Equity vs Salary

1. Types of Equity and How They Work

Not all equity is the same. The type of equity matters enormously for your actual outcome:

Stock Options (ISOs and NSOs): The right to buy shares at a set price (the "strike price" or "exercise price") in the future. If the company's share value rises above your strike price, you profit from the difference. ISOs (Incentive Stock Options) are for employees and have favorable tax treatment; NSOs (Non-Qualified Stock Options) are taxable as ordinary income at exercise. Options expire — typically 10 years from grant, or 90 days after leaving the company.

RSUs (Restricted Stock Units): A promise to give you actual shares when certain conditions are met (usually time-based vesting). Unlike options, RSUs don't require you to pay anything — the shares are simply granted to you. The value of RSUs at vesting is taxed as ordinary income. RSUs are common at mid-stage startups and all public companies (Google, Meta, Amazon).

Common Stock vs Preferred Stock: Employees almost always receive common stock. Investors typically hold preferred stock with liquidation preferences — they get paid first in an exit. This means in a downside scenario (company sold for less than its last valuation), employees may get little or nothing while investors recover some capital.

2. Vesting Schedules and the Four-Year Cliff

Equity vests over time — you don't receive all your shares immediately upon joining. The standard startup equity package is a 4-year vesting schedule with a 1-year cliff:

• After 12 months (the "cliff"): 25% of your equity vests all at once
• Months 13-48: The remaining 75% vests monthly or quarterly (roughly 2% per month)
• If you leave before the 1-year cliff: You receive zero equity

This structure is designed to align your incentives with the company's long-term success. Leaving after 2 years means you walk away with 50% of your grant.

Salary has no vesting. You earn it as you work. There's no penalty for leaving — you simply stop receiving future paychecks.

Refresh grants are common at larger companies — once you've been with a company for 2-3 years and your original grant is mostly vested, you receive a new equity grant to maintain retention incentive. This is why employees at companies like Stripe or Airbnb stay for 6-8+ years.

3. Tax Implications of Equity Compensation

Equity taxation is complex and getting it wrong can cost you significantly more than you anticipated:

Stock Options (ISOs):

• No tax at grant or exercise (for regular income tax)
• Potential Alternative Minimum Tax (AMT) at exercise if spread is large
• Long-term capital gains rates (15-20%) if held 1+ year after exercise and 2+ years after grant date
• Most favorable tax treatment of all equity types

Stock Options (NSOs):

• No tax at grant
• Ordinary income tax on the spread (FMV minus strike price) at exercise
• Capital gains on any appreciation after exercise

RSUs:

• Taxed as ordinary income at vesting (on the full share value)
• Capital gains on any gains after vesting date
• Companies typically withhold shares to cover taxes automatically

Salary: Straightforward — ordinary federal and state income tax, plus FICA (Social Security and Medicare). Withholding is automatic. No complexity.

4. How to Evaluate an Equity Offer

The percentage ownership matters far more than the raw number of shares. Always ask:

• What percentage of the fully-diluted company do these shares represent? (Number of shares being granted / total shares outstanding)
• What is the current 409A valuation (fair market value) per share?
• What is the last round valuation and price per share?
• How much runway does the company have?
• What are the liquidation preferences of existing investors?
• What is the strike price relative to current FMV?

Simple valuation exercise: If offered 0.1% of a company currently valued at $50M, your equity is worth $50,000 on paper today. If the company reaches $500M at exit (10x growth), your shares would be worth $500,000 before dilution and taxes. But if the company fails — the most likely outcome statistically — your equity is worth $0.

Compare to salary sacrifice: If a startup offers you $80K salary + 0.5% equity vs a public company offering $130K salary + $50K RSUs annually, you're giving up $50K/year in cash for 0.5% in a risky startup. For that to pay off at a 4-year vest, the startup needs to be worth at least $400M at exit just to break even on the salary delta.

5. Liquidity: The Crucial Practical Difference

Salary is immediately usable. You can pay rent, invest in a diversified portfolio, or spend it the day it hits your account. There's zero friction between earning and using it.

Equity is frozen until a liquidity event. At a private company, you cannot sell your shares even if they're worth millions on paper. You must wait for one of:

• IPO: The company goes public, and you can sell shares after a lockup period (typically 6 months post-IPO)
• Acquisition: Company is bought, and your shares are converted to cash or acquirer shares
• Secondary market sale: Rare, but some companies allow employees to sell through platforms like Forge or EquityBee

The median time from startup founding to IPO or acquisition is 7-10 years. Many never get there. Your equity might be technically vested and valuable on paper for 6 years with no way to access it.

Public company RSUs are more liquid — they vest as actual tradeable shares on a public exchange. You can sell immediately at vesting or hold. This is why RSU packages at Google, Meta, and Apple are closer to salary in practice than private company equity.