Executive Summary
In 2026, equity compensation represents 35-50% of total comp at tech companies. Public companies favor RSUs (82% adoption) for their simplicity and liquidity, while startups use stock options and phantom shares. Annual equity refreshers have become standard, with top performers receiving grants worth $100K-$300K annually. Understanding vesting schedules, tax implications, and valuation is critical for maximizing equity value.
Equity Instrument Types
Different equity structures serve different company stages and employee needs:
| Instrument | Best For | Tax Treatment | Liquidity | Risk Level |
|---|---|---|---|---|
| RSUs | Public companies | Taxed as income on vest | Immediate | Low |
| ISO Stock Options | Early-stage startups | AMT risk, cap gains if held | None until exit | High |
| NSO Stock Options | Late hires, contractors | Ordinary income + cap gains | None until exit | High |
| Phantom Shares | Pre-IPO companies | Cash bonus on exit | None until exit | Medium |
| Profit Interest | LLCs, partnerships | Cap gains treatment | None until exit | High |
RSU Compensation at Public Companies
Restricted Stock Units dominate at public tech companies (82% adoption in 2026). RSUs offer simplicity: they vest over time and convert to shares you can immediately sell.
Typical RSU Structure
- Initial Grant: $100K-$300K worth of RSUs at hire, vesting over 4 years
- Vesting Schedule: 25% after 1 year (cliff), then quarterly or monthly thereafter
- Annual Refreshers: $40K-$150K grants each year to retain talent
- Taxation: Taxed as ordinary income when vested, at current FMV
| Level | Initial Grant | Annual Refresher | 4-Year Value |
|---|---|---|---|
| Junior (L3) | $80K | $30K | $170K |
| Mid-Level (L4) | $140K | $50K | $290K |
| Senior (L5) | $200K | $80K | $440K |
| Staff (L6) | $300K | $120K | $660K |
| Principal (L7) | $450K | $180K | $990K |
Stock Options at Startups
Pre-IPO companies grant stock options because they can't offer liquid equity. Options give the right to buy shares at a strike price (typically the 409A valuation at grant date).
Key Metrics
- Typical Grant: 0.05-0.50% ownership depending on role and stage
- Strike Price: Set by 409A valuation (usually $0.50-$10/share at Series A-C)
- Vesting: 4 years with 1-year cliff (standard)
- Exercise Window: Must exercise within 90 days of leaving (or forfeit)
- ISO Annual Limit: $100K worth can vest per year for favorable tax treatment
Equity Value Modeling
Startup equity has uncertain value. Model expected outcomes using probability-weighted scenarios:
| Outcome | Probability | Exit Valuation | Your 0.10% Value |
|---|---|---|---|
| Failure | 40% | $0 | $0 |
| Acqui-hire | 25% | $50M | $50K |
| Modest Exit | 20% | $500M | $500K |
| Strong IPO | 12% | $3B | $3M |
| Unicorn+ | 3% | $10B+ | $10M+ |
| Expected Value | 100% | - | $565K |
Vesting Schedules and Cliffs
Understanding vesting mechanics is critical:
Standard 4-Year Vesting
- Year 1: 0% vested until 12-month cliff, then 25% vests
- Years 2-4: Remaining 75% vests monthly (2.08% per month)
- Total: 100% vested after 48 months
Alternative Structures
- Back-weighted: 10%/20%/30%/40% per year (rewards retention)
- Front-weighted: 40%/30%/20%/10% per year (rare, used for critical hires)
- Performance-based: Vest accelerates if milestones hit
Tax Implications
Equity taxation varies dramatically by instrument type:
RSUs (Public Companies)
- Taxed as ordinary income when shares vest
- Withholding typically 22% federal + state
- Can sell immediately to cover taxes
- Subsequent gains/losses taxed as capital gains
ISOs (Incentive Stock Options)
- No tax on grant or vest
- AMT (Alternative Minimum Tax) may apply on exercise
- If held 2 years from grant + 1 year from exercise: long-term cap gains
- Otherwise: ordinary income treatment
NSOs (Non-Qualified Stock Options)
- Ordinary income tax on (FMV - strike price) at exercise
- Subsequent gains taxed as capital gains
- No AMT concerns but less favorable overall
Refresher Grants: The Hidden Goldmine
Annual equity refreshers create compounding value often exceeding initial grants:
Refresher Strategy
- Year 1: Initial grant begins vesting (25% in year 1)
- Year 2: Initial continues + refresher grant begins
- Year 3: Initial continues + Year 2 refresher + new refresher
- Year 4+: Multiple overlapping grants vest simultaneously
By year 4, a Senior Engineer may have $200K+ annual equity income from stacked grants—significantly exceeding their initial offer.
Negotiation Strategies
For Public Company Offers
- Negotiate dollar value, not share count: Stock price fluctuates
- Request sign-on bonus instead of front-loaded equity: Immediate cash vs. 4-year lockup
- Ask about refresher policy: "What was the average L5 refresher last year?"
- Time your start date: After earnings if stock is volatile
For Startup Offers
- Ask for % ownership, not option count: Share count is meaningless
- Request latest 409A and cap table: Understand dilution
- Negotiate early exercise rights: Start capital gains clock sooner
- Clarify acceleration: What happens on acquisition?
Conclusion
Equity compensation in 2026 represents 35-50% of total tech compensation. RSUs offer simplicity and liquidity at public companies, while startup options provide asymmetric upside with significant risk. Understanding vesting schedules, tax treatment, and refresher strategies is essential for maximizing long-term wealth.
The most sophisticated candidates model equity value probabilistically, negotiate based on % ownership (startups) or $ value (public), and actively manage their equity like any investment portfolio—timing exercises, planning for AMT, and diversifying as grants vest.