You just got the offer letter from your dream tech company. The base salary looks good. The benefits are solid. And then you get to the equity compensation section, and your eyes glaze over.
RSUs. Stock options. Vesting schedules. Strike prices. Something called a “four-year vest with a one-year cliff.”
If you’re fresh out of college (or switching into tech from another field), this might be your first time dealing with equity compensation. And honestly, it can feel like learning a new language.
But here’s the thing. That equity compensation section might be worth more than your base salary over the next few years. Understanding it before you accept the offer is crucial.
So let’s break down everything you need to know about equity compensation as a new grad entering the tech world.
The Two Main Types of Equity: RSUs and Stock Options
Most tech job offers for new grads include one of two types of equity compensation: restricted stock units (RSUs) or stock options.
Restricted Stock Units (RSUs)
RSUs are the simpler of the two. When your company grants you RSUs, they’re promising to give you actual shares of company stock on a vesting schedule.
For example, your offer might say you’re getting 1,000 RSUs with a four-year vesting schedule. That means over the next four years, you’ll receive 250 shares per year (or more commonly, about 62 shares every three months).
When your RSUs vest, you own those shares. They’re worth whatever the stock price is at that moment. If the stock is trading at $100 per share and 62 shares vest, you just received $6,200 worth of stock (before taxes).
The catch? You pay ordinary income tax on the value of those shares when they vest, just like you would on a cash bonus. Your company will usually withhold some shares to cover the tax bill, so you’ll end up with fewer shares in your account than the total grant.
Stock Options
Stock options are a bit more complicated. When you’re granted stock options, you’re getting the right to buy company stock at a set price (called the strike price or exercise price) in the future.
Let’s say your offer includes 10,000 stock options with a strike price of $10. If the stock price goes up to $50, you can exercise your options (buy the shares at $10) and then sell them at $50, pocketing a $40 profit per share.
But if the stock price stays at $10 or goes down, your options are worthless. You’re not going to buy stock at $10 if you can buy it on the open market for less.
Stock options are more common at startups. They’re also riskier because there’s no guarantee they’ll ever be worth anything. But they also have more upside potential if the company grows significantly.
Understanding Vesting Schedules and Cliffs
No matter what type of equity you’re granted, it doesn’t all become yours on day one. It vests over time, usually after four years.
Here’s how a typical vesting schedule works.
Four-Year Vest with a One-Year Cliff
This is the standard structure. It means you don’t get any equity in your first year. Then, on your one-year anniversary, 25% of your grant vests all at once (that’s the “cliff”). After that, the remaining 75% vests gradually, usually monthly or quarterly, over the next three years.
For example, if you were granted 1,000 RSUs:
- Year 1: 0 shares vest (you’re waiting for the cliff)
- Year 1 anniversary: 250 shares vest all at once
- Years 2-4: About 20-21 shares vest every month (or 62 shares every quarter)
The one-year cliff exists to incentivize you to stay with the company for at least a year. If you leave before your first anniversary, you walk away with zero equity.
Why This Matters
When you’re comparing job offers, pay close attention to vesting schedules. A company offering $100,000 in RSUs with a two-year vest is giving you a much better deal than one offering the same $100,000 over four years.
And if you’re thinking about leaving a job before you hit a vesting milestone, run the numbers. You might be walking away from tens of thousands of dollars in unvested equity.
How to Calculate the True Value of Your Equity Grant
Your offer letter will usually tell you how many RSUs or options you’re getting, but it might not tell you what they’re actually worth.
For RSUs at Public Companies
This is straightforward. Look up the current stock price and multiply by the number of shares you’re receiving.
If you’re granted 1,000 RSUs and the stock is trading at $150, your total grant value is $150,000. Divide that by four years, and you’re getting about $37,500 per year in equity (before taxes).
Add that to your base salary to get your total annual compensation.
For Stock Options at Private Companies
This is much harder. Private company stock doesn’t trade publicly, so there’s no market price to reference.
Your offer letter should state the strike price (what you’d pay to exercise the options) and may include the current “409A valuation” (an estimate of the stock’s value).
But here’s the reality. Until your company goes public or gets acquired, those options might be worth zero. Or they might be worth millions. It’s genuinely unknowable.
When evaluating a startup offer, I usually tell new grads to mentally value the options at zero and focus on whether the base salary alone is acceptable. Treat any equity upside as a potential bonus, not guaranteed compensation.
The Tax Implications You Need to Know
Equity compensation comes with tax complexity that cash compensation doesn’t.
RSU Taxes
When your RSUs vest, the IRS treats them as ordinary income. If 100 shares vest and they’re worth $150 each, you just “earned” $15,000. You’ll owe income tax and FICA taxes on that amount.
Your employer will usually withhold 22% (or 37% if your total supplemental wages exceed $1 million) to cover federal taxes. But depending on your total income and tax bracket, that withholding might not be enough.
A lot of new grads get surprised by this. They see 100 shares vest, assume they have 100 shares, and then realize their employer withheld 22 shares for taxes, and they only actually received 78 shares.
Stock Option Taxes (ISOs vs. NSOs)
There are two types of stock options: incentive stock options (ISOs) and non-qualified stock options (NSOs). The tax treatment is completely different.
NSOs are taxed as ordinary income when you exercise them. If you exercise 1,000 options with a $10 strike price and the current fair market value is $50, you owe ordinary income tax on the $40,000 gain.
ISOs are more complex. You don’t owe regular income tax when you exercise them, but you might trigger the alternative minimum tax (AMT). And if you hold the shares long enough after exercising (one year from exercise and two years from grant), your eventual gain is taxed as long-term capital gains instead of ordinary income.
Most new grads get NSOs. If your offer includes ISOs, that’s actually a nice perk, but you’ll want to talk to a tax professional before exercising.
Red Flags to Watch For in Equity Offers
Not all equity compensation is created equal. Here are some warning signs to watch for.
Extremely Long Vesting Schedules
If a company offers a five- or six-year vesting schedule, that’s unusual and not in your favor. The standard is four years. Anything longer suggests they’re trying to lock you in or spread out the value to make the grant look bigger than it really is.
Back-Loaded Vesting
Some companies try to structure vesting so that more equity vests in later years. For example, 10% in year one, 20% in year two, 30% in year three, and 40% in year four.
This is designed to prevent you from leaving after a couple of years. It’s not necessarily a dealbreaker, but it’s worth noting.
Valuations That Seem Too Good to Be True
If you’re evaluating a startup offer and they say your options are worth $500,000 based on the latest funding round valuation, be skeptical.
Private company valuations are often inflated, and there’s no guarantee you’ll ever be able to sell your shares at that price. Until the company goes public or gets acquired, your options could be worthless.
Questions to Ask Before You Accept the Offer
Before you sign on the dotted line, ask these questions about your equity compensation.
For RSUs:
- What’s the vesting schedule?
- How often do RSUs vest (monthly, quarterly, annually)?
- What happens to unvested RSUs if I leave the company or get laid off?
- What tax withholding rate will be applied when RSUs vest?
For Stock Options:
- Are these ISOs or NSOs?
- What’s the strike price?
- What’s the current 409A valuation?
- How long do I have to exercise options if I leave the company?
- What’s the company’s plan for going public or providing liquidity?
For Both:
- What happens to my equity if the company is acquired?
- Can I see the equity incentive plan document?
Don’t be afraid to ask these questions. Any reputable company will be happy to explain how its equity compensation works.
Comparing Multiple Offers: How to Weight Equity vs. Cash
Let’s say you have two offers on the table.
Offer A: $120,000 base salary + $40,000 per year in RSUs at a public company
Offer B: $140,000 base salary + stock options worth (maybe?) $50,000 per year at a startup
How do you compare them?
Here’s my framework. For RSUs at public companies, I value them at 80% to 90% of their stated value. There’s some discount because of taxes and potential stock price volatility, but they’re pretty reliable.
For stock options at private companies, I value them at 0% to 20% of their stated value, depending on the company’s stage, funding, and trajectory.
Using that framework:
Offer A total comp = $120,000 + ($40,000 x 85%) = $154,000
Offer B total comp = $140,000 + ($50,000 x 10%) = $145,000
Offer A is the better financial deal.
But maybe the startup in Offer B is doing something you’re genuinely passionate about, and you’re willing to take a pay cut for the mission and learning opportunity. That’s a valid choice. Just go into it with eyes open.
Your First Equity Comp Decision Checklist
Ready to evaluate your offer? Here’s what to do.
This Week:
- Request clarification on anything in the equity section you don’t fully understand
- Calculate your total compensation (base + equity value) for each offer you’re considering
- Research the company’s stock performance (if public) or funding trajectory (if private)
Before You Accept:
- Understand the vesting schedule and when you’ll actually receive equity
- Model the tax implications of your first RSU vest or option exercise
- Talk to current employees about their experience with equity compensation at the company
After You Accept:
- Set calendar reminders for vesting milestones
- Review your equity compensation annually and adjust your financial plan accordingly
- Consider working with a financial planner who understands equity compensation (hi, that’s me)
Let’s Make Sure You’re Making an Informed Decision
If you’re evaluating your first tech job offer and you’re not sure how to value the equity component, let’s talk.
I work with new grads and early-career tech professionals all the time, and I can help you understand what your offer is really worth, how to negotiate effectively, and how to plan for the tax implications down the road.
Schedule a consultation at wovencapital.net/schedule. We’ll review your offer letter together, walk through the equity compensation details, and make sure you’re making a decision that sets you up for long-term financial success.