Employee equity, explained: vesting, cliffs, exercise windows and the tax nobody mentions

What you are actually being given

A stock option is not a share. It is the right to buy a share at a price fixed on the day the option is granted — the strike price, or exercise price. If the company is later worth more per share than that, the difference is your gain. If it is worth less, the option is worthless and you simply do not exercise it. The right expires, usually ten years after grant, and much sooner if you leave.

That structure has two consequences people find counter-intuitive. First, exercising costs real money: the strike price multiplied by the number of shares, out of your own pocket, often before there is any way to sell. Second, at an early-stage company the strike price is low precisely because the shares are worth little — which is why joining early and exercising early is the arrangement that produces outsized outcomes, and also the one that puts the most cash at risk.

The offer letter almost never contains this detail. It states a number of shares and defers everything else to the plan and the grant notice — see what an offer letter actually commits you to. Ask for those documents before you accept.

Vesting, and what the cliff is for

Vesting is the schedule on which the grant becomes yours to exercise. The industry standard is four years with a one-year cliff: nothing at all vests for the first twelve months, 25% of the grant vests in a single step on the first anniversary, and the remaining 75% vests monthly across the following three years — one forty-eighth of the total each month.

The cliff exists to stop the company giving equity to someone who leaves in month three, and it is binary in a way that is worth planning around. It is also the reason the twelve-month mark is a real decision point rather than an arbitrary one. If you are considering leaving near it, the difference between two weeks either side of the anniversary is a quarter of the grant.

ISOs and NSOs: the same right, different tax

US option grants come in two statutory flavours. Incentive stock options can only go to employees, and carry potentially favourable treatment. Non-qualified stock options can go to anyone — employees, contractors, advisers, directors — and are taxed more simply and usually more heavily.

The trap in the ISO column is the alternative minimum tax. Exercising a large ISO position in a private company can generate a tax bill in a year in which you received no cash and cannot sell anything to pay it. The interaction with your overall position is specific enough that this is one of the few places where paying an accountant before acting is straightforwardly worth it.

Early exercise and the 30-day election

Some plans let you exercise options before they vest, buying shares that remain subject to forfeiture until the vesting schedule catches up. The point of doing so is to start the capital-gains holding clocks early and to fix the taxable spread while it is close to zero.

That only works if you file a section 83(b) election. Without it, the tax is measured at each vesting date on the value then, which defeats the entire exercise. The rules are unforgiving and worth stating plainly:

• Thirty days from the transfer of the shares. Not from vesting, not from the tax year end. There is no extension and no relief for a late filing.
• You cannot file one on an option grant. The election applies to property — restricted stock, or the shares you receive on an early exercise. An unexercised option is not property for this purpose.
• The IRS now has a standard form. Form 15620 was introduced in late 2024 and can be filed online through an IRS account, which produces a confirmation of receipt. Paper filing still works; do one or the other, not both.
• Send a copy to the company. That obligation did not change when the filing method did.
• It is a bet. You are paying tax now on value that may never materialise, and there is no refund if the shares end up worthless.

The 90-day window, and why it exists

This is the single most consequential term in most grants, and it is almost never discussed at hiring. When employment ends, a standard plan gives you 90 days to exercise everything you have vested. Miss it and the options lapse — not the money, the entire right. Four years of vesting can evaporate over a deadline nobody mentioned.

The 90 days is not arbitrary corporate meanness. To keep incentive stock option treatment the tax code requires the holder to have been an employee at all times from the grant date until three months before exercise. Exercise later than that is taxed as a non-qualified option regardless of how the grant was labelled. Companies adopted 90 days as the universal default because it is the outer edge of that rule, then applied it to NSOs as well for consistency.

RSUs are a different instrument entirely

Restricted stock units are a promise to deliver shares, not a right to buy them. There is no strike price and nothing to pay, so they cannot go underwater — an RSU is worth something as long as the shares are worth something. The trade-off is that the whole value is taxed as ordinary income when the units settle, rather than as capital gain.

At a public company, RSUs typically vest on time alone and are taxed at vesting, with shares withheld to cover it. At a private company they are usually double-trigger: they need both the time condition and a liquidity event such as an IPO or acquisition. That structure exists to protect you, because otherwise you would owe income tax on shares you had no way to sell.

The thing to plan for is the settlement year. When a liquidity event triggers years of accumulated units at once, the entire value hits as ordinary income in a single tax year, and employers withhold at the flat supplemental-wage rate rather than at your actual marginal rate. For anyone whose income lands in the higher brackets that is systematic under-withholding, and the shortfall arrives at filing.

What to ask before you accept

Every one of those has a short factual answer that someone at the company already knows. A recruiter who deflects all eight is telling you something about how the equity is likely to be administered later.

How to think about the number

Equity in a private company is not deferred salary. It is a concentrated, illiquid, undiversified holding in your own employer, in an asset class where most outcomes are zero and a small number are extraordinary. It can be an excellent trade. It is a bad trade when it is priced as though it were cash, or when someone takes a materially lower salary because a spreadsheet in a recruiting deck assumed a valuation nobody has agreed to pay.

The honest way to value it is to accept that the expected value is genuinely uncertain and decide how much salary you are willing to give up for the exposure. Then read the four terms that decide whether you keep it: the cliff, the schedule, the exercise window and the strike price. Those you can actually verify.