What You Should Know About Equity Compensation
Few workplace perks create more excitement— or confusion—than an equity award. Stock-linked pay can turbo-charge wealth, yet the acronyms alone—RSU, ESPP, ISO, NQSO—sound like alphabet soup. Falcon Wealth Planning wrote this guide to demystify your grant so you can treat it as one of many resources for funding a life you value.
Identify Your Equity
Before you can plan, you must know what you own. Most corporate plans center on one or more of the following:
Restricted Stock Units (RSUs)
The Life Cycle in four beats
Grant
You receive a promise of future shares.
Waiting period
Time passes or performance hurdles are met.
Vesting
Shares transfer to you and their value is taxed as ordinary income
Choice
You may hold the stock or sell it.
Substantial risk of forfeiture
Substantial risk of forfeiture ends when an RSU is no longer subject to vesting or other restrictions. Only then does tax apply.
What happens at vesting?
Think of vested RSUs as a cash bonus paid in stock. Your employer withholds federal, state, and payroll taxes—often at a statutory 22 percent—by delivering fewer shares than promised. Confirm whether that withholding matches your true bracket; if it falls short, set cash aside for April 15.
Hold or sell?
Because the major tax hit occurs at vest, many professionals sell shares immediately to avoid single-stock concentration. Holding makes sense only if the position fits your diversified target and the after-tax return justifies the extra risk.
Employee Stock Purchase Plans (ESPPs)
ESPPs let you buy company shares through after-tax payroll deductions—up to $25,000 per year in a qualified plan. A well-designed ESPP can generate attractive risk-adjusted returns.
Payroll deductions begin.
Purchase dates arrive on a fixed calendar. Money collected buys stock, often at up to a 15 percent discount and sometimes at the lower of two prices thanks to a look-back provision.
You decide when to sell. No tax is due until sale.
Plans differ, so read the document. A discount plus a look-back can lock in gain the moment shares appear in your account—especially if you resell them right away, freeing capital for goals that aren’t tied to employer stock
Qualified vs. disqualified disposition
Sell at least two years after the offer date and one year after the purchase date and the discount portion is ordinary income while the rest is long-term capital gain. Sell sooner and more of the profit is ordinary. Even so, quick sales often make sense if diversification or cash flow outrank tax deferral.
Non-Qualified Stock Options (NQSOs)
A non-qualified option grants the right to buy shares at a fixed strike price. You pay nothing until exercise. If your strike price is below market value (“in the money”), you have leverage. But leverage cuts both ways: unexercised options can expire worthless if the stock falls or time runs out.
Grant
Example: 1,000 options at $20 strike, vesting 20 percent annually for five years
Exercise window
After vesting you may buy shares any time before the contractual expiration—usually ten years from grant or 90 days after leaving the company.
Tax on exercise
The spread between market price and strike counts as ordinary income.
Funding options
Write a check, execute a cashless (net) exercise, or sell enough shares to cover costs.
After exercise
Hold the remaining shares or sell them; future gains or losses are capital in nature.
If your strike price is below market value (“in the money”), you have leverage. But leverage cuts both ways: unexercised options can expire worthless if the stock falls or time runs out.
Incentive Stock Options (ISOs)
ISOs resemble NQSOs but receive more favorable treatment—if you follow the rules. Because AMT can sneak up on you, coordinating ISO exercises with Falcon’s tax-aware planners is essential.
No regular tax at exercise, yet the bargain element (market minus strike) is an AMT preference item that can trigger Alternative Minimum Tax.
Sell after two years from grant and one year from exercise and you pay long-term capital-gain rates on nearly all profit (a "qualified sale").
Sell sooner and the IRS re-labels much of the gain as ordinary income (a "disqualified sale"). .
Because AMT can sneak up on you, coordinating ISO exercises with Falcon’s tax-aware planners is essential.
83(b) election
Some early-stage employees can exercise options immediately and elect to pay tax on a low valuation today instead of a potentially higher one later. The strategy works only if the company’s future is bright and you can stomach the risk.
Bringing It All Together
Equity awards thrive when integrated into a comprehensive plan. Start by mapping grant dates, vesting milestones, tax triggers, and expiration deadlines on a single timeline. Then layer in cash-flow needs, portfolio allocation targets, and your personal tolerance for volatility. Adjust annually—or sooner if stock prices swing sharply or life goals evolve.
Remember: the goal is not to dodge every tax dollar, but to convert stock promises into dependable wealth that supports the life you envision.
Compliance Disclosure
Falcon Wealth Planning, Inc. (“Falcon”) is a fee-only, SEC-registered investment adviser based in Ontario, California. Registration does not imply a certain level of skill or training. This material is educational; it is not individualized investment, tax, or legal advice, nor an offer to buy or sell securities. Examples are hypothetical and do not predict future performance. All investing involves risk, including loss of principal. Falcon provides advice only after an advisory agreement is in place and only in jurisdictions where we are properly registered or exempt. Consult your own attorney, CPA, or adviser before acting on any information herein.
