Understanding equity compensation
Equity compensation is one of the most powerful — and most misunderstood — parts of a tech compensation package. Whether you're evaluating an offer from a public company paying in RSUs or a Series B startup offering stock options, the dollar figure on your offer letter rarely tells the full story. Vesting schedules, tax treatment, strike prices, and exit timing all dramatically affect what your equity is actually worth.
This calculator helps you model the real-world value of four types of equity: RSUs (the default at most public tech companies), ISOs and NSOs (common at startups), and PPUs (the unusual structure used by companies like OpenAI). Enter your grant details, and the calculator shows you a monthly vesting timeline, exit scenario modeling, and estimated tax impact.
RSUs vs. stock options: which is better?
RSUs are simpler: you receive shares on a vesting schedule and owe income tax when they vest. There's no purchase price, so RSUs always have value as long as the stock is above $0. Public companies like Google, Meta, and Amazon use RSUs as the primary equity vehicle because they're straightforward for employees and predictable for the company.
Stock options give you the right to buy shares at a fixed strike price. If the stock goes up significantly, options can be worth more than equivalent RSUs because your upside is leveraged — you're only paying the strike price for shares worth much more. But options carry risk: if the stock price falls below your strike (known as being "underwater"), your options are worthless. Startups typically grant ISOs or NSOs because they can't easily grant RSUs when there's no public market for the stock.
For pre-IPO equity considerations, see our Databricks compensation breakdown for a real-world example of how pre-IPO RSUs work at a late-stage company.
How vesting schedules work
The standard tech vesting schedule is four years with a one-year cliff. Here's what that means in practice:
- Months 0-11: Nothing vests. If you leave, you walk away with zero equity. This is the cliff period — the company's protection against short-tenure employees.
- Month 12 (the cliff): 25% of your total grant vests at once. For a 10,000-share grant at $25/share, that's $62,500 worth of shares hitting your account on your first anniversary.
- Months 13-48: The remaining 75% vests monthly (or quarterly). Each month you get roughly 208 shares (10,000 * 0.75 / 36).
Some companies use back-weighted schedules (Amazon famously vests 5/15/40/40 over four years) or front-loaded schedules. This calculator supports standard schedules and custom configurations.
Tax implications: ISOs vs. NSOs
Tax treatment is where ISOs and NSOs diverge sharply. For NSOs, the spread between strike price and fair market value at exercise is taxed as ordinary income. If your strike is $5 and you exercise when the stock is at $25, you owe ordinary income tax on $20 per share — regardless of whether you sell.
ISOs receive preferential tax treatment: you don't owe regular income tax at exercise (though the spread may trigger Alternative Minimum Tax). If you hold for at least one year after exercise and two years after the grant date, the entire gain is taxed as long-term capital gains — which can save you 15-20% compared to ordinary income rates. The catch: you need cash to exercise and the patience to hold through potential price drops.
What are PPUs?
Profit Participation Units are an unusual equity-like instrument used by companies structured as capped-profit entities — most notably OpenAI. PPUs don't represent ownership. Instead, they entitle you to a share of the company's profits up to a defined cap. They vest on a schedule similar to RSUs, but their value is tied to profit distribution events rather than a stock price on a public exchange.
PPUs are harder to value because there's no daily price ticker. Their worth depends on the company's internal valuation, its profitability, and the structure of any eventual liquidity event. If you hold PPUs, track the company's secondary market valuations and any announced tender offers — those are the closest approximation to a "price" for your units.