Glossary · Compensation
Equity compensation
Equity compensation is pay in the form of ownership (shares, stock options, or similar), giving an employee a stake in the company's future value.
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Common at startups and scale-ups, where equity can be the largest part of a senior package. Its real value depends on the company's growth and the terms: vesting, strike price, and dilution.
The word covers instruments that behave very differently. Shares are ownership now; restricted stock units are a promise of shares later; options are a right to buy at a fixed price, worth something only above it; and some plans grant phantom or cash-settled awards that track the share price without conveying ownership at all. Treating them as one thing, because an offer letter calls each of them equity, is how a package comes to be overvalued.
Tax follows the instrument and the jurisdiction. In the Netherlands, for example, the wage tax act counts as pay not the value of an employee share option itself but the value of the shares acquired by exercising it, measured at exercise if the shares can be traded straight away, or when they become tradable if they cannot; if the option itself is sold, what is received for it. Equity's neighbours in this glossary are total compensation, where it has to be valued, and the signing bonus or golden hello, which is often sized against equity lost on leaving.
In practice
What an equity award is worth turns on the mechanics behind the headline number: how many shares rather than what percentage, set against the fully diluted count; the vesting schedule and any cliff; the exercise price where options are granted; and the treatment of vested and unvested awards on leaving. Instruments differ, and tax treatment differs with them, according to jurisdiction, company stage, and the plan's own terms.
Timing is where equity meets a move. Whether unvested awards lapse on resignation is set by the plan; where they do, the forfeited value is what a signing bonus at the new employer would be sized against, and the reason vest dates and notice dates can be read against each other before a leaving date is fixed. Where vested options must be exercised within a limited window after the leaving date, that decision arrives with a cost attached.
In listed companies, holding and exercise periods may be set by governance as well as by the plan. The Dutch corporate governance code, applied on a comply-or-explain basis, says that shares awarded to management board members should be held for at least five years after they are awarded, and that share options cannot be exercised during the first three years after they are awarded. For a candidate weighing a listed offer against a private one, those periods sit beside vesting in deciding when the equity can actually be turned into money.
Common questions
- What is the difference between stock options and RSUs?
- A stock option is a right to buy shares at a fixed price, so it has value only if the shares are worth more than that price; a restricted stock unit is a promise of the shares themselves, which holds value unless the shares become worthless. Options therefore carry more upside and more risk of ending up worth nothing. Vesting conditions attach to both, and availability varies by company stage and jurisdiction.
- What happens to your equity if you leave the company?
- The plan rules and the terms of departure decide. Unvested awards may lapse on leaving, while vested awards can be retained, though what retention means depends on the instrument: vested options may have to be exercised within a limited window after the leaving date, and private-company plans can include buy-back rights. Where a plan uses good leaver and bad leaver provisions, they change the outcome again, and the terms differ by jurisdiction.
- Is equity compensation better than a higher salary?
- Neither is better in the abstract; they price different things. Salary is certain and immediately spendable, and where pension contributions are set as a proportion of base, it fixes that reference too. Equity is contingent on the company's outcome and on terms written into the plan, realisable only after vesting and, in private companies, on a liquidity event. Comparing them means valuing the equity explicitly inside total compensation.
- What is a vesting cliff?
- A cliff is a period at the start of a vesting schedule during which nothing vests; at its end a block vests at once, and the rest follows in instalments. It protects the company against granting ownership to someone who leaves early, and it shapes the timing of a move: leaving shortly before a cliff forfeits the whole first block, which is the kind of loss a signing bonus is sometimes sized to replace.
Sources
Placed, not posted.
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