A Quick Guide to Equity Compensation Types

What Type of Equity Do I Have and What Does It Actually Mean?

Equity compensation is one of the most powerful and most misunderstood components of executive compensation. Stock options, restricted stock, and employee purchase plans can meaningfully enhance long-term wealth, but only if they are understood and integrated thoughtfully into a broader financial plan.

One of the most common questions we hear from executives is:

“What type of equity do I have, and what does it actually mean?”

The answer matters more than many people realize. Different equity types come with different tax treatments, risks, cash-flow implications, and planning opportunities. Understanding what you own is the first step toward making informed decisions.

Below is a high-level overview of the most common forms of equity compensation and why the distinctions matter.

Incentive Stock Options (ISOs)

ISOs are often granted to key employees as part of long-term incentive packages.

Key characteristics:

• You typically do not recognize ordinary income at exercise

• Gains may qualify for long-term capital gains treatment if holding requirements are met

• Exercise can trigger Alternative Minimum Tax (AMT)

• Shares are usually forfeited if not exercised within a limited time after leaving the company

Why this matters: ISOs can offer favorable tax treatment, but poor timing or lack of planning can lead to unexpected tax exposure or lost opportunities.

Non-Qualified Stock Options (NSOs)

NSOs are more flexible in structure and are commonly granted to both employees and non-employees.

Key characteristics:

• Ordinary income tax is due at exercise on the spread between strike price and fair market value

• Subsequent appreciation may be taxed as capital gains

• Withholding requirements apply at exercise

Why this matters: NSOs create immediate taxable income, which can affect cash flow, marginal tax rates, and other planning decisions.

Restricted Stock Units (RSUs)

RSUs have become increasingly common, particularly among public companies.

Key characteristics:

• Shares vest over time and are taxed as ordinary income at vesting

• No purchase or exercise decision is required

• Employers typically withhold shares to cover taxes

Why this matters: RSUs may feel “simpler,” but vesting events can significantly increase taxable income and portfolio concentration if not proactively managed.

Employee Stock Purchase Plans (ESPPs)

ESPPs allow employees to purchase company stock at a discount through payroll deductions.

Key characteristics:

• Purchase discounts (often up to 15%)

• Favorable tax treatment may apply if holding requirements are met

• Sale timing determines whether gains are taxed as ordinary income or capital gains

Why this matters: While ESPPs can be attractive, repeated participation can quietly increase exposure to a single company.

Performance Shares or Performance Stock Units (PSUs)

Performance-based equity ties vesting to company or individual performance metrics.

Key characteristics:

• Vesting depends on achieving predefined goals

• Taxation generally occurs at vesting

• Outcomes can vary widely from initial projections

Why this matters: Performance equity introduces uncertainty that should be modeled within a broader financial plan, rather than assumed as guaranteed compensation.

Why Understanding Your Equity Type Is Only the Beginning

Knowing what type of equity you have is essential but it’s not enough on its own.

Executives also need to understand:

• How equity income interacts with base pay, bonuses, and deferred compensation

• The tax implications of vesting, exercise, and sale decisions

• Concentration risk tied to employer stock

• How equity aligns with long-term goals such as retirement, liquidity needs, or charitable planning

Equity compensation decisions are rarely isolated decisions. They are planning decisions.

A Planning-First Perspective

Equity compensation can be a powerful wealth-building tool when approached intentionally. The goal is not simply to maximize equity value, but to make decisions that support long-term financial stability, flexibility, and personal goals.

For many executives, that clarity comes from stepping back and evaluating equity compensation within a comprehensive financial planning framework. One that considers taxes, cash flow, risk, and life priorities together.

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About Rigden Capital Strategies

Rigden Capital Strategies was founded on a simple belief: financial advice should be personal, transparent, and centered around your goals, not built on generic models or product-driven sales. With decades of combined industry experience, we’ve developed a process grounded in three core values: value, integrity, and progress.

As a fee-only fiduciary, we provide personalized, goals-based wealth planning services designed to adapt with your life. Our services include investment management, retirement and tax planning, and estate coordination. We use a mix of active and passive strategies to help clients navigate market changes with clarity and confidence.

We believe in building real relationships and delivering clear, actionable strategies focused on long-term planning and aligned with your objectives.

Your goals, our strategies. Together, let’s make your goals happen.

Disclosure: This content is for informational purposes only and does not constitute individualized investment advice. Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Consult a qualified financial professional before making any investment decisions. Equity compensation strategies involve risk and tax considerations that vary by individual. Consult qualified professionals before making decisions related to your equity compensation.