Understanding Equity Compensation: RSUs, Options and Vesting Made Simple

Equity compensation can turn a decent job offer into a life-changing one — or into a disappointing pile of paperwork. The problem is that RSUs, stock options, vesting cliffs, and the tax rules around them are deliberately confusing, which leads many people to either overvalue or ignore their equity entirely. This guide strips it back to plain English so you can judge what your equity is really worth.

The two main types of equity

Most equity comes in one of two forms. Restricted stock units, or RSUs, are shares the company simply gives you once they vest — you own them outright and they have real value the moment they land. Stock options give you the right to buy shares at a fixed price (the strike price) in the future; they are only worth something if the share price rises above that strike. Knowing which type you have been offered is the first step, because the two behave completely differently.

How vesting works

You almost never get all your equity at once. Instead it vests over time, typically over four years, meaning you earn it in stages the longer you stay. A common schedule releases a quarter after one year and the rest monthly or quarterly thereafter. Until equity vests, it is a promise, not a possession — leave early and you forfeit whatever has not yet vested. This is why equity is as much a retention tool for the company as a reward for you.

The one-year cliff

Many grants include a “cliff,” usually at one year, before which nothing vests at all. Stay past the cliff and a chunk vests at once; leave a day before and you walk away with nothing. If you are weighing an offer heavy on equity, the cliff matters enormously, because it ties a real portion of your compensation to staying at least twelve months.

How equity is taxed

Tax is where equity trips people up. RSUs are generally taxed as income when they vest, based on the share value that day, which can create a sizable and sometimes surprising tax bill. Options have more complex rules that depend on their type and when you exercise and sell. Because the amounts can be large, understanding the tax treatment before a vesting event is essential; our payroll tax guide covers the withholding basics that apply.

What your equity is actually worth

A grant described as “£100,000 in equity” is rarely worth that today. For options, subtract the strike price and remember it is worthless if the shares never rise. For RSUs in a private company, the shares may be illiquid — real on paper but impossible to sell until an IPO or acquisition. Value equity conservatively, discount it for risk and time, and never treat unvested, illiquid equity as money you already have.

Weighing equity in an offer

When equity is part of a package, judge the whole thing, not the biggest number. A strong base salary with modest equity is often safer than a low salary propped up by speculative shares. Consider the company’s stage, your belief in its future, and how much risk you can afford. Our full guide to bonuses and equity goes deeper, but the principle is simple: equity is potential, not guaranteed pay.

Making equity work for you

Treat equity as a deliberate part of your financial plan rather than a mystery. Know your grant type, your vesting schedule, your cliff, and your likely tax events, and revisit them whenever the company’s value changes. Handled with clear eyes, equity can be a powerful wealth builder; treated as magic money, it can lead to poor decisions and painful tax surprises.

Questions about pay

What is the difference between RSUs and stock options?

RSUs are shares given to you outright once they vest; stock options give you the right to buy shares at a fixed price and are only valuable if the price rises above it.

What does vesting mean?

Vesting is earning your equity over time, usually four years, so you only fully own it if you stay; unvested equity is forfeited if you leave early.

What is a vesting cliff?

A cliff, often at one year, is a period before which nothing vests at all; stay past it and a chunk vests at once, leave before and you get nothing.

How is equity taxed?

RSUs are generally taxed as income when they vest based on that day's value, while options follow more complex rules depending on type and timing.