Equity Compensation in Tech: A Complete Guide for Employers & Candidates

Equity compensation is a form of non-cash pay that gives employees an ownership stake in the company they work for. In tech, this typically comes as stock options, restricted stock units (RSUs), employee stock purchase plans (ESPPs), or direct stock grants. It is designed to align employee interests with company performance and long-term growth.

Stock options give you the right to purchase company shares at a predetermined strike price after a vesting period, meaning they only have value if the stock price rises above that price. RSUs are actual shares granted to you on a vesting schedule with no purchase required, so they always have value once vested. RSUs are generally considered less risky than stock options.

A vesting schedule determines when you earn ownership of your equity. Most tech companies use a four-year vesting schedule with a one-year cliff, meaning you receive no equity until your first anniversary, then vest incrementally over the remaining period. Understanding the vesting schedule is essential for knowing how long you need to stay to fully realize your equity benefits.

A 409A valuation is a formal, independent appraisal of a private company's common stock fair market value. It matters because stock options must be granted at or above this fair market value to avoid severe tax penalties under Section 409A of the Internal Revenue Code. Companies are required to obtain these valuations regularly, and candidates should ask when the last one was completed.

If you leave a company before your options fully vest, you typically forfeit the unvested portion. For vested options, most companies require you to exercise them within a specific window — often 90 days — or you lose them entirely. This means you may need to pay the strike price out of pocket to retain your shares.

In an acquisition, your stock options or RSUs may be assumed by the acquiring company, converted to cash, or in some cases canceled. The outcome depends on the terms of the acquisition agreement and your specific equity grant. It is important to understand these scenarios before accepting an equity offer from a startup.

Yes, equity is absolutely negotiable. You can negotiate the number of shares, the type of equity, the vesting schedule, and sometimes the strike price. According to CRB Workforce's guide, candidates should always negotiate their equity offer, just as they would negotiate base salary or other benefits.

Start by asking about the company's latest 409A valuation, total shares outstanding, liquidation preferences, debt levels, and planned funding rounds. Stock options at a private company are essentially illiquid until a liquidity event like an IPO or acquisition occurs. The guide recommends treating options as a lottery ticket and ensuring your base salary alone meets your financial needs.

Tax treatment varies by equity type. Stock options may trigger taxes when exercised and again when shares are sold. RSUs are taxed as ordinary income upon vesting, which can create a tax burden even if you have not sold the shares. Non-compliance with Section 409A can result in immediate taxation, a 20% penalty tax, and interest charges on underpayments.

A liquidation preference determines the order in which shareholders are paid when a company is sold or liquidated. Preferred stockholders — typically investors — get paid before common stockholders, which includes most employees. If the aggregate liquidation preference is high relative to the sale price, common shareholders may receive little or nothing.

Equity allows companies, especially startups with limited cash, to offer competitive total compensation packages. It aligns employee interests with company success, incentivizes long-term retention through vesting schedules, and reduces immediate cash outlays. This makes it possible for smaller companies to compete with large tech firms for top-tier candidates.

An ESPP allows employees to purchase company stock at a discounted price, typically 10-15% below market value, through payroll deductions over a set offering period. Many ESPPs include a lookback feature that lets you buy at the lower price from either the beginning or end of the offering period. While ESPPs offer immediate value, they require employees to invest their own funds and carry risk if the stock price declines.