Equity Compensation: Private vs. Public Companies

Getting paid in company stock can be a great perk, but it's not always as simple as it sounds. A little clarity can go a long way in helping you make smart decisions.

Restricted Stock Units (RSUs)

RSUs are the most common type of equity compensation, especially in public companies. Think of them as a promise: your employer is saying, "If you stay with us for a certain period of time, we'll pay you with shares."

For example, you might be granted 1,000 RSUs that vest over four years. Each year, 250 shares become yours.

In public companies, once those shares vest, you receive stock that you can sell fairly quickly (as long as you follow the company's trading rules). If the stock is trading at $50 when your shares vest, those 250 shares are worth $12,500.

In private companies, RSUs can feel a bit different. Even after they vest, you might not be able to sell them right away. So, while you technically "own" the stock, you may still be waiting for a future event, like an IPO, to turn it into cash.

Stock Options

Stock options are another common type of equity, especially in private companies. They grant you the right (but not the obligation) to buy shares of your company at a fixed price in the future.

The basic idea is pretty straightforward. Let's say your company offers you the option to buy stock at $10 per share. If the company is worth $25, you can buy it for $10 and benefit from the difference.

In private companies, options are especially popular when attracting and retaining employees. They give employees an early opportunity to participate in the company's growth, often at minimal purchase prices. The catch is that it can be hard to know what the shares are really worth, and you usually can't sell them right away. In many cases, the payoff only comes later if the company is acquired or goes public.

In public companies, options are easier to understand because you can track the stock price every day. As with the earlier example, if you're able to buy stock at $10 per share and it's trading at $25, you immediately know those options have value and are considered "in the money." That transparency and liquidity make it much easier to evaluate.

Restricted Stock Awards

Restricted stock awards (RSAs) are similar to RSUs, but with one key difference: you receive the shares upfront.

There are still strings attached, usually in the form of vesting. If you leave the company early, you may have to give back the unvested portion.

This type of equity is more common in private companies, especially for early employees or executives. For example, a startup might grant you shares when you join, but you only fully earn them over four years.

Because you receive the shares earlier, taxes can get more complicated. Some employees choose to make what's called an 83(b) election, which can reduce taxes in certain situations, but it's something you'd want to research and think through carefully.

Employee Stock Purchase Plans (ESPPs)

ESPPs are another form of equity compensation common among public companies. They allow you to buy employer stock at a discount, often through automatic payroll deductions.

For example, you might be able to buy shares at a 15% discount off the lowest market price over the past six months.

Let's say the stock bottomed out at $100 the first half of the year. Through an ESPP offering a 15% discount, you can buy shares for $85. That built-in discount can create an immediate gain, but buyer beware. ESPPs often come with holding period requirements that trigger favorable tax treatment.

As with all forms of equity compensation, it's best to consult with your accountant or financial planner before selling to better understand the tax implications.

Why Private and Public Stocks Feel So Different

The biggest difference between private and public company equity comes down to liquidity.

With public company stock, there's an active market. In many cases, once your shares vest, you can sell them and turn that value into cash relatively quickly.

With private company stock, it's a different story. Even if your shares vest and the company is doing well, you may not have an easy way to sell them. You could be waiting years for an IPO, acquisition, or another opportunity to cash out.

Summary

Equity compensation can be a powerful way to build wealth. However, not all plans are the same. If you're offered equity, take time to understand how it vests, when you can sell, and how it's taxed—those details can significantly impact its real value.

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