nearly every equity package in tech. Each gets its own chapter later. One honest table now, so the names stop being scary.
| Instrument | What it is | When you pay tax | Risk level |
|---|---|---|---|
| RSU (restricted stock unit) | A promise of free shares once you vest | At vest, as ordinary wages, on that day's value | Low to moderate: worth something as long as the stock has a price |
| NSO (non-qualified stock option) | The right to buy shares at a fixed strike price | At exercise, the gain over the strike is wages; later growth is capital gains | Moderate to high: worthless if the stock stays below the strike |
| ISO (incentive stock option) | An option with special tax treatment if you follow strict holding rules | No regular tax at exercise, but the AMT can apply; capital gains if you hold long enough | High: same option risk plus the most dangerous tax trap in this guide |
| ESPP (employee stock purchase plan) | Buying stock through payroll deductions at a discount, often 15% | Mostly at sale; the discount is usually taxed as wages | Low if you sell immediately; the discount is close to free money |
| Restricted stock | Actual shares granted to you early, common at very young startups | At vest, or at grant if you file an 83(b) election within 30 days | Varies: cheap to own early, easy to fumble the paperwork |
Two patterns are worth noticing before any details. RSUs and ESPPs are about receiving value. Options are about the right to buy value, which means they can expire worth nothing. The tax column also previews a theme that runs through this whole guide: taxes arrive on a schedule set by the instrument, whether or not cash arrives with them.
The liquidity line
One fact splits the equity world cleanly in two: whether you can sell the shares today.
At a public company, you can. Shares trade on an exchange, the price updates every second, and vested stock converts to cash in one trading window. Wei's $200,000 grant is this kind. The value will wobble, but it is real in the way that matters: it can pay rent.
At a private company, the answer is no. There is no exchange, no daily price, and usually no buyer until the company is acquired, goes public, or runs a tender offer. Private equity value is a number on a screen that you cannot spend. This single fact changes the tax math, the risk math, and the career math, which is why chapters 7 through 9 exist. The shorthand this guide will repeat: paper money is not money.
The line also changes how seriously you should treat a headline. When a public company employee says "I got $200,000 in stock," that statement is roughly true. When a private company employee says it, the honest translation is "I hold instruments that might be worth $200,000 by one estimate, if several good things happen in order." Both people deserve their equity. Only one of them can pay a hospital bill with it this month, and your savings plan should know which one you are.
Dilution, in plain English
Private company offers often come with an ownership percentage, and that percentage shrinks. Dilution happens when a company issues new shares, usually to raise money. Your share count stays the same while the total share count grows, so your slice of the pie gets thinner.
Suppose your options represent 0.1% of the company today. The company then raises two funding rounds, and each round creates about 20% more shares. After the first round your stake is 0.1% divided by 1.2, or about 0.083%. After the second it is about 0.07%. Your 0.1% became 0.07% without anyone taking anything from you.
Dilution sounds sinister and usually is not. Those funding rounds bought fuel, and 0.07% of a company that doubled in value beats 0.1% of one that stalled. The honest takeaway is narrower: an ownership percentage quoted at offer time is a starting point, so value your grant in shares and dollars, and expect the percentage to drift down.
The five fields that matter
Every grant comes with a grant agreement, a dense document that most people never read. You can skip most of it if you extract five fields and store them somewhere you will find them again.
The five fields
- Type. RSU, NSO, ISO, ESPP, or restricted stock. Everything about taxes follows from this one word.
- Count. The number of shares or units, and the dollar value used to set it.
- Price. The strike price for options, the discount for an ESPP. RSUs have no purchase price, which is part of their charm.
- Schedule. When the grant vests: the start date, the cliff, the frequency. Chapter 2 is entirely about this field.
- Expiration. For options, when the right to buy dies: usually 10 years from grant, and often just 90 days after you leave the company. People lose fortunes to this field.
Wei decodes his offer
Wei prints the offer letter and goes through it with a pen. Type: RSUs, the simple kind, at a public company. Count: $200,000 divided by the recent share price of $50 comes to 4,000 units. Schedule: four years with a one-year cliff, so 1,000 shares after year one, then monthly. Price and expiration: none, because RSUs are a gift with a waiting period rather than a right to buy. Then he finds the sentence that reframes the whole document: every vest is "subject to continued employment." The $200,000 is not in his account. It is a schedule of future paydays that exist only if he stays, and their dollar value will be set by the share price on each vest day, not by the number in the letter.
The decoded version of Wei's offer is the template for every offer you will ever read. Total pay is salary plus the yearly slice of equity. The equity slice is conditional on staying and floats with the stock price. Both facts matter, and neither appears in the headline number.
Treat every equity grant as salary the company has promised but not yet paid. Value it in dollars per year, read the five fields before you sign, and remember that your job and your grant depend on the same company. The company is already betting on itself with your pay; you do not need to add to the bet.
Where people go wrong
- Reading the salary line and skimming the equity line. Wei's equity is 26% of his year-one pay. Skimming it means negotiating blind and budgeting wrong.
- Treating the grant value as guaranteed. $200,000 was the value at one share price on one day. The vest-day prices are the ones that pay you.
- Confusing instruments. RSU rules applied to ISOs, or the reverse, produce expensive surprises. The type field decides everything downstream.
- Counting private equity as savings. Until there is a buyer, it is paper. Plan your emergency fund and your spending as if it were zero.
- Never locating the grant agreement. When you resign, the 90-day clock on options does not pause while you search your inbox.
Key takeaways
- Equity compensation is salary paid in shares. Wei's $140,000 offer is really about $190,000 a year, with $50,000 arriving as stock.
- Companies pay in equity for alignment, cash preservation, and retention. All three shift risk onto you, and you already carry paycheck risk from the same employer.
- Five instruments cover nearly everything: RSUs, NSOs, ISOs, ESPPs, and restricted stock. The instrument type sets the tax treatment, so identify it first.
- Public equity can become cash this week; private equity cannot. Paper money is not money.
- Dilution thins ownership percentages over time, often for good reasons. Extract the five fields (type, count, price, schedule, expiration) from every grant and keep them where you can find them.
Sources: IRS: Topic 427, Stock Options · IRS: Publication 525, Taxable and Nontaxable Income · SEC Investor.gov: Employee Stock Plans · Finvest Personal Finance Guide