Equity is opportunity—leverage it.
f you're a tech professional, executive, or employee receiving stock options or restricted stock units (RSUs), you know they can build long-term wealth. But without the right guidance, equity compensation can also lead to costly mistakes—especially around taxes, vesting, and selling decisions. At Schmidt Financial Management, we specialize in helping professionals make sense of equity compensation plans so they can make your equity work as part of a bigger financial picture.
Why Employee Equity Compensation Plans Matter
Equity compensation gives employees a financial stake in the company’s future. That could mean receiving company stock outright, or having the option to buy shares at a set price. In fast-growing companies—especially in tech—this often represents the biggest opportunity to build long-term wealth.
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But with opportunity comes complexity. And without a plan, what looks like upside can quickly turn into surprise tax bills, missed deadlines, or unnecessary risk.
Here’s what we’re seeing:
- RSUs can create unexpected tax consequences. If your RSUs vest during a high-income year and the stock price drops before you sell, you could owe more in taxes than you gain. That’s why we help clients build a proactive selling and withholding strategy to stay ahead of surprises.
- Exercising stock options isn’t always straightforward. Exercise too early, and you might pay taxes on gains that never materialize. Wait too long, and you could lose the options after leaving the company. Timing matters—and we help clients plan around liquidity events, job changes, and shifting tax brackets.
- Too much company stock can be risky. It’s easy for equity to accumulate quietly, until one day you realize a huge portion of your net worth is tied to your employer’s stock price. We work with clients to diversify wisely without missing out on potential upside.
- Performance shares and ESPPs come with rules. Miss a holding period or sell too soon, and you could lose out on favorable tax treatment. With clear guidance, you can avoid these costly mistakes and keep more of what you earn.
At Schmidt Financial Management, we help bring clarity to equity comp. From RSUs and options to ESPPs and performance shares, we’ll help you understand what you have, when to act, and how it all fits into your larger financial plan.
Types of Equity Compensation
Tech professionals are often offered equity as part of their total compensation. Equity compensation gives you partial ownership in the company—potentially turning into real money if the company performs well. Below are the most common types used in the tech industry:
- Stock Options (ISOs and NSOs)
- Restricted Stock Units (RSUs)
- Performance Shares
- Employee Stock Purchase Plans (ESPPs)
- Other Types: DCP (Deferred Compensation Plan/Program), 401(k) stock, and
more
How Does Equity Compensation Work?
Understanding the types of equity your company offers is the first step toward building a smart plan. Here’s a breakdown of the most common forms—and what you need to know about each.
1. Stock Options
Stock options give you the right to buy company shares at a fixed price (called the strike or exercise price). If the market price rises above that, you can profit.
Incentive Stock Options (ISOs)
- Offered to employees (usually managers or executives)
- Potential for favorable tax treatment if you meet holding requirements
- Must hold shares at least 1 year after exercise and 2 years after the grant date
- Risk: If the stock drops after exercising, you could owe taxes on paper gains
Non-Qualified Stock Options (NSOs)
- More common and available to employees, contractors, and advisors
- Taxed as ordinary income on the spread when exercised
- Less restrictive, but typically less tax-advantaged than ISOs
✅ Talk to a financial advisor if you're unsure when to exercise or how to manage the tax impact.
2. Restricted Stock units (RSUs)
RSUs are shares of company stock that are granted to you after certain conditions are met—usually time-based vesting.
- You don’t buy them—they’re awarded
- Common vesting schedule: 4 years with a 1-year cliff
- Taxed as income when they vest, based on the stock’s fair market value
- If you don’t sell immediately, you may face market risk while holding
✅ Read more about how restricted stock units (RSUs) work.
3. Performance Shares
These are similar to RSUs, but they only vest if specific performance goals are achieved—like revenue growth or product milestones.
- Often granted to executives or senior leaders
- Aligns your compensation with company success
- Taxed when vested (similar to RSUs), but timing and value can be harder to predict
- Tied to specific goals with specific measurements for success
✅ Ideal for long-term thinkers—ask a financial advisor how to fit these into your
broader goals.
4. Employee Stock Purchase plans (ESPPS)
ESPPs let you buy company stock at a discount through payroll deductions.
- Typically offered by public companies
- Discounts range from 5%–15% off the market price
- May include a “lookback” feature for bigger discounts
- Potential for tax benefits if you hold the stock long enough
✅ Read about how to maximize your equity compensation benefits elections with ESPPs.
5. Other Equity-Like plans
These may not give you actual stock, but they still reward you based on company value.
- Phantom Stock: Mimics stock value; pays out usually in cash
- Stock Appreciation Rights (SARs): You receive the gain in stock value, not the shares themselves
- 401(k) Employer Stock Contributions: Some companies match in company
stock, which comes with both opportunity and risk
✅ Ask how these fit into your full compensation picture—they often go overlooked.
Equity compensation can be used as a strategic edge for wealth building—but it’s rarely one-size-fits-all. A financial advisor at Schmidt Financial Management can help you map out a clear, customized strategy that fits your career goals, risk tolerance, and tax situation.
What To Know About Equity Compensation
Each type of equity compensation comes with unique rules, tax consequences, and risks. To make the most of your equity, you should understand:
- What kind of equity you’ve been granted (e.g., RSUs, stock options, ESPPs)
- Your vesting schedule—and what happens if you leave the company
- When and how it’s taxed
- The potential upside—and the real risks
✅ Equity can be a powerful wealth-building tool, but without a strategy, it can also lead to unexpected taxes or missed opportunities. That’s why working with a financial advisor who understands tech compensation, like Schmidt FM, is essential.
Understanding Your Vesting Schedule
Vesting determines when your equity actually becomes yours. If you leave the company before you're fully vested, you could forfeit some or all of it.
Common vesting types:
- Cliff Vesting: You earn 100% of your grant after a set period (e.g., 1 year). If you leave before the cliff, you get nothing.
- Graded Vesting: You earn equity in regular chunks over time (e.g., 25% after 1 year, then yearly on your employment anniversary).
- Performance-Based Vesting: Equity is tied to hitting specific company or personal goals.
💡 Tip: Always check what happens to unvested shares if you’re laid off, switch jobs, or your company is acquired.
Understanding Tax Implications
Taxes are one of the most overlooked—and costly—parts of equity compensation. The timing of vesting, exercising, and selling can have a huge impact on what you owe.
Here's what to know:
- RSUs: Taxed as ordinary income when they vest, based on the stock’s market value.
- ISOs: May qualify for long-term capital gains treatment if you meet holding rules—but exercise can trigger AMT.
- NSOs: Taxed as ordinary income at exercise on the spread between strike price and market price.
- ESPPs: Can qualify for favorable tax treatment if held long enough after purchase.
💡 Tip: Great tools exist for tax projections and scenario planning, but it's best to work with a financial advisor and tax professional for a smart strategy.
Understanding Trading Periods and Risk
Your equity might not be as liquid or reliable as it seems. Company policies often limit when you can sell shares—and concentration risk is real.
Key things to keep in mind:
- Blackout Periods: Public companies typically restrict trading during earnings season or other sensitive times.
- Private Company Lockups: If your company IPOs, you may be unable to sell for 6+ months.
- Concentration Risk: Holding too much of your net worth in one company (your employer) can backfire if the stock drops.
💡Tip: Plan in advance how you’ll diversify your holdings. A financial advisor can
help you decide when to sell, reinvest, or hold.
How Your Equity Compensation Fits Into Your
Financial Plan
Your equity is more than a job perk—it’s a major part of your overall financial picture. How you handle it can shape everything from your tax bill to your timeline for buying a home or reaching financial independence.
Below are a few real-world scenarios that show how strategic planning (or lack of it) can make a big difference:
Case Study 1: "The Early Employee Who Waited Too Long"
Sam joined a startup early and received ISOs with a low strike price. Years later, the company was preparing to go public. The stock value had soared—but Sam hadn’t exercised any options. When the IPO hit, Sam exercised a large number of shares all at once and triggered the Alternative Minimum Tax (AMT).
Lesson: Don’t wait until a liquidity event to exercise. A financial advisor can help you explore early exercise or staged strategies to reduce tax surprises.
Case Study 2: "The RSU Windfall That Made Homeownership Possible"
Monica, a senior engineer at a public tech company, received regular RSU grants. When her shares vested, she worked with her advisor to sell a portion quarterly and earmark the proceeds for a home down payment. Within 3 years, she bought a home in the Bay Area without dipping into savings or taking on excess debt.
Lesson: Equity compensation can fund big life goals—if you plan ahead and sell strategically over time.
Case Study 3: "The ESPP Power User"
Diego maxed out his company’s ESPP, buying shares at a 15% discount and selling them shortly after purchase in a qualified disposition window. He reinvested the gains into a diversified portfolio. Over five years, those reinvested profits compounded significantly.
Lesson: Even small discounts can add up—especially when paired with a long-term investment strategy. A financial advisor can help you decide when to sell and how to reinvest.
Case Study 4: "The overexposed exec"
Tina, a VP at a late-stage startup, had most of her net worth tied up in unvested RSUs and vested stock she hadn’t sold. When the company delayed its IPO due to market conditions, Tina realized she had no liquidity—and a huge amount of risk.
Lesson: Equity can be exciting, but relying too heavily on one company’s future is risky. Diversification is key, especially when your salary, bonuses, and equity are all tied to the same employer.
Whether you’re weighing whether to exercise early or deciding how much stock to sell, a personalized plan from a financial advisor like Schmidt FM can help turn your equity into a real financial foundation—not just a hypothetical payoff.
Ready To Take Control Of Your Equity Compensation?
Equity comp can be one of the most powerful tools for building wealth—but only if it’s part of a clear, thoughtful plan. That means understanding how your RSUs or stock options work, how they’re taxed, and how they fit into your broader financial goals.
The good news? You don’t have to navigate it alone.
At Schmidt Financial Management, we help clients turn equity compensation into strategy. Whether you’re negotiating a new offer, planning a major sale, or just trying to avoid surprises at tax time, we’ll help you take control and make confident decisions at every stage.
📞 Let’s turn your stock grants into long-term financial confidence. Schedule a consultation with our team to get expert advice tailored to your career and goals.
Frequently Asked Questions About Equity Compensation
1. What is equity compensation?
Equity compensation is a form of non-cash pay that companies offer to employees, often in the form of stock options, restricted stock units (RSUs), or employee stock purchase plans (ESPPs). It allows employees to share in the company’s growth and success by owning part of the business. Equity compensation can help build long-term wealth but also comes with important tax, timing, and diversification considerations.
2. What is an example of equity-based compensation?
A common example is Restricted Stock Units (RSUs). Let’s say you receive a grant of 4,000 RSUs with a 4-year vesting schedule. Every year, 1,000 shares vest. Once vested, the value of those shares is treated as income, and you can choose to sell them or hold on to them. RSUs are especially popular at large public tech companies like Amazon or Meta.
Other examples include:
- Stock options at a startup, where you purchase shares at a set price
- ESPPs at a public company, where you buy discounted shares via payroll deductions
3. How much equity compensation should I ask for?
There’s no one-size-fits-all answer—it depends on your role, the company’s stage, and your risk tolerance. But here are a few guidelines:
- Startups: Ask for a % of ownership or number of shares, and understand the company’s valuation and cap table. 0.1% of a pre-IPO startup could be meaningful—or not, depending on dilution and exit potential.
- Established companies: Focus on total value over time. What are the RSUs worth now? How often do new grants happen? What’s the vesting schedule?
💡 A financial advisor can help you evaluate an offer, model potential outcomes, and compare offers apples-to-apples—especially if equity is a big part of the package.
4. Does equity compensation count as income?
Yes, but how it’s taxed depends on the type:
- RSUs: Taxed as ordinary income when they vest
- NSOs: Taxed on the gain at exercise as ordinary income
- ISOs: May qualify for capital gains treatment if holding requirements are met—but can trigger AMT
- ESPPs: May be taxed favorably if you hold shares long enough after purchase
📌 Because tax treatment varies, it’s important to plan ahead with both a financial advisor and a tax pro to avoid unexpected tax bills.
5. What happens to my equity if I leave the company?
It depends on the type of equity and your vesting status:
- Unvested shares/options: You typically forfeit these when you leave.
- Vested stock options: You usually have a limited window (often 90 days) to exercise them, or they expire.
- RSUs: Vested RSUs are yours, though you’ll still owe taxes when they vest, even if you leave.
📌 Review your grant agreements and talk to a financial advisor before leaving a job to avoid missing out on valuable equity or facing a surprise tax hit.
6. Can I use my equity to help buy a house or fund other big goals?
Yes—but timing matters. You may be able to:
- Sell vested RSUs or exercised options to generate a down payment
- Use company stock as collateral (in some cases)
- Strategically exercise options over time to manage taxes
However, relying too heavily on your company stock creates concentration risk. A financial advisor can help you diversify and make smart decisions that balance today’s needs with future goals.
7. Should I sell my shares or hold onto them?
It depends on your financial situation, risk tolerance, and goals. Some reasons to consider selling include:
- Covering taxes or large expenses
- Diversifying your portfolio
- Reducing exposure to company-specific risk
On the other hand, you might choose to hold if you:
- Believe in the company’s long-term potential
- Can afford to wait for a favorable tax outcome
🧠 There’s no universal answer—but there is a smart strategy for you. A financial advisor with experience in tech equity can help you create a plan.