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Understanding Employee Equity: The Basics of Terms, Taxes, and Selling

Published 7.10.2024

The number of companies that offer equity compensation is on the rise, and for good reason: A full 80% of workers say it’s among the chief things driving employee motivation. More than three-quarters of companies now offer some form of equity compensation, according to Morgan Stanley's 2024 State of the Workplace Survey.

Curiously, only 38% of employees are aware that their workplace offers equity, and this misconception highlights just how hard it can be to fully understand this topic — even if you, generally, that you get equity as part of your compensation package! So we’re going to dive into some of the basics here to give you a hand. 


Equity is stock (or other security) that represents an ownership interest. 

There are two main types. Stock options are just that: options. It’s the right to be able to buy shares in your company. You need to buy (“exercise”) them at the “strike price” in order to own them. 

On the other hand, restricted stock units (RSUs) are shares given to you by your company. You don’t need to plan to exercise your RSUs; they’re yours outright once they vest. (But when they do vest, you’ll need to pay taxes.)

Vesting is earning the right to actually own your equity, and companies use it to incentivize you to stay longer. (Vesting can also be event-based, but that’s less common.) The vesting “cliff” is the length of time you have to wait until you first vest — and that’s typically one year from your start date. Generally, you’d then vest an additional 25% for each subsequent year of work, until you’ve vested 100% after four years. (Of course, this can vary, so make sure you check your own equity grant for specifics.) 


Though having equity can boost your net worth even while the stocks are just humming along in your portfolio, the way to actually make money on them is by selling. 

Liquidity is the finance term for being able to sell your shares for cash. While public company shares are bought and sold fairly easily on the stock market, opportunities to sell your private company shares are more limited, so we’re going to focus on that latter option here. 

Either a company will be acquired or will merge with another company, or the company will attempt to become a public company through an IPO (initial public offering). Both these situations will create opportunities for you to sell your shares in the company — but both can also take time and come with their own caveats (like black out periods or other trading restrictions). As usual, read the fine print!

Tax implications

This is where equity can get a bit tricky. The two types of stock options — non-qualified stock options and incentive stock options — have different tax burdens. With ISOs, you may end up paying the alternative minimum tax, though this depends on both the amount that you exercise and the difference between the strike price and the shares’ current value. Whenever you sell shares, you’re also likely to be subject to capital gains taxes. 

Ideally even before you exercise options, you should talk to a tax adviser, CPA, or accountant in order to be fully prepared about what you’re going to owe and when. 

For RSUs, you pay tax once they vest.

Key takeaways 

What is the most important thing when it comes to equity compensation? Understanding what you’re dealing with. Take the time to fully study your equity grant, and don’t be afraid of asking a professional! They do this all the time. 

In between appointments with your financial adviser, you can monitor your equity — and how it fits into your larger financial future — by using Origin. Our dashboard is simple, and easy to use. 

Track your equity with Origin