RSU vs Stock Options: What Every Engineer Should Know Before Signing

You got an offer. The salary looks good. But then you see the equity section: “50,000 ISOs with a $2.50 strike price, 4-year vest, 1-year cliff.” What does that mean? What’s it worth? When do you pay tax on it? Should you exercise early?

Equity is often the largest component of total compensation at tech companies — and also the most misunderstood. Millions of engineers have accepted offers without fully understanding whether their equity was real money or a line on a spreadsheet that would never convert to cash. This guide changes that.

RSUs, ISOs, NSOs & PPUs: Plain English Explanations

RSUs (Restricted Stock Units)

An RSU is a promise to give you shares of company stock at a future date, subject to a vesting schedule. You don’t pay anything to receive them — they’re granted to you as compensation. When they vest, you receive actual shares (or cash equivalent), and you owe ordinary income tax on their value at that moment.

RSUs are the dominant equity type at public companies like Google, Meta, Amazon, and Microsoft. They’re also increasingly common at well-funded private companies like Anthropic and Databricks. The key feature: RSUs always have some value as long as the stock price is above zero. There’s no exercise, no decision to make at vesting — the shares just show up in your brokerage account.

ISOs (Incentive Stock Options)

An ISO gives you the right to buy company shares at a fixed price (the “strike price” or “exercise price”) set on the date of grant. If the company grows and shares become worth more than your strike price, you can buy shares at the cheaper price and either hold them or sell for a profit. The spread is your gain.

ISOs are the standard equity type for early employees at startups. They have special tax advantages: if you hold the shares long enough after exercising (at least 2 years from grant and 1 year from exercise), your gains are taxed at the lower long-term capital gains rate rather than ordinary income rates. That difference — roughly 20% vs. 37% at top brackets — can be worth a significant amount on a large grant.

The catch: ISOs carry AMT risk, expire if you leave (usually 90 days after departure), and are worthless if the stock price falls below the strike price.

NSOs (Non-Qualified Stock Options)

NSOs work mechanically like ISOs — you get the right to buy shares at a fixed strike price — but without the tax advantages. When you exercise an NSO, the spread between the strike price and fair market value is taxed as ordinary income immediately, regardless of whether you sell the shares. The company also owes payroll tax on this amount.

NSOs are typically granted to contractors, advisors, and sometimes employees when the ISO annual limit ($100K/year in vesting) is exceeded. They’re also more flexible than ISOs — they can have longer exercise windows after departure and can be granted to non-employees. Some companies (especially later-stage startups) have moved to 5–10 year post-termination exercise windows for NSOs as a retention benefit.

PPUs (Profit Participation Units)

PPUs are OpenAI’s invention and don’t fit neatly into any of the above categories. A PPU is a contractual right to a share of OpenAI’s future profits — not ownership of the company. You don’t own shares; you hold a profit interest. PPUs vest evenly over 4 years (25%/year, no cliff) and can be sold during periodic tender offers where external investors purchase them directly from employees.

For a full breakdown of how PPUs work and what they mean for total compensation, see our OpenAI Compensation 2026 guide.

Side-by-Side Comparison: RSU vs ISO vs NSO vs PPU

Tax Implications for Each Type

Equity tax is one of the most consequential financial topics an engineer will encounter — and also one of the most poorly understood. Here’s what you actually need to know:

RSU Taxes: Simple but Brutal

When RSUs vest, the value of the shares on that day is taxed as ordinary income. If you’re in the top bracket, that’s 37% federal plus state taxes. Most companies withhold shares automatically to cover the tax bill (the “sell to cover” method). You receive the net shares and can do whatever you want with them — hold, sell, or transfer.

From that point forward, any gains or losses on the shares are treated as capital gains. If you sell immediately after vesting, you owe no additional tax (the cost basis is the vest-day price). If you hold for over a year and then sell, any additional appreciation is taxed at long-term capital gains rates (0%, 15%, or 20% depending on income).

One gotcha: if RSUs vest and you don’t sell, and the stock then drops, you’ve paid income tax on a value you no longer have. This happened to many employees at companies whose stock fell significantly after their vest date. There’s no refund of income tax paid on the higher vest-day value.

ISO Taxes: Complicated but Potentially Powerful

ISOs have a two-stage tax story. When you exercise (buy the shares), there is no regular income tax — but the spread between the strike price and fair market value is an AMT preference item. If your spread is large enough, you could owe AMT on paper gains you haven’t realized. This is the infamous “AMT trap” that has blindsided many startup employees.

The good news: if you hold the shares for at least 2 years from the original grant date AND at least 1 year from exercise, the eventual gain when you sell is taxed entirely at long-term capital gains rates. At top income brackets, that’s the difference between paying 37% and 20% on the same dollar of gain. On a $1M gain, that’s $170K in your pocket rather than the IRS’s.

The bad news: if the company fails, is acquired below your exercise cost, or the stock price drops below your strike price, options are worth nothing — and you can’t recover the AMT you paid at exercise.

NSO Taxes: Clear, but Less Favorable

NSOs are taxed as ordinary income on the spread at the time of exercise. If you exercise 10,000 NSOs with a $1 strike price when the stock is worth $20/share, you’ve realized $190,000 of ordinary income in that tax year — regardless of whether you sell. Your employer will withhold taxes as if this were a bonus.

After exercise, the shares have a cost basis of the exercise FMV. Future gains above that are capital gains. Like ISOs, you need to hold over a year to qualify for long-term capital gains treatment.

Figuring out your actual after-tax number on an equity grant requires modeling multiple scenarios: different exercise timing, different exit multiples, different tax brackets. We built a free equity calculator that shows exactly what your grant would be worth — after AMT, after income tax, after state taxes — across different outcomes. Try it at jobsbyculture.com/tools →

Vesting Schedules Explained

Vesting is how you earn your equity over time. The most common structure in tech is:

• 4-year total vesting period
• 1-year cliff: nothing vests during your first 12 months. On your 1-year anniversary, 25% vests all at once.
• Monthly (or quarterly) vesting thereafter: the remaining 75% vests in equal monthly or quarterly increments over the following 3 years.

Variations to Know About

• Quarterly vesting (no monthly cliff): Used by some companies including OpenAI PPUs. Vesting happens every 3 months rather than monthly. Slightly less granular, but still employee-friendly.
• Back-weighted schedules: Some companies use a 0%/25%/35%/40% annual split (nothing year 1, then increasing annual vests). This is a retention tool — leaving before year 3 means leaving significant equity on the table.
• Performance-based vesting: Some grants (particularly RSU refreshers and bonuses) vest based on hitting company or individual performance milestones. Read these clauses carefully — “at the discretion of the board” performance targets are not guaranteed.
• Double-trigger acceleration: A provision that vests all your equity immediately if (1) the company is acquired AND (2) you’re laid off or constructively dismissed within a window (typically 12–18 months). This is common at well-run startups and important to ask about.
• Single-trigger acceleration: Less common; vests all equity on acquisition alone regardless of employment status. Acquirers dislike this because it removes retention incentive.

When to Exercise Options: 83(b), Early Exercise & Timing

The 83(b) Election

An 83(b) election is one of the most powerful tools available to early startup employees. Here’s how it works:

Normally, you pay tax when equity vests (or when options are exercised). But if you file an 83(b) election, you elect to pay tax now at the current fair market value instead of when the shares vest. At an early-stage startup, the 409A valuation (the IRS-approved FMV for common stock) is usually very low relative to the preferred stock price investors paid. This means the taxable income is tiny or zero.

If the company grows 10x, 50x, or 100x, all of that appreciation is now treated as a capital gain rather than ordinary income. On a large outcome, this distinction can be the difference between paying 37% and 20% on millions of dollars.

Early Exercise

Some startups offer employees the right to exercise options before they vest (early exercise). This is powerful in combination with an 83(b) election: you exercise all your unvested options while the 409A is low, file an 83(b) to lock in that low FMV as your basis, and then wait for shares to vest. The clock on the capital gains holding period starts immediately rather than at vesting.

Risks to consider: you’re paying real money for shares that haven’t vested yet. If you leave before the cliff, you may be able to get a refund (check your grant agreement), but it’s not guaranteed. If the company fails, you lose the exercise cost. Only early exercise when (1) you genuinely believe in the company, (2) the dollar amount is affordable to lose, and (3) the 409A is materially below the preferred price.

When Not to Exercise

• When the AMT hit exceeds your cash reserves and you can’t sell shares to cover it
• When the company’s 409A is already near or above the preferred stock price (little spread to capture)
• When you have serious doubts about the company’s trajectory or runway
• When your options will expire far in the future and you’re still gathering information

Real Examples: How Different Companies Structure Equity

Google RSUs — Maximum Liquidity

Google (Alphabet) grants RSUs that vest quarterly over 4 years. Because Google is publicly traded on the NASDAQ, every vested RSU converts instantly into liquid shares at market price. An L5 engineer receiving $600K in RSUs knows with near-certainty what that’s worth. The only uncertainties are stock price movement during the vesting period and ordinary income tax at vesting. No exercise decision, no AMT, no illiquidity risk. For engineers who want the simplest and most certain equity structure, publicly traded RSUs are the gold standard.

Anthropic RSUs — Well-Funded Private Company

Anthropic grants RSUs, but the company is private. This means vested RSUs don’t automatically become liquid — you hold shares in a private company until there’s an IPO, acquisition, or secondary market sale. Anthropic has facilitated some secondary liquidity, and there are secondary markets where employees can sell pre-IPO shares, but the process is less seamless than selling Google stock. The upside: Anthropic is pre-IPO, so shares could appreciate significantly if the company goes public at a premium. The trade-off is illiquidity and uncertainty. For more, see our pre-IPO RSU guide using Databricks as a case study.

OpenAI PPUs — Novel and High-Ceiling

OpenAI’s PPUs are unique. Rather than granting ownership of the company, PPUs grant a share of future profits. They vest evenly over 4 years with no cliff, and liquidity comes through periodic tender offers where investors buy PPUs directly from employees. The valuation at each tender offer reflects OpenAI’s current perceived value — which has been enormous. Employees who joined early and held PPUs through multiple tender events have realized life-changing returns. The risk: PPUs are a newer instrument with no decades of legal precedent, and OpenAI’s governance structure is still evolving. Read the fine print carefully. See our full OpenAI compensation breakdown for a deeper dive on PPUs.

Typical Seed-Stage Startup ISOs — High Risk, High Upside

The most common early-startup package: 50,000 ISOs at a $0.50 strike price, 4-year vest, 1-year cliff. The 409A FMV at grant time is also $0.50 (matching the strike), meaning the options are “at the money.” If you early-exercise and file an 83(b) today, your taxable income is $0 (50,000 shares × $0 spread). You pay nothing now. If the company is later acquired for $20/share, you’ve made $975,000 in long-term capital gains — taxed at 20% rather than 37% ordinary income. That’s roughly $170K in tax savings on a single outcome. If the company fails, your early-exercise cost (50,000 × $0.50 = $25,000) is lost. This is the core risk/reward calculation of startup equity.

Is Your Startup Equity Worth Anything? A Framework

The uncomfortable truth: the majority of startup equity grants eventually expire worthless. Before you accept a low salary in exchange for equity, run this five-question framework:

Question 1: What Is Your Actual Ownership Percentage?

Your offer letter says “100,000 shares.” That number is meaningless without knowing the total diluted shares outstanding. Ask for the total capitalization table (or at least total shares on a fully diluted basis). Your ownership percentage = your shares ÷ total diluted shares. A 0.1% stake at a company worth $1B = $1M of theoretical equity. At 0.01%, it’s $100K. Know your number.

Question 2: What Liquidation Preferences Exist?

Investors typically hold preferred stock with liquidation preferences — the right to get their money back (or multiples of it) before common shareholders (employees) see a dollar. A company valued at $500M in preferred stock doesn’t need to sell for $500M for employees to get paid; it might need to sell for $1B after 1x or 2x preferences are covered. In many acquisitions, preferred holders take everything and common shareholders get nothing. Ask: “What are the liquidation preferences on the cap table?” If nobody will tell you, that’s a red flag.

Question 3: What Exit Multiple Is Realistic?

Most early-stage startups don’t exit at 50x their last valuation. In a realistic outcome, a Series B company raising at a $500M valuation might exit at $1–2B — a 2–4x return on the valuation, less than the liquidation preferences, leaving common shareholders with little. The home-run outcomes (10x+ on the last valuation) are statistically rare. Run a scenario analysis: what does my equity pay out at 1x, 2x, 5x, and 10x the current valuation? Adjust for dilution from future funding rounds.

Question 4: What Is the Timeline to Liquidity?

Options expire — typically 10 years from grant date, and often just 90 days after you leave. If a company is 5 years old and hasn’t shown signs of moving toward a liquidity event, your options may expire before any exit. ISOs especially create pressure: you must decide whether to exercise (and pay) or let them lapse. Ask: “What does the company’s path to liquidity look like?” If the answer is vague, factor that into your evaluation.

Question 5: Is There Secondary Market Access?

Some well-funded private companies (Anthropic, Stripe, SpaceX) have active secondary markets where employees can sell vested shares to institutional buyers before an IPO. If your company facilitates secondary sales or tender offers, your equity has real partial liquidity even without an exit. This dramatically reduces the risk of holding equity in a company that “might IPO someday.” Ask your recruiter directly: “Has the company run any employee tender offers or secondary programs?”

When Equity Is a Trap vs. When It’s Life-Changing

Equity Is Likely a Trap When…

• You’re being asked to take a salary significantly below market in exchange for options at a company with no revenue and an unproven team
• The 409A is already close to the preferred stock price (little spread, and dilution ahead)
• The company has heavy liquidation preferences that would require a massive exit before you see anything
• You don’t understand the cap table and leadership won’t explain it
• Your options expire 90 days after departure and you can’t afford to exercise them when you leave
• The company has been “about to IPO” for several years

Equity Can Be Life-Changing When…

• You’re early at a company with genuine product-market fit, growing revenue, and a clear path to exit
• You early-exercise and file an 83(b) while the 409A is materially below preferred price
• The company has a realistic timeline to IPO or acquisition within your options’ lifespan
• You understand your diluted ownership percentage and modeled realistic outcomes
• The company’s preferred investors have reasonable liquidation preferences (≤1x)
• You can afford the exercise cost and AMT exposure without financial stress