Understanding Tech Company Equity: Stock Options and RSUs Basics

Introduction to Tech Company Equity

As a software developer in the tech industry, understanding your equity compensation is crucial for maximizing your total compensation package. Whether you’re at a startup or an established tech giant, equity can represent a significant portion of your wealth-building opportunity.

Types of Equity Compensation

Stock Options Explained

Incentive Stock Options (ISOs)

Tax-advantaged employee stock options
Usually offered by startups and growth companies
Exercise price set at fair market value
Maximum term of 10 years
Must be exercised within 90 days of leaving company

Non-Qualified Stock Options (NSOs)

More flexible than ISOs
Can be offered to contractors and advisors
No special tax treatment
Variable exercise price
Longer exercise windows possible

Restricted Stock Units (RSUs)

Key Characteristics

Actual shares of company stock
No purchase required
Value tied directly to stock price
Common at public companies
Taxed as ordinary income when vested

Common RSU Structures

Public Companies

Quarterly vesting common
No purchase requirement
Immediate liquidity
Market-based valuation

Pre-IPO Companies

Double-trigger vesting
Time-based requirements
IPO or acquisition requirement
Limited liquidity

Understanding Your Grant

Stock Option Components

Exercise Price

Also called “strike price”
Set at fair market value
Determined by 409A valuation
Fixed for the life of the option

Grant Size Benchmarks

Entry Level Developer:

Startup: 0.1-0.25% equity
Growth Stage: 0.01-0.1% equity
Public Company: $100K-200K RSU value

Senior Developer:

Startup: 0.25-1.0% equity
Growth Stage: 0.1-0.5% equity
Public Company: $200K-500K RSU value

Lead/Principal Developer:

Startup: 1.0-2.0% equity
Growth Stage: 0.5-1.5% equity
Public Company: $500K-1M+ RSU value

Vesting Schedules

Standard Four-Year Schedule

One-year cliff (25% vests)
Monthly or quarterly thereafter
Full vesting at four years
Reset on promotion/refresh grants

Example Schedule:

Initial Grant: 10,000 shares
Year 1 (cliff): 2,500 shares vest
Years 2-4: 208 shares vest monthly

Refresh Grants

Additional equity grants
Usually annual
Performance-based
Maintains retention value

Valuation Basics

Private Company Valuation

409A Valuations

Independent assessment
Updated every 12 months
Affects exercise price
Used for tax purposes

Preferred vs Common Stock

Preferred: Investor shares
Common: Employee shares
Liquidation preference
Conversion rights

Public Company Valuation

Market Price Considerations

Real-time stock price
Trading volume
Market volatility
Company performance

RSU Value Calculation

Formula:

Number of RSUs × Current Stock Price
Less applicable taxes
Consider vesting schedule
Account for blackout periods

Risk Assessment

Private Company Risks

Liquidity Risk

No public market
Limited selling opportunities
Transfer restrictions
Long holding periods

Valuation Risk

Company performance
Market conditions
Future funding rounds
Exit timing

Public Company Risks

Stock Price Volatility

Market fluctuations
Industry trends
Company performance
Economic conditions

Concentration Risk

Single stock exposure
Industry correlation
Company-specific risk
Career alignment

Initial Decision Framework

Evaluation Checklist

Company Assessment

Financial Health

Revenue growth
Funding history
Burn rate
Path to profitability

Market Position

Competitive advantage
Market size
Growth potential
Industry trends

Personal Considerations

Financial Planning

Current income needs
Tax situation
Risk tolerance
Investment timeline

Career Goals

Growth potential
Industry alignment
Company stability
Exit opportunities

Implementation Steps

Immediate Actions

Review grant documents
Understand vesting schedule
Calculate current value
Assess tax implications

Planning Steps

Create exercise strategy
Set up tracking system
Consider tax planning
Review regularly

Tax Planning for Tech Stock Options and RSUs: Strategic Exercise and Management

Understanding Tax Implications

Stock Options Tax Framework

ISO Tax Treatment

Exercise Timing

No regular tax at exercise
Subject to AMT considerations
Holding period requirements:
2 years from grant date
1 year from exercise date

AMT Impact Calculation
Example for 10,000 ISOs:

Exercise price: $2/share
Fair market value: $5/share
AMT adjustment: $30,000
(FMV – Exercise Price) × Shares
($5 – $2) × 10,000

NSO Tax Treatment

Exercise Tax

Taxed at exercise as ordinary income
Subject to withholding
Reportable on W-2
Social Security and Medicare tax apply

Cost Basis Calculation
Example for 5,000 NSOs:

Exercise price: $1/share
FMV at exercise: $10/share
Taxable spread: $45,000
(FMV – Exercise Price) × Shares
($10 – $1) × 5,000

RSU Tax Considerations

Public Company RSUs

Vesting Schedule Tax Impact

Taxed at vesting as ordinary income
Automatic withholding (typically 22%)
Supplemental wage taxation
Medicare surtax considerations

Tax Withholding Methods

Sell-to-cover: Most common
Cash payment: Rare
Share withholding: Company dependent

Example Calculation:

1,000 RSUs vesting
Stock price: $50
Value at vest: $50,000
Federal withholding (22%): $11,000
State tax (varies): $2,500-5,000
FICA: $3,825
Net shares received: ~700-750

Private Company RSUs

Double Trigger Vesting

No tax until both triggers met
Time-based vesting complete
Liquidity event occurs
Special IPO considerations

Tax Planning Opportunities

83(b) election consideration
Liquidity event timing
Tax rate management
State tax planning

Strategic Exercise Planning

Early Exercise Considerations

Risk vs. Reward Analysis

Financial Investment Required

Exercise cost calculation
Tax impact assessment
Opportunity cost evaluation
Cash flow planning

Potential Benefits

Lower tax basis
Earlier holding period
AMT planning opportunities
Potential 83(b) election

Decision Framework

Investment Thresholds:

Low Risk: Exercise cost < 5% of liquid net worth
Medium Risk: 5-15% of liquid net worth
High Risk: >15% of liquid net worth

Exercise Timing Strategies

Market Conditions

Company Valuation Factors

Growth trajectory
Funding rounds
Competition analysis
Market conditions

Personal Timing Factors

Vesting schedule
Cash availability
Tax bracket planning
Risk tolerance

Exercise Windows

Regular Exercise

Post-cliff consideration
Regular intervals
Tax year planning
Cash flow management

Exit Planning

Pre-IPO strategy
M&A considerations
Secondary sale opportunities
Lock-up periods

Advanced Tax Planning

AMT Management

AMT Calculation

Basic Formula

AMT Income = Regular Income + ISO Spread
AMT Exemption (2024):
- Single: $81,300
- Married: $126,500
AMT Rate: 26% or 28%

Planning Strategies

Exercise timing across tax years
Income management
AMT credit utilization
State tax considerations

Tax Rate Optimization

Income Timing

Annual Planning

Regular income consideration
Other compensation timing
Deduction planning
State tax residency

Multi-Year Strategy

Progressive exercise plan
Vesting schedule alignment
Tax bracket management
Exit timing

Liquidity Planning

Exit Strategies

IPO Considerations

Lock-up Period Planning

Cash flow management
Tax liability funding
Diversification timing
Rule 10b5-1 plans

Post-IPO Strategy

Selling schedule
Tax loss harvesting
Concentration management
Regular rebalancing

M&A Planning

Transaction Structure

Stock vs. cash consideration
Rolling equity options
Accelerated vesting
New grant negotiations

Tax Impact Analysis

Character of gain/loss
State tax implications
Net investment income tax
Alternative minimum tax

Risk Management

Diversification Strategies

Concentration Management

Rule of Thumb Guidelines

Single stock: <10% of portfolio
Company stock: <25% of net worth
Industry exposure: <35% of portfolio

Implementation Timeline

Post-vest selling strategy
Regular rebalancing
Tax-efficient transitions
Alternative investments

Hedging Considerations

Available Strategies

Public Company Options

Cashless collars
Exchange funds
Protective puts
Forward sales

Private Company Alternatives

Secondary markets
Private sales
Loan strategies
Insurance options

Implementation Checklist

Immediate Actions

Document review

Grant agreements
Exercise windows
Vesting schedules
Tax documents

Financial Analysis

Current equity value
Exercise costs
Tax implications
Cash requirements

Ongoing Monitoring

Regular Reviews

Quarterly valuation check
Tax projection updates
Exercise opportunity assessment
Risk management review

Documentation

Cost basis tracking
Exercise records
Tax payments
Trading records

Advanced Equity Strategies: Maximizing Your Tech Compensation

Portfolio Management Strategies

Equity Concentration Management

Diversification Targets

Early Career (Age 25-35)

Company stock: Maximum 40%
Growth assets: 40-50%
Fixed income: 10-20%
Cash reserves: 5-10%

Mid Career (Age 35-45)

Company stock: Maximum 30%
Growth assets: 45-55%
Fixed income: 15-25%
Cash reserves: 10-15%

Established Career (Age 45+)

Company stock: Maximum 20%
Growth assets: 40-50%
Fixed income: 20-30%
Cash reserves: 15-20%

Investment Integration

Asset Allocation Strategy

Total Portfolio Approach:
1. Consider equity compensation as part of growth allocation
2. Adjust other investments accordingly
3. Regular rebalancing schedule
4. Risk tolerance alignment

Example $1M Portfolio:

Tech company equity: $400K (40%)
Diversified stocks: $300K (30%)
Bonds: $200K (20%)
Cash: $100K (10%)

Wealth Building Strategies

Multiple Income Streams

Active Income Development

Primary Employment

Base salary optimization
Bonus maximization
Equity refresh grants
Performance reviews

Side Projects

Consulting: $100-250/hour
Technical writing: $200-500/article
Code reviews: $75-150/hour
Teaching/mentoring: $50-150/hour

Passive Income Building

Investment Income

Dividend stocks: 2-4% yield
REITs: 4-6% yield
Bonds: 3-5% yield
P2P lending: 6-10% yield

Digital Assets

Online courses: $5K-20K/year
Technical books: $2K-10K/year
Code libraries: $1K-5K/year
Templates/tools: $3K-15K/year

Career Growth Optimization

Equity Negotiation Strategies

New Role Negotiations

Base equity grant
Sign-on bonus
Refresh schedule
Performance targets

Internal Growth

Annual refresh grants
Promotion packages
Project bonuses
Retention awards

Advanced Tax Optimization

Tax-Advantaged Accounts

Retirement Accounts

401(k) Strategy

Maximum contribution: $22,500 (2024)
Employer match optimization
After-tax contributions
Mega backdoor Roth

IRA Planning

Backdoor Roth IRA
Traditional IRA
SEP IRA for side income
Contribution timing

Tax Loss Harvesting

Implementation Strategy

Regular Monitoring

Weekly price checks
Volatility tracking
Correlation analysis
Replacement selection

Execution Process

Wash sale avoidance
Documentation requirements
Basis tracking
Gain/loss netting

Exit Planning Strategies

Pre-IPO Planning

Preparation Timeline

12 Months Before:

Review all grants
Update exercise strategy
Prepare cash reserves
Establish tax planning

6 Months Before:

Complete early exercises
Set up trading accounts
Create selling strategy
Review lock-up terms

Post-IPO Management

Selling Strategy

Rule 10b5-1 Plans

Automatic selling schedule
Price triggers
Volume limitations
Blackout periods

Diversification Timeline

Year 1: Sell 20-30%
Year 2: Sell 15-25%
Year 3: Sell 15-25%
Hold remainder long-term

Risk Management Framework

Insurance Protection

Coverage Types

Personal Insurance

Term life: 10-12× income
Disability: 60-70% income
Umbrella: $1-5M coverage
Health: High-deductible plan

Professional Coverage

E&O insurance
Cyber liability
Business interruption
Professional liability

Emergency Planning

Liquidity Management

Cash Reserves

Basic: 6 months expenses
Intermediate: 12 months
Advanced: 18-24 months

Credit Lines

Personal line: $50-100K
HELOC: 75-80% LTV
Portfolio line: 50% LTV
Business line: Based on revenue

Long-term Wealth Preservation

Estate Planning

Basic Structure

Documentation

Living trust
Pour-over will
Power of attorney
Healthcare directive

Asset Protection

Trust structure
Entity formation
Insurance strategy
Tax efficiency

Legacy Planning

Wealth Transfer

Gifting Strategy

Annual exclusion gifts
Education funding
Family trusts
Charitable giving

Business Succession

Buy-sell agreements
Management transition
Equity distribution
Tax efficiency

Implementation Framework

Action Items

Immediate Steps (30 Days)

Portfolio analysis
Insurance review
Tax planning update
Cash flow assessment

Short-term Goals (90 Days)

Estate planning review
Investment rebalancing
Career development plan
Risk management update

Annual Review

Portfolio rebalancing
Tax strategy adjustment
Insurance updates
Estate plan review