Equity Comp 101

First off, big congrats on the job offer, HENRY! You did it. You survived the interview gauntlet and no more pretending that you’re “super passionate” about a company’s mission when, let’s be honest, you’re just trying to get a paycheck. Now, we’re here to help with the next boss-level challenge: understanding and negotiating equity compensation.

Here’s the deal with equity comp (a.k.a. stock-based compensation): Instead of offering you a higher salary, companies—especially startups—might throw some ownership in the mix. You know, partial ownership in the form of stocks. It sounds sexy, right? The guy from your gym swears he’s chilling on a beach somewhere because he got in early at Twitter. But let’s pump the brakes before you’re fantasizing about retiring at 35. You're (probably) not a pro athlete, and that’s the unicorn scenario.

Equity compensation: Cool perk or a clever trick?

We get it, cash is king, and you’d probably prefer a direct deposit that hits your bank account. But equity comp isn't an MLM scam. Sure, it helps companies hold onto their cash, especially when they’re in the scrappy, ramen-eating startup phase. Still, equity can motivate you in a way a bigger paycheck can’t—because when you’ve got skin in the game, you’re a little more invested (literally) in the company’s success.

That said, don’t let your decision hinge on dreams of cashing out like a lottery winner. Most of the time, this is a long play, and not every company turns into the next Netflix or NVIDIA.

Equity comes in flavors—and some taste better than others

Before we dive into the types of equity, let’s talk about vesting. In plain terms, vesting means you don’t get your shares all at once. You have to stick around for a while before you can collect. Think of it like the NBA—you’re on a contract, but you gotta play the games before you get the stats. So, if you’re planning to bail on this job after a year, keep that in mind before locking into any equity deal.

Here’s a quick breakdown of what you might be offered:

Stock options: Classic. You get the option to buy company stock at a set price. If the company’s stock blows up? You’re golden. There are two main types: Incentive stock options (ISOs., also known as SARs - Stock Appreciation Rights), which are taxed at capital gains rates (meaning you don’t get hit with taxes until you sell), and nonqualified stock options (NSOs, or NQSO), which are taxed as ordinary income when you buy. ISOs are the better deal, but NSOs are more common.

Restricted Stock Units (RSUs): These are a hot trend right now, especially at bigger companies. You don’t buy stock here; the company just gives it to you—eventually. You usually have to wait for a vesting period, and the catch is, they’re taxed as ordinary income when you get them. If the company hasn’t gone public, you might end up paying taxes on stock you can’t even sell yet.

Performance shares: You’ve gotta hit certain metrics to unlock these bad boys. They’re mostly for the higher-ups, so unless you’re coming in hot with a corner office, this might not apply.

Employee Stock Purchase Plans (ESPPs): Think of this as a discount rack at your favorite store. You can buy stock at a lower price, and the cash comes straight out of your paycheck. You’ll pay taxes on the discount as income, and then you get hit with capital gains taxes when you sell.

Should you negotiate your equity comp?

Here’s the brass tacks: more shares don’t automatically mean more money. What you want to ask about is the total number of shares the company has—what’s called "fully diluted shares." This number tells you how much of the pie you’re getting. If you’re being offered 10,000 shares but there are a billion shares out there, you’re not exactly Mark Cuban.

If you don’t love the number, feel free to push for more equity, a bigger salary, or even some extra perks, like WFM days. And don’t be afraid to bounce if they’re not willing to budge—nothing’s worse than signing up with a bottom-feeder like the Calgary Flames.

And if your situation’s extra complicated, we’ve got your back. Hit up ARC Wealth, and we’ll help you figure out your next move.