Equity Compensation 101 — Stock vs Options

Startups often compensate early team members with equity, using either stock or stock options. Understanding the differences—including tax treatment and timing—is critical to designing fair and motivating compensation.

Why it Matters

Equity is the #1 incentive tool for early-stage startups — but offering it without understanding the mechanics (stock vs options, vesting, tax treatment) can backfire with both team and investors.

Founders Checklist

Decide when to use restricted stock (typically for founders) vs stock options (for employees)
Understand ISO vs NSO options — different tax rules apply
Set a vesting schedule (usually 4 years with a 1-year cliff)
Ensure equity grants are board-approved and documented
Educate your team on strike price, vesting, and expiration

Founder Fails

Promised “1% equity” without knowing cap table > turned out to be 0.1%
Didn’t file 83(b) > massive tax bill on future growth
Granted options without board approval > legally invalid

When to ask for Help

Before issuing any equity to employees, advisors, or contractors
When deciding between stock and options for different roles
To structure your first equity plan or ESOP
If planning to issue equity to international hires
During fundraising or when adjusting your cap table

Frequently Asked Questions

Q: What’s the difference between stock and options?
A: Stock = actual ownership today.
Options = the right to buy stock later (usually at a fixed strike price, once vested).

Q: What’s the benefit of giving stock to founders or early hires?
A: At early stages, stock is often low-value (cheap to issue) and can avoid future exercise costs. But it must be purchased and taxed early (83(b) election applies).

Q: What’s the difference between ISOs and NSOs?
A:

ISOs = Incentive Stock Options > tax-favored, only for employees
NSOs = Non-qualified Stock Options > broader use, but higher tax exposure