Equity compensation is a valuable component of many compensation packages today—especially in the tech, finance, and startup worlds. One of the most common forms of equity compensation is employer stock options, which give you the right (but not the obligation) to buy company stock at a set price.

Used effectively, stock options can help you build long-term wealth. But like any financial tool, they come with rules, risks, and important decisions. Here’s what to know about how they work, how they differ from other types of equity compensation, and how to approach them in a way that aligns with your goals.

What Are Employer Stock Options?

Employer stock options give you the right to purchase a specific number of shares at a fixed price, known as the strike price or exercise price, within a defined period of time.

Your ability to exercise the option is typically subject to:

• A vesting schedule (e.g., 25% per year over four years)
• A potential blackout period (common before earnings announcements or IPOs)
• A final expiration date, often 10 years from the grant date—or sooner if you leave the company

Once vested, you can choose when—or if—you want to exercise your options. The timing of that decision can be influenced by taxes, market value, your personal cash flow needs, and overall market conditions.

RSUs vs. Stock Options: What’s the Difference?

While Restricted Stock Units (RSUs) and stock options are both forms of equity compensation, they function very differently.

Stock Options

• What you receive: The right to buy shares at a set price
• Vesting: Usually time-based (or sometimes tied to performance milestones)
• What you pay: You pay the exercise price when you choose to buy the shares
• Taxes: Taxed at exercise (NSOs) or sale (ISOs), depending on the type

RSUs

• What you receive: Shares of company stock outright (once vested)
• Vesting: Typically time-based or based on performance
• What you pay: Nothing; shares are granted to you when they vest
• Taxes: Taxed as ordinary income when the shares vest

In short: With stock options, you choose when to act. With RSUs, the company gives you shares once vested, and you’re taxed immediately at that time.

Key Characteristics of Stock Options

• Exercise Price: Set at the time of grant, typically equal to the fair market value
• Vesting: Usually over time (e.g., 4 years with a 1-year cliff)
• Payment Methods: Cash exercise, cashless exercise (sell to cover), or stock swap
• Taxation: Taxed at exercise and/or sale, depending on the type
• Common Use: Frequently used by early- and mid-stage private companies and startups

Key Characteristics of RSUs

• Exercise Price: None—you receive shares directly once vested
• Vesting: May be time-based or tied to performance benchmarks
• Payment: No purchase required
• Taxation: Taxed as ordinary income when shares vest
• Common Use: Often used by late-stage startups and public companies

The Two Main Types of Stock Options

Understanding what kind of stock options you have is essential. There are two primary types of employer-issued options, and each has different rules and tax implications.

Non-Qualified Stock Options (NSOs)

• Who can receive them: Employees, contractors, consultants, and board members
• Tax treatment:
  • You pay ordinary income tax on the spread between the exercise price and fair market value at the time of exercise.
  • If you hold the shares after exercise, you may also owe capital gains tax when you sell.
• Flexibility: More broadly available, but less favorable tax treatment

Incentive Stock Options (ISOs)

• Who can receive them: Only employees
• Tax treatment:
  • No income tax due at exercise (if you meet holding requirements)
  • If held for at least two years from the grant date and one year from the exercise date (a qualifying disposition), any gain is taxed at the long-term capital gains rate.
  • May trigger Alternative Minimum Tax (AMT) at exercise
• Favorable terms: More complex tax planning, but potential for better tax outcomes

What to Consider Before Exercising Stock Options

Choosing when to exercise your options isn’t always straightforward. Some key considerations include:

• Tax implications: Will exercising now push you into a higher tax bracket? Are you approaching an AMT trigger?
• Market conditions: Is the current share price well above your strike price, or are you expecting volatility?
• Liquidity: If you’re at a private company, is there a plan for a future IPO or secondary sale?
• Concentration risk: How much of your net worth is tied up in your employer’s stock?
• Life events: Are you planning a major expense like buying a home, or retiring soon?

Working with a financial advisor can help you model different outcomes and time your decisions thoughtfully.

How to Approach Equity Compensation Strategically

Employer stock options and RSUs can be a meaningful part of your compensation, but they require proactive planning. A thoughtful strategy can help you avoid:

• Unintended tax bills
• Missed opportunities due to expiration
• Overexposure to a single stock

Have Equity Compensation? Here’s What to Do Next

Whether you’ve just received your first grant or you’re sitting on years of vested options, it’s never too early—or too late—to create a plan.

At Navalign Wealth Partners, we help individuals and families make informed, personalized decisions about their equity compensation. Our fiduciary approach means your goals and interests always come first.

Need help deciding what to do with your shares?

Contact us today to schedule a complimentary consultation and explore how your equity fits into your broader financial plan.