The Most Misunderstood Part Of Tech Pay

This segment unpacks stock options, a type of equity compensation typically offered by startups rather than large public tech companies. It contrasts stock options with RSUs and explains how options function, including taxation and risk.

• What Stock Options Are: A stock option gives the right to purchase company shares at a predetermined price (the “strike price”). These are common in startups but rare in large public companies like Google or Facebook.
• Grant and Vesting Mechanics: Similar to RSUs, options usually vest over four years with a one-year cliff. The total grant allows employees to buy a fixed number of shares—often a large number—at a low strike price.
• Value and Risk: The value of stock options depends on the company’s success. While paper valuations can be high, employees must actually buy the shares (unlike RSUs, which are granted). If the company never goes public, the options might end up worthless.
• Types of Stock Options:

  • ISOs (Incentive Stock Options): Taxed only upon sale, usually favorable for employees.

  • NSOs (Non-qualified Stock Options): Taxed at the time of exercising and again at sale, even if the shares haven't yet generated real money—making them riskier.

• Tax Implications: With NSOs, employees may owe taxes just for exercising the option (based on fair market value), creating potential financial burden even before any profit is realized.

This complexity and risk/reward profile is a key difference from the more predictable RSU structure in big tech compensation packages.