Stock Options vs. Restricted Stock Units

"So I Got 50,000 Shares!" - A Reality Check Picture this: Your friend bursts into the room, beaming with excitement. "I just got offered 50,000 shares!" They're practically floating. You ask three simple questions: - "What's the total outstanding shares?" - "What type of shares are they?" - "When can you sell them?" Their face falls. "Um... I should probably ask..." Sound familiar? I've created this guide to help you navigate the complex world of startup equity. 1. Not All Equity Is Created Equal Think of equity like ice cream – there are many flavors, and each tastes different: - RSUs: Real shares that become yours over time. - Stock Options: The right to buy shares at a set price. Think of it as a coupon for shares. - Preferred vs. Common Stock: Different rights, different outcomes. Preferred stockholders are first in line at the buffet. 2. The Vesting Schedule: Your Golden Handcuffs Ever heard of "4-year vest with a 1-year cliff"? Here's what it really means: - Leave before year 1? You get nothing. - Stick around for a year? Congratulations! You get 25%. - Stay longer? You earn ~2% each month. But here's the kicker – don't assume this is standard. Always ask: - What's your specific vesting schedule? - Are there acceleration clauses? (Your get-out-of-jail-free card in acquisitions) - What happens if the company gets bought? 3. The Numbers Game: Questions That Matter Before you start dreaming of your yacht, get these answers: - Total shares outstanding (Your 50,000 out of what? 50 million?) - Latest 409A valuation (What's this actually worth today?) - Investor preferences (Who gets paid first?) - Previous funding rounds (What's the trajectory?) - Expected exit timeline (When might you see real money?) 4. Reality Check: Model Every Scenario Sure, everyone loves to dream about the billion-dollar IPO. But let's get real. - The down round (Ouch) - The flat round (Treading water) - Modest growth (Steady as she goes) - Hyper growth (To the moon!) - Acquisition (Wild card) 5. The Fine Print: Understanding Downsides Options aren't free money. Watch out for: - Exercise costs (Could be more than your car) - Holding periods (Hope you're patient) - Tax bombs (Uncle Sam wants his share) - The golden handcuffs effect (Leaving means losing) 6. Negotiation Ninja Moves Don't just focus on the number. These details matter: - Early exercise options (Get that tax clock ticking) - Extended exercise windows (Breathing room after you leave) - Acceleration triggers (Your fast pass to vesting) - Refresher grants (Keep the equity flowing) - Tax planning (Your future self will thank you) 7. The "What If" Scenarios Life happens. Plan for: - Company gets acquired (Hello, new bosses) - Early departure (Sometimes it's not a fit) - Down rounds (Markets go up... and down) Pro Tips 1. Email these questions to your recruiter 2. Get everything in writing The Bottom Line Equity can be life-changing money. It can also be worth less than the paper it's printed on.

Founders: what type of equity will you give your startup employees? I've gotten this question a lot over the past few weeks while working with accelerator cohorts and other early-stage founders. It can seem like a simple choice, but want to lay out some differences between kinds of startup equity that can have major implications for your employees (and their tax bills) down the road. So - in the vast majority of cases, you'll give your employees Incentive Stock Options (ISOs). A few useful points about each type: 𝗜𝗦𝗢 • They represent the right to buy a set number of shares at a fixed price, usually called a strike price, or exercise price • These will have a vesting schedule. Usually that is a 4-year vest with a 1-year cliff • Typically only taxed when you eventually sell the shares, not at exercise (some exceptions here) • Typically come with a 10-year timeframe before expiration (unless you leave the company then it shortens to a 90-day window to make an exercise choice - yikes) 𝗡𝗦𝗢 • Very similar to the ISO, except it doesn't qualify for the special tax treatment and is usually taxed both at exercise and at final sale (which is why ISO is preferred) 𝗥𝗦𝗨 • Not actually a stock "option", this form of equity is simply a promise from your employer to give you shares of the company’s stock (or the cash equivalent) on a future date—as soon as you meet certain conditions • Because you don't have to pay to exercise, you also don't get to choose when the equity arrives - meaning you pay ordinary income tax on the shares whenever they vest • This automatic tax moment is why most companies only issue RSUs at very late stage Now - what do founders get? They often issue themselves RSAs, or Restricted Stock Awards, aka Founder Shares. With RSAs, founders own the shares on the date they accept the grant and satisfy any purchase price requirements, but the shares will still be subject to vesting conditions. I think the past year or so is a good illustration of why waiting to switch to RSUs matters. Many companies are now valued at less than they were in 2021 - meaning if the employees had been issued RSUs, they may have paid income tax on an asset that is currently worth a lot less. Most advisors / consultants / other company builders that are not founders or employees receive NSOs. Happy hiring! #cartadata #ISOs #NSOs #startupequity #compensation #RSUs #startups

Equity Compensation Explained 📑 You got a piece of the cake, but is it a fair share? When starting a company or new job at a tech startup/scaleup, equity is a major part of compensation. Understanding it is far from trivial, though. 𝗚𝗲𝗻𝗲𝗿𝗮𝗹 𝗿𝘂𝗹𝗲 𝗼𝗳 𝘁𝗵𝘂𝗺𝗯 For early-stage startups, employee stock options (ESO) are often preferred. As companies scale, restricted stock units (RSU) can provide more value. Carta's data wizard Peter Walker compiled a great overview. 💲 𝗢𝗽𝘁𝗶𝗼𝗻𝘀 Right to purchase shares at a fixed price (expires). Until exercised, no ownership. Subject to fluctuations (can be underwater). 𝗚𝗼𝗼𝗱 𝗳𝗼𝗿: 𝗘𝗮𝗿𝗹𝘆 𝘀𝘁𝗮𝗴𝗲𝘀 ; 𝗴𝗿𝗼𝘄𝘁𝗵 𝗽𝗼𝘁𝗲𝗻𝘁𝗶𝗮𝗹 ; 𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲 𝗿𝗲𝘄𝗮𝗿𝗱𝘀 ; 𝘁𝗮𝘅 𝗽𝗹𝗮𝗻𝗻𝗶𝗻𝗴 𝗳𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆 ; 𝗵𝗶𝗴𝗵𝗲𝗿 𝗿𝗶𝘀𝗸 𝗮𝗽𝗽𝗲𝘁𝗶𝘁𝗲 💲 𝗦𝘁𝗼𝗰𝗸 𝗨𝗻𝗶𝘁𝘀 Upfront promise of shares. Once vested, recipient becomes a shareholder without purchasing. More predictable, lower risk profile. 𝗚𝗼𝗼𝗱 𝗳𝗼𝗿: 𝗟𝗮𝘁𝗲𝗿 𝘀𝘁𝗮𝗴𝗲𝘀 ; 𝗰𝗼-𝗳𝗼𝘂𝗻𝗱𝗲𝗿𝘀 𝗮𝗻𝗱 𝗸𝗲𝘆 𝗵𝗶𝗿𝗲𝘀 ; 𝗹𝗶𝗾𝘂𝗶𝗱 𝗰𝗼𝗺𝗽𝗮𝗻𝗶𝗲𝘀 ; 𝘀𝗶𝗺𝗽𝗹𝗶𝗰𝗶𝘁𝘆 ; 𝗶𝗺𝗺𝗲𝗱𝗶𝗮𝘁𝗲 𝗼𝘄𝗻𝗲𝗿𝘀𝗵𝗶𝗽 💬 𝗟𝗶𝗻𝗴𝗼 ▶Nonqualified stock options (NSO): For employees and 3rd parties. Exercising = income tax , Selling = capital gains. ▶Incentive stock options (ISO): Only for employees, come with restrictions. Tax benefits vs NSOs (deferred taxes and lower rates). ▶Restricted Stock Units (RSU): For employees and 3rd parties. Treated as income once they vest + potential capital gains tax later. ▶Restricted Stock Awards (RSA): Like RSUs with some ISO elements. Usually purchased, restricted transfer rights, dividends and voting rights. #founders #startupjourney #equity #fundraising #finance

Whenever I speak about employee ownership, the first question I get is: “Should we give ESOPs or RSUs?” The answer is not either/or. Both play an important role in building a motivated, growth-focused team. ESOPs (Employee Stock Option Plans) Employees get the option to buy shares at a predefined price in the future. Best for early-stage SMEs who want to attract talent without draining cash flow. Works like a long-term incentive—if the company grows, employees gain. RSUs (Restricted Stock Units) Employees are granted actual shares for free (they dont have to buy ). Usually tied to performance or tenure. Best for mature SMEs or companies preparing for IPOs, because it locks key people in and signals seriousness to investors. Why does this matter? Because IPO readiness is not just about financial statements—it’s about people. At the end of the day, valuation follows profits.The stronger your numbers, the higher your valuation. But to consistently grow profits, you need the right people driving the business with you. And: ESOPs help attract talent in the building phase. RSUs help retain and reward in the scaling phase. So if you’re serious about building an institution, don’t think of ESOPs and RSUs as “startup perks.” Think of them as strategic tools to professionalise and grow your business—and prepare for IPO success.

Stock compensation confuses a lot of people. I meet so many med reps who have been earning it for years but don't understand what they have. So here’s a breakdown of the three most common types of equity compensation you’ll see in MedTech: 1. Employee Stock Purchase Plan (ESPP) ESPP lets you buy your company’s stock at a discount, typically up to 15% off. It’s the only equity plan where you choose how much to put in. Example: Your company offers a 15% discount. If the stock is $100, you get to buy in at $85. Even if the stock doesn’t move, you have an instant 15% gain. And most plans have a “lookback” feature, which makes the deal even better. This means you could get a discount off the lowest price over the last 6 months or 1 year. So if the stock has been increasing, you can be getting it at a big discount. Just remember this is money coming out of your paycheck. 2. Stock Options (ISOs & NSOs) Options give you the right to buy shares at a fixed price (strike price), no matter what the stock trades at later. But this means they only have value if the stock goes above that strike price. Example: You receive options with a $20 strike price. If the stock is trading at $50, your gain equals $30/share (50-20) But if the stock is only $18, your options are worth $0 (you wouldn’t exercise them). ISOs and NSOs have different tax rules but the big idea is the same for both. Options only matter if the stock goes up. 3. Restricted Stock Units (RSUs) RSUs are the simplest form of equity because you don't buy anything. You’re granted shares today that become yours at some point later (when they vest). Example: You’re granted 400 RSUs with a 4-year vesting schedule (25% per year): Year 1: 100 shares vest Year 2: 100 shares vest Year 3: 100 shares vest Year 4: 100 shares vest When shares vest, the value is treated as taxable income. If the stock is $60 when 100 shares vest → $6,000 of income. And if it shoots up to $150 the next year → that's $15,000 of income. Because of this, there’s no tax advantage to holding vested shares Which is why many people treat RSUs like a cash bonus and diversify. Here's the bottom line... ESPP = discounted shares (risk free return) Options = potential upside (if the stock rises) RSUs = guaranteed shares (taxed when they vest) Understanding how each one works is the first step. Using them intentionally is how you actually build wealth.