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Many tech sales roles include equity compensation -- stock options or restricted stock units. Most reps don't understand what they have, when to exercise, or what the tax consequences are. These guides cover the mechanics of ISOs and RSUs, the tax rules that govern them, and how to think about equity as part of your overall financial plan.
Key Concepts
A type of stock option granted to employees that gives the right to purchase company stock at a set price. ISOs receive preferential tax treatment but come with specific holding period requirements to qualify for long-term capital gains rates. AMT can apply at the time of exercise.
A promise to deliver actual company shares when vesting conditions are met, typically time-based or performance-based. RSUs are taxed as ordinary income at vest. There is no exercise required -- you receive shares automatically. RSUs are common at public companies and late-stage startups.
The fixed price at which an option holder can purchase shares, set at the time of grant. For ISOs, this must be set at the fair market value of the stock on the grant date. The difference between the exercise price and the current stock price is the intrinsic value of the option.
An ISO sale that meets both holding period requirements: shares held for at least 2 years from the grant date and at least 1 year from the exercise date. Meeting these requirements means the gain is taxed at long-term capital gains rates rather than ordinary income rates.
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Tax treatment and timing comparison for ISOs and RSUs. What each one costs you at vest, exercise, and sale -- and how to think about the tradeoffs.
AMT, timing strategy, and pre-IPO considerations. The decision of when to exercise can be worth six figures in after-tax outcomes.
Common Questions
Equity compensation is pay delivered in the form of company stock or the right to purchase stock. For tech sales reps, it usually means ISOs at startups and pre-IPO companies, or RSUs at public companies. The value depends on the company's stock price and, for options, whether the price has moved above your exercise price.
ISOs are options that give you the right to buy company stock at a set price. You pay to exercise them, and the tax treatment depends on when you exercise and when you sell. RSUs are grants of actual shares that vest over time. You don't pay anything to receive them, but you owe ordinary income tax on the full value when they vest.
Timing ISO exercises around AMT exposure is the central challenge. Exercising early in the year gives you time to assess your AMT position before year end. Exercising before an IPO or acquisition can lock in a lower 409A valuation and start the clock on qualifying holding periods. The right timing depends on the spread, your current income, and the company's trajectory.
Most ISOs have a 90-day post-termination exercise window. If you don't exercise within that period, the options expire worthless. Some companies offer extended exercise windows of 5 or 10 years, but this is not standard. Before leaving a job, check the post-termination deadline and weigh whether the options are worth exercising given the cost and tax implications.
Private company equity is valued using the most recent 409A valuation, which is an independent appraisal of the fair market value of common stock. For planning purposes, treat private equity as having uncertain value until there is a liquidity event. Build your financial plan around income, not potential equity value.
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