Edition 8: The Lowdown on Equity, Stock Options, and Tech Comp

Today, we’re diving into the world of equity stock options, and other forms of compensation that you may encounter when starting a job in tech. It might seem complex at first, but by the end of this read, you’ll be talking about ESPPs and ISOs like a pro!

So… What’s equity, anyway?

Let’s start with the basics. When we talk about “equity”, we’re really talking about ownership. When you own equity in a company, you own a small slice of the pie - even if it’s just a sliver! Companies give out equity as part of compensation to align employees with the company’s success. When the company grows, your equity value grows too. And if it goes public or gets acquired… well, that’s when dreams of early retirement can start to take shape.

Types of Tech Compensation

Stock Options (ISOs & NSOs)

This is the classic tech comp!

Incentive Stock Options (ISOs) are usually for employees and if you hold onto them for a while, you might qualify for some tax breaks when you sell them.

Non-qualified Stock Options (NSOs) are available to all, even non-employees. NSOs don’t have the same tax perks as ISOs, but they still give you a great opportunity to benefit from the company’s growth.

So what’s the difference? It mostly comes down to taxes and eligibility, but both are a way for you to purchase shares at a pre-set “strike price”. When the company’s stock price increases, the difference between the strike price and the market price can lead to some ✨ big gains✨.

RSUs (Restricted Stock Units)

RSUs are the “no-buying required” version of equity. They’re basically “gifted” to you over time, though there’s often a catch. Yep, you guess it - vesting! Usually, you’ll need to stay with the company for a while before the shares are truly yours. Once they vest, you own them outright, so any increase in value is yours for the taking.

ESPP (Employee Stock Purchase Plan)

This is like a super-powered discount program for employees to buy stock. ESPPSs let you buy company stock at a discount (usually around 15%) and sometimes even lets you buy at the stock’s lowest price within a specific purchase period. It’s a popular, risk-managed way to own more company stock.

Vesting, the good ol’ time game 🕗

One thing all these perks have in common? Vesting. Most equity-based compensation comes with a vesting schedule, which means it’s given out bit by bit, year by year, often with something called a “cliff”. A cliff is a point where you need to stay a certain amount of time before anything is yours. In other words, rest and vest.

Real talk tho, equity vs cash?

Equity sounds amazing, but keep in mind that equity isn’t guaranteed cash - at least, not right away. If you’re someone who likes certainty, you might want a compensation package that tilts more towards cash. On the other hand, if you believe in the company’s future and are okay with some risk, taking a higher portion of equity could mean a big payoff down the line.

💡Using a tool like Carta, Fidelity, or even an old-school spreadsheet can help you stay on top of your options and make smarter decisions about when to exercise or sell.

Equity and stock options might seem complicated, but you’ve taken a great first step in understanding the basics. With a little planning, your tech comp package can become a powerful part of your financial future.

Stay curious, keep learning, and may your options be ever in the money! 💸