RSUs
Restricted stock units are the workhorse of modern equity comp. They’re straightforward on paper and deceptively complicated in practice.
The simple version: your employer promises you shares on a vesting schedule. When shares vest, they become yours, and the fair market value on the vest date counts as ordinary income. Your employer withholds taxes, usually at a statutory supplemental rate of 22% federal (37% on supplemental wages above $1M in a calendar year). That rate is almost always too low for high earners. The gap is the first place a real equity comp advisor earns their fee.
At pre-IPO companies, RSUs are often double-trigger: they vest only when both a time-based service condition is met AND a liquidity event (IPO or acquisition) occurs. Until both triggers hit, no income is recognized, even on shares that have completed their full vesting period. The income event lands at the liquidity event, often as a single concentrated tax bill on years of accumulated vests. Planning for that landing is its own discipline.
Post-vest decisions are where the real money moves. Hold your vested shares and you’re betting on a concentrated position with the same company that pays your salary. Sell them at vest and you exit the position cleanly, sale price equals cost basis, no further capital-gains exposure on those shares, but an immediate diversification question on the proceeds. Neither choice is right by default. Both demand a plan.
Watch your 1099-B. Brokers frequently report your RSU cost basis as $0, which would double-tax you on the same income already withheld at vest. The fix is reporting the corrected basis (vest-date FMV) on Form 8949.
The tax tail should never wag the investment dog. With RSUs, it often does, usually because no one ran the math.
ISOs (Incentive Stock Options)
Incentive stock options are the most favorable option grant the U.S. tax code offers. Hold the shares for at least one year after exercise and two years after grant, a qualifying disposition, and the entire spread between strike and sale price gets long-term capital gains treatment. But exercising and holding triggers Alternative Minimum Tax on the spread regardless of qualifying disposition. The cash to pay AMT is due even though you haven’t sold a single share.
One technical note: each calendar year, only $100,000 worth of ISOs (calculated at grant-date FMV) can vest as ISOs. Anything beyond that is automatically treated as NSOs for that year. Senior employees with large grants often have a mix of both treatments without realizing it.
A simplified example: you have 10,000 ISOs with a $5 strike. The stock is trading at $50 on the day you exercise. If you exercise and hold, you’ve just generated $450,000 of AMT preference income, even though you haven’t sold a single share. The regular tax impact is zero. The AMT impact is not.
| Scenario | Regular tax | AMT liability | Cash required |
|---|---|---|---|
Exercise + hold to qualify (1y from exercise, 2y from grant) Qualifying disposition — LTCG on full spread at sale | $0 | $125,000 | $125,000 |
Exercise + sell same year Disqualifying disposition — ordinary income | $160,000 | $0 | $0 (proceeds cover) |
Exercise + hold, price drops AMT still owed on the preference from exercise | $0 | $125,000 | $125,000 |
The table above is illustrative, not advice. Real numbers depend on your state, your AMT exemption phase-out, your other income, and whether you have prior-year AMT credits to draw against. The point: ISOs reward careful planning more than any other equity type.
One more deadline that matters: when employment ends, you generally have 90 days to exercise vested ISOs before they convert to NSOs (losing the favorable AMT-and-LTCG treatment). For someone leaving a private company with no liquidity, this 90-day clock can force a six-figure cash decision with no easy answer.
NSOs (Non-Qualified Stock Options)
NSOs come up when ISOs aren’t an option: non-employees, contractors, executives, or portions of a grant exceeding the ISO annual limit. No AMT drama. Instead, the spread between your strike and the fair market value at exercise is taxed as ordinary income right at exercise. Your employer withholds (usually at 22% federal, which again is often too low). Any appreciation after exercise is capital gains, short-term if you sell within a year, long-term after that.
The planning questions are whether to exercise early to start the long-term holding clock (and pre-pay ordinary income tax on today’s spread), whether to wait until a liquidity event, and whether to cashless-exercise to cover the tax bill. Each has tradeoffs and none of them are the same answer for every client.
For early-exercised options at a private company (when the plan allows it), an 83(b) election treats the spread at the early-exercise date as the income event, often $0 or close to it for at-the-money options at a startup. For NSOs, that means paying ordinary income tax on the small early-exercise spread instead of the larger vest-date spread. For ISOs, the same election crystallizes AMT preference at the small early-exercise spread and starts the long-term capital gains clock immediately. The election must be filed with the IRS within 30 days of the exercise. Miss the window and it’s gone.
ESPP (Employee Stock Purchase Plan)
A qualifying ESPP is the most reliable free money in tech comp. You contribute up to 15% of salary across a purchase period, at a discount of up to 15% on the lower of the starting or ending stock price, subject to a $25,000-per-year stock purchase cap calculated at the offering-date price. Execute the sale right after purchase and the discount is taxed as ordinary income (a disqualifying disposition); any additional appreciation since purchase is short-term capital gain. Hold for the qualifying period (2 years from offering, 1 year from purchase) and the ordinary-income portion is the lesser of the offering-date discount or the actual gain (sale price minus purchase price). The rest is long-term capital gain.
Most clients don’t max their ESPP. When we add it up, it’s often the cheapest equity-comp win in the plan.
QSBS (Section 1202)
If you hold stock from a qualified small business, typically a domestic C-corp with under $50 million in assets at the time you acquired your shares, you may be able to exclude up to $10 million (or 10× your cost basis, whichever is greater) of capital gains from federal tax when you sell. The hold requirement is five years from the date you acquired the shares.
Most pre-IPO startup equity qualifies for QSBS treatment if the company met the criteria when your shares were issued. The exclusion can be substantial — see the Sources section below for the IRC § 1202 specifics. State treatment varies. California decoupled in 2013; most other states conform.
The planning questions for pre-IPO employees: was the company QSBS-qualifying at the date of acquisition, when does the five-year clock finish relative to your expected liquidity, and is there room to multiply the exclusion across family members or trusts.
Section 1202 has gotchas worth naming. The corporation must run a “qualified trade or business,” which excludes financial services, professional services like law and consulting, and a handful of other industries. Stock must be acquired at original issuance, so secondary purchases (like tender-offer participations) don’t qualify. And the 100% exclusion applies only to stock acquired after September 27, 2010; earlier vintages get partial treatment.
10b5-1 Plans
If you’re an insider, or functionally one (senior IC, tech lead, people manager at a public company with a formal policy), a 10b5-1 plan is the SEC-sanctioned affirmative defense to insider-trading liability. Most company insider-trading policies allow plan-driven trades even during blackout windows. You set up a written schedule in advance (price, quantity, frequency), and the plan executes on that schedule regardless of any material non-public information you subsequently receive. The plan only protects you if you didn’t possess MNPI at adoption, which means plans typically must be set up during open trading windows.
Since 2023, Section 16 officers and directors face a 90-day cooling-off period (or longer, depending on earnings releases) between plan adoption and first trade. Other employees filing Form 144 face a 30-day cooling-off period. The 2023 rules also require companies to disclose adoption and termination of 10b5-1 plans by Section 16 officers and directors in quarterly filings, generally limit a person to one plan at a time, and require written certification that the person isn’t aware of MNPI when adopting the plan. The rules make 10b5-1 less tactical and more strategic. We help clients set plans that match their real financial needs, not just their feelings about the stock on the day the plan is written.
Concentrated Stock
After several good vesting years, many of our clients arrive with the majority of their net worth in employer stock. That’s a position that rewards you when your company does well and punishes you twice when it doesn’t: the stock falls and the job comes with it.
There are tools beyond “sell it all on Tuesday.” A thoughtful diversification plan considers your time horizon, your tax picture, your charitable intent, and how much control you’re willing to trade for efficiency. The right approach is rarely the same for any two clients, and we work through it case by case.
AMT Primer
AMT in plain English
The Alternative Minimum Tax is a parallel tax system. Every year, you compute your regular federal tax and your AMT, and you pay whichever is higher. For most people, regular tax is always higher and AMT is invisible. For people who exercise ISOs, AMT often becomes the binding number.
The ISO spread at exercise is added to your AMT income even though it doesn’t show up in your regular tax return until you sell. That creates a “phantom” tax bill on gains you haven’t realized.
The good news: AMT paid on ISO exercises usually generates an AMT credit that can be recovered in future years. The timing of that recovery depends on future regular-tax liability exceeding future AMT liability, which is its own planning problem.