LumaResume

Evaluating Equity & Stock Options in Offers

RSUs, ISOs, NSOs - understand equity compensation and its true value in your total package.
Follow-Up & Negotiations

LumaResume Team

Dec 9, 2024

12 min

Evaluating Equity Offers: Understanding Stock Options, RSUs, and Risk

You get an offer: $120K salary + 50,000 stock options.

Is that good? What does that even mean?

Here's the truth: Equity can make you wealthy—or be worthless. Understanding the difference between stock options, RSUs, vesting schedules, and risk is critical to making smart career decisions.

What this guide covers:

  • Stock options vs. RSUs: What's the difference?
  • How to value equity (it's not just # of shares)
  • Vesting schedules and cliffs
  • Risk assessment: Startup vs. public company equity
  • Tax implications (simplified)
  • Red flags to watch for

By the end, you'll know how to evaluate equity offers and make informed decisions.

Types of Equity: Options vs. RSUs

Stock Options (Common at Startups)

What they are: The right to buy company stock at a fixed price (strike price)

How they work:

  1. Company grants you options at a strike price (e.g., $1/share)
  2. You wait for them to vest (typically 4 years)
  3. When they vest, you can exercise (buy) them at $1/share
  4. If company is worth more (e.g., $10/share), you buy at $1, sell at $10, profit $9/share
  5. If company fails, options are worthless

Two types:

  • ISOs (Incentive Stock Options): Tax advantages, but complex rules
  • NSOs (Non-Qualified Stock Options): Taxed as income when exercised

Key point: Options require you to pay money to exercise them. They're only valuable if the company succeeds.

RSUs (Restricted Stock Units) (Common at Public Companies)

What they are: Actual company stock given to you (after vesting)

How they work:

  1. Company grants you RSUs (e.g., 1,000 shares)
  2. They vest over time (typically 4 years)
  3. When they vest, you receive the shares automatically (no payment required)
  4. You can sell them immediately or hold
  5. Taxed as income when they vest

Key point: RSUs are "real" shares. No purchase required. Value = current stock price × # of shares.

Comparison: Options vs. RSUs

FactorStock OptionsRSUs
Do you pay to get shares?Yes (exercise price)No
Value if company fails?$0$0
Value if company succeeds?High upside potentialSteady value
Common atStartups, private companiesPublic companies
Risk levelHigherLower
Tax complexityHigh (especially ISOs)Moderate

How to Value Equity

For Public Companies (RSUs):

Formula: # of RSUs × Current Stock Price = Value

Example:

  • 1,000 RSUs
  • Stock trades at $150/share
  • Value: 1,000 × $150 = $150,000 (over 4 years = $37,500/year)

Easy to value: Stock has a public price.

For Private Companies (Stock Options):

Much harder to value. You need:

  1. # of options granted
  2. Strike price (what you pay per share)
  3. Current valuation (409A valuation)
  4. Fully diluted shares outstanding

Formula:

Value per share = (Company Valuation / Fully Diluted Shares) - Strike Price

Total value = Value per share × # of options

Example:

  • 50,000 options
  • Strike price: $1/share
  • Company valuation: $500M
  • Fully diluted shares: 100M

Value per share = ($500M / 100M) - $1 = $5 - $1 = $4

Total value = 50,000 × $4 = $200,000 (if company maintains valuation)

Caveat: This is paper value. You only realize it if:

  • Company goes public (IPO)
  • Company gets acquired
  • There's a secondary market (rare)

💡 Pro Tip: Ask recruiters for the 409A valuation and fully diluted share count. If they won't share, the equity is hard to value.

Understanding Vesting Schedules

Standard Vesting: 4 Years with 1-Year Cliff

How it works:

  • Year 1 (cliff): 0% vested. If you leave before 1 year, you get nothing.
  • After 1 year: 25% vests (cliff)
  • Months 13-48: Remaining 75% vests monthly (1/48 per month)

Example:

  • Grant: 48,000 shares
  • After 1 year: 12,000 shares vest
  • Months 13-48: 1,000 shares/month vest

Why the cliff exists: Protects company from people who leave quickly.

Variations:

No cliff (rare): Vests monthly from day 1

Accelerated vesting: Some portion vests faster (e.g., on acquisition)

Backloaded vesting: More vests in later years (common at Amazon)

Risk Assessment: Startup vs. Public Company Equity

Startup Equity (Stock Options): High Risk, High Reward

Potential outcomes:

  1. Company fails (60-70% of startups): Options worth $0
  2. Company stays private forever: Options illiquid, hard to sell
  3. Company IPOs or gets acquired: Options could be worth millions

When startup equity is worth more:

  • Early-stage (seed/Series A): Higher upside if company succeeds
  • Company is well-funded and growing fast
  • You believe in the mission and team

Risk mitigation:

  • Don't sacrifice too much salary for equity
  • Diversify: Don't put all eggs in one startup basket
  • Understand the fundraising trajectory (how much runway?)

Public Company Equity (RSUs): Lower Risk, Steady Value

Potential outcomes:

  1. Stock goes down: You still get shares, but worth less
  2. Stock stays flat: Predictable value
  3. Stock goes up: Bonus upside

Advantages:

  • Liquid: You can sell immediately when they vest
  • Transparent: Stock price is public
  • Lower risk: Company already successful

When to prioritize RSUs:

  • You value stability over lottery tickets
  • You're joining a proven company (Google, Meta, etc.)
  • Stock has steady growth trajectory

Questions to Ask About Equity

For Startups (Stock Options):

  1. How many fully diluted shares are outstanding?

    • Need this to calculate % ownership

  2. What's the current 409A valuation?

    • Determines current value per share

  3. What's the strike price?

    • What you'll pay to exercise

  4. What's the vesting schedule?

    • 4 years with 1-year cliff is standard

  5. Are there any acceleration clauses?

    • E.g., vesting speeds up if acquired

  6. What's the company's funding status and runway?

    • How long until they need more money?

  7. Is there a secondary market?

    • Can you sell shares before IPO/acquisition?

  8. What's the post-termination exercise window?

    • How long do you have to exercise options after leaving? (90 days is common, but some offer 10 years)

For Public Companies (RSUs):

  1. How many RSUs am I receiving?
  2. What's the current stock price?
  3. What's the vesting schedule?
  4. Are there any performance conditions?
    • Some RSUs vest only if company/individual hits targets
  5. What's the company's stock performance trend?
    • Growing, flat, declining?

Tax Basics (Simplified)

Stock Options (ISOs):

  • At grant: No tax
  • At exercise: Potential Alternative Minimum Tax (AMT)
  • At sale: Capital gains tax (if held >1 year after exercise)

Strategy: Exercise early and hold to qualify for long-term capital gains

Stock Options (NSOs):

  • At grant: No tax
  • At exercise: Taxed as ordinary income (difference between strike price and FMV)
  • At sale: Capital gains on any additional appreciation

RSUs:

  • At vesting: Taxed as ordinary income (company withholds ~40% for taxes)
  • At sale: Capital gains on any appreciation since vesting

💡 Pro Tip: Consult a tax professional for your specific situation. Equity taxes are complex.

Red Flags in Equity Offers

🚩 Red Flag #1: Won't Share 409A Valuation or Share Count

Why it matters: You can't value the equity

🚩 Red Flag #2: Huge # of Options, Tiny Salary

Why it matters: Equity might be worth $0; you can't pay rent with options

🚩 Red Flag #3: Unusual Vesting Schedule

Why it matters: 5-year vests or backloaded vesting lock you in longer

🚩 Red Flag #4: Short Post-Termination Exercise Window (90 days)

Why it matters: If you leave, you have 90 days to exercise (pay $) or lose options

🚩 Red Flag #5: Company is Running Out of Runway

Why it matters: If they can't raise more funding, equity becomes worthless

Evaluating Total Compensation

Formula: Base + Bonus + (Equity / Vesting Years) = Annual Comp

Example 1: Public Company

  • Base: $150K
  • Bonus: $20K
  • RSUs: 1,000 shares × $200 = $200K / 4 years = $50K/year
  • Total annual comp: $220K

Example 2: Startup

  • Base: $120K
  • Bonus: $10K
  • Options: 50,000 @ $1 strike, company valued at $5/share = $200K potential value / 4 = $50K/year if company succeeds
  • Total comp: $130K guaranteed + $50K speculative = $180K

Risk adjustment: Startup equity is speculative. Discount by 50-70% for risk.

Risk-adjusted startup comp: $130K + $15K = $145K (more realistic)

Key Takeaways

  1. Understand the type: Options (you pay to exercise) vs. RSUs (free shares)
  2. Value public company equity easily: # of RSUs × stock price
  3. Value startup equity carefully: Need 409A, strike price, share count
  4. Standard vesting: 4 years, 1-year cliff
  5. Startup equity = high risk: Only valuable if company IPOs/exits
  6. Public company equity = lower risk: Liquid and transparent
  7. Ask the right questions: 409A, share count, vesting, post-termination window
  8. Risk-adjust startup equity: Discount by 50-70% when comparing offers

Next Steps

  1. Identify equity type: Options or RSUs?
  2. Get the numbers: 409A, strike price, share count (startups) or RSU count + stock price (public)
  3. Calculate value: Use formulas above
  4. Risk-adjust: Discount startup equity by 50-70%
  5. Compare total comp: Base + bonus + equity = annual comp
  6. Read our guide on Salary Research Tools to benchmark your offer

Remember: Equity can be life-changing—or worthless. Don't let big numbers on paper distract from base salary. Prioritize guaranteed compensation, especially early in your career. Equity is the cherry on top, not the foundation. Evaluate it carefully, understand the risks, and make decisions that balance upside with stability.