Equity and RSUs: A Plain-English Explanation for New Grads

TL;DR - RSUs (Restricted Stock Units) at public companies are real, spendable money. They vest over time, typically four years with a one-year cliff. - Stock options at private companies are different. They are the right to buy shares at a set price, and they only pay off if the company succeeds and you can actually sell. - Startup equity is difficult to value and carries real risk. Treat it as a potential bonus, not guaranteed compensation. - A four-year vesting schedule with a one-year cliff is standard. Understand what happens to your equity if you leave before you're fully vested. - Comparing offers that include different types of equity requires converting everything to an apples-to-apples annual figure.

Equity shows up in most tech job offers in some form. At public companies, it typically comes as RSUs. At startups, it usually comes as stock options. The words sound similar. The mechanics are very different.

New grads tend to land in one of two failure modes with equity. The first is treating startup options as if they have the same reliability as RSUs at a public company. The second is ignoring RSUs at a public company because "stocks are confusing" and focusing only on base salary. Both approaches lead to misinformed decisions.

This article explains how each type of equity works, how to think about its value, and how to incorporate equity into a job offer comparison. To see how equity fits into the full compensation picture, what makes up total compensation for software engineers covers all the components together.

RSUs: The Basics

RSU stands for Restricted Stock Unit. An RSU is a promise from your employer to give you shares of company stock at a future date, contingent on you remaining employed.

Here's how it works in practice:

You receive a grant at hire. The grant says something like: 100 shares of company stock over four years.
Those shares vest according to a schedule. The most common schedule at public companies is 25% after one year (the "cliff"), then monthly or quarterly vesting for the remaining three years.
When shares vest, they become yours. At a public company, you can sell them, hold them, or transfer them. They are real money.
The value of vested shares depends on the stock price at the time of vesting. If the company's stock is trading at $100 per share and 25 shares vest, you have $2,500 of real, taxable income.

RSUs are taxed as ordinary income when they vest, not when they're granted. The company will typically withhold shares to cover the tax obligation. You receive the net shares or the net cash equivalent.

At public companies, RSUs are straightforward to value. Look at the current stock price. Multiply by the number of shares granted. Divide by four (for a four-year vest). That's your estimated annual equity value. It will fluctuate with the stock price, but it's a real, calculable number.

The Vesting Schedule and the Cliff

The vesting schedule determines how quickly you gain ownership of your RSUs. Almost every tech company uses a variant of the same basic structure.

The four-year vest. Standard across the industry. Your grant vests over four years, typically with vesting starting after the first year.

The one-year cliff. You receive zero vested shares in the first twelve months. After twelve months of employment, you receive the first 25% of your grant at once (the cliff). After that, vesting continues monthly or quarterly for the remaining three years.

The cliff is important to understand for one practical reason: if you leave in month eleven, you leave with nothing. If you stay through month twelve, you've earned a year's worth of equity.

This structure is not unusual or predatory. It's standard. But knowing it exists changes how you should think about accepting an offer and about the timing of any decision to leave.

Some companies use a different cliff or a different total vesting timeline. Ask. The offer letter should specify the vesting schedule. If it doesn't, ask HR or your recruiter for the grant agreement before you sign.

Stock Options: The Basics

Stock options are common at private companies, particularly early-stage startups. An option is not a share. It is the right to purchase a share at a specific price (called the strike price or exercise price) in the future.

Here's how it works:

You receive a grant. The grant says: you have the option to purchase X shares at $Y per share.
Options vest over time, typically also on a four-year schedule with a one-year cliff.
To actually own shares, you must exercise the option. That means paying the strike price for each share you want to own.
You only make money if the shares are eventually worth more than the strike price.

Example: your options have a strike price of $10. If the company's shares are later valued at $50 and you can sell, you profit $40 per share. If the company fails or is sold for less than the value at which you were granted options, your options are worth nothing.

There are two common types of options: ISOs (Incentive Stock Options) and NSOs (Non-Qualified Stock Options). The tax treatment differs. ISOs have favorable tax treatment if you exercise them at the right time. NSOs are taxed as ordinary income on the spread between strike price and fair market value when exercised. This matters, but it's secondary to the core question of whether the options will ever be worth anything.

Why Startup Equity Is Hard to Value

Private company equity is not liquid. You cannot sell it when you want. There is no public market to check a price. This creates several layers of difficulty.

Dilution. When a startup raises new funding, it issues new shares. Existing shares represent a smaller percentage of the total company. Your option grant may have said "0.1% of the company" at the time it was issued, but after subsequent funding rounds, your 0.1% may have been diluted to 0.05% or less. The absolute number of shares granted to you has not changed, but what those shares represent in company ownership has shrunk.

Preference stacks. Investors in startups typically receive preferred shares with liquidation preferences. This means investors get paid first in any exit (acquisition or IPO). After investors are made whole, common shareholders (including employees with options) receive what's left. In many acquisition outcomes, especially ones the founders call "successful," employees with options receive little or nothing because investors' preferences absorb most or all of the proceeds.

No exit guarantee. Options only pay off if there's a liquidity event: an IPO or acquisition where you can sell shares. Many startups never reach either. They either fail entirely or remain private indefinitely. "Held private indefinitely" is not a catastrophic outcome for the company, but it means your equity may be illiquid for a very long time.

Exercise windows. When you leave a company where you have unvested or unexercised options, you typically have a limited window to exercise them (often 90 days). Exercising requires paying the strike price in cash. If the shares are not yet liquid, you're paying real money now for something you can't sell yet. Some companies have extended exercise windows (years instead of months), but many don't. Understand this before you join.

None of this means startup equity is worthless. Sometimes it pays off very well. But it should be evaluated as a high-risk, high-variance component of compensation. For most new grads, it is not a reliable substitute for a competitive base salary.

How to Compare Equity Across Offers

When comparing a public company offer with RSUs to a startup offer with options, you need to put both on comparable footing.

For RSUs at a public company: - Take the total grant value (current stock price times number of shares). - Divide by four to get the annualized value. - That's the number to include in your total compensation comparison.

For stock options at a private company: - You can try to calculate the implied value based on the last funding round valuation and your percentage ownership, but this number is speculative. - Apply a significant discount to account for dilution, preference stacks, and the probability that no liquidity event occurs. Discounts of 50% to 90% are not unreasonable depending on the stage of the company. - For most early-stage companies, it's more honest to assign the equity a value of zero for comparison purposes and treat any future payout as a bonus.

If the startup offer's base salary is competitive with or better than the public company offer, and you're genuinely excited about the company for reasons beyond the equity lottery ticket, the startup may be the right choice. If the startup is offering significantly below-market base and the pitch is primarily "but the equity upside," that's a harder case to make.

Comparing startup offers and big company offers involves more than just equity — compensation structure, growth environment, and career development all matter. But equity is one of the biggest structural differences between the two, and it's worth understanding clearly before you sign.

What to Ask About Equity Before You Sign

Once you have an offer that includes equity, ask these questions:

For RSUs: - What is the current stock price used to calculate the grant value? - What is the vesting schedule? - Is there a cliff? - What happens to unvested RSUs if the company is acquired?

For stock options: - How many total shares are outstanding (to calculate your percentage ownership)? - What was the most recent 409A valuation (the IRS-approved fair market value of the common stock)? - What is the strike price? - What is the vesting schedule and cliff? - How long is the post-termination exercise window if I leave before a liquidity event? - Have there been any rounds of dilution since the last funding, and is more funding expected?

These are legitimate, reasonable questions. A company that won't answer them is a company that doesn't want you to understand what you're agreeing to.

The Practical Takeaway for New Grads

RSUs at public companies are straightforward and should be taken seriously. They are part of your compensation. Calculate their annualized value and include them in your offer comparison.

Startup equity is real but uncertain. It's not worth treating as though it's equivalent to RSUs at a public company. Go in with clear eyes: the base salary is what you'll actually receive. The equity is a long-odds bet that may pay off or may not.

At either type of company, understanding the full picture of what makes up your offer helps you see the compensation correctly rather than anchoring on base salary alone.

The engineers who benefit most from equity are typically the ones who understood it before they joined: what it was, what it required, and what had to happen for it to be worth anything. That understanding starts with reading your grant agreement and asking the questions above before you sign.

For more on negotiating the overall package once you understand equity, see salary negotiation for your first engineering job.

If you want structured help working through offer comparisons and negotiation, here's how the Globally Scoped program works.