Equity compensation is one of the most powerful — and confusing — parts of an employee’s pay package. From stock options to RSUs to phantom stock, companies use equity to align employees with the company’s success. Done well, it can be life-changing wealth. Done poorly (or misunderstood), it can be worth far less than it looks on paper.

If you’ve ever wondered:

• What’s the difference between RSUs vs stock options?
  
  
• How do stock options work?
  
  
• Which type of equity compensation is best?
  
  
• How do I negotiate my equity package?
  
  

…this guide is for you.

Why Companies Offer Equity Compensation

Unlike salary or bonuses, equity compensation gives you a stake in the company’s future. The upside is clear: if the company grows, your stake grows with it. The catch? Equity is often complex, illiquid, and full of “fine print” around taxes, vesting, and exercise rules.

That’s why understanding the type of equity you’re offered is just as important as knowing how much.

The Main Types of Equity Compensation

1. Restricted Stock Units (RSUs)

• What they are: A promise of actual company stock once your shares vest.
  
  
• Why it matters: Always has value once vested — no need to “buy in.”
  
  
• Tax impact: Taxed as ordinary income when shares vest.
  
  

Best for employees who want predictable, guaranteed value.

2. Incentive Stock Options (ISOs)

• What they are: The right to buy stock at a fixed “strike price.”
  
  
• Why it matters: Huge upside potential if stock price rises.
  
  
• Tax impact: Favorable treatment if holding periods are met (possible long-term capital gains).
  
  

Best for employees at high-growth startups with big upside potential.

3. Non-Qualified Stock Options (NSOs or NQSOs)

• What they are: Like ISOs, but taxed less favorably.
  
  
• Why it matters: Still valuable if the company performs, but more tax drag.
  
  
• Tax impact: Ordinary income tax at exercise.
  
  

Best for later-stage companies where stock appreciation is more predictable.

4. Employee Stock Purchase Plans (ESPPs)

• What they are: Opportunity to buy company stock at a discount (often 10–15%).
  
  
• Why it matters: Built-in return if you sell shares right away.
  
  
• Tax impact: Favorable if you follow holding rules, but can be complex.
  
  

Best for public company employees who want a low-risk benefit.

5. Phantom Stock & Stock Appreciation Rights (SARs)

• What they are: “Shadow” equity tied to company performance, paid in cash (or sometimes stock).
  
  
• Why it matters: No true ownership, but you share in upside.
  
  
• Tax impact: Taxed as ordinary income when paid.
  
  

Best for private companies not ready to issue real equity.

6. Direct Stock Grants / Ownership Units

• What they are: Actual shares granted (sometimes with restrictions).
  
  
• Why it matters: Immediate ownership, but potential tax bill at grant.
  
  
• Tax impact: Taxed as income at grant unless you file an 83(b) election.
  
  

Best for senior leaders negotiating ownership upfront.

7. Employee Stock Ownership Plans (ESOPs)

• What they are: A company-sponsored retirement plan invested primarily in company stock.
  
  
• Why it matters: Long-term wealth builder, but usually illiquid until retirement.
  
  
• Tax impact: Tax-deferred like a retirement account.
  
  

Best for employees at established companies that use ESOPs as a retirement benefit.

Ranking Equity Compensation: Best to Worst

Every situation is different, but generally here’s how they stack up for most employees:‍

1. Restricted Stock Units (RSUs)
   Predictable and guaranteed value once vested, making it the safest option for employees.
   
   
2. Incentive Stock Options (ISOs)
   Offer significant upside potential with favorable tax treatment if conditions are met, ideal for high-growth environments.
   
   
3. Direct Stock Grants / Ownership Units
   Provide true ownership immediately, though they can result in a tax bill at grant.
   
   
4. Employee Stock Ownership Plans (ESOPs)
   Great long-term wealth builders with tax-deferred growth, but liquidity issues until retirement.
   
   
5. Employee Stock Purchase Plans (ESPPs)
   Allow for discounted stock purchases and quick gains, but tax rules can complicate returns.
   
   
6. Phantom Stock & Stock Appreciation Rights (SARs)
   Offer a way to benefit from company performance without true ownership, but payouts are cash-based and taxed as ordinary income.
   ‍
7. Non-Qualified Stock Options (NSOs or NQSOs)
   Similar to ISOs but with less favorable tax treatment, making them the least attractive for employees due to potential tax drag.

How to Negotiate Equity Compensation

When your employer offers you stock options or RSUs, don’t just accept blindly. Frame the conversation around clarity and fairness:

Questions to Ask:

• How many units/options/shares am I receiving?
  
  
• What % of the company does that represent?
  
  
• What’s the vesting schedule? (Standard: 4 years with a 1-year cliff)
  
  
• What’s the strike price (for options)?
  
  
• What happens if I leave the company?
  
  
• Is there a liquidity plan (IPO, buyback, acquisition)?
  
  

Negotiation Angles:

• Ask for more units/shares/options (grant size).
  
  
• Push for faster vesting or partial acceleration if the company is sold.
  
  
• Negotiate a longer exercise window if you leave the company.
  
  
• Consider trade-offs: a slightly higher salary or bonus may be worth more than risky options.

Bottom Line

Equity compensation can be the most valuable part of your pay — or the most confusing. RSUs and ISOs tend to offer the best mix of value and upside, while other forms like phantom stock or ESOPs can still be beneficial depending on your company’s stage.

The golden rule: clarity first, negotiation second. Understand exactly what you’re being offered, then make sure it aligns with your financial goals.