What is equity compensation and how does it work?

Wealth planning

If you're offered equity compensation, a financial advisor can help you evaluate your options.


Before you accept a new job, you typically review the salary and benefits package. If you work for a tech or biotech company, especially if it’s a startup, you’re likely to see “equity compensation” as part of the job offer as well as potentially ongoing compensation. Both private and public companies can provide equity compensation to supplement your salary.

Equity compensation can be a way to entice new employees to commit to a young company, which is why it’s a common part of compensation packages at startups. Other companies use equity compensation to reward and retain experienced employees.

The financial implications of equity compensation range from an incremental increase in assets to a life-changing influx of wealth. For example, if you’ve been given stock options before your company goes public, there could be significant upside. But your equity compensation could be worth very little if the company doesn’t succeed or there is a major downturn in the economy.

For that reason, equity compensation should be reviewed in the context of your overall financial picture. A financial advisor can help explain the various scenarios and related implications, as well as how the compensation fits with your short- and long-term financial goals.

Tips for managing your equity compensation

Generally, equity compensation is offered in the form of stock options, restricted stock or units, and performance shares or units. The various forms often require you to be vested for a specific period of time, have rules around the sale or transfer of options, and have important tax implications. Though it may take time and effort to understand all of your options, the following tips can help you effectively manage your equity compensation, no matter what form it takes.

1. Don’t ignore it

Read your offer carefully to understand what type of equity compensation you have and how and when you can benefit from it.

2. Know the restrictions on your stock options and the rules around vesting

Your financial advisor can help you understand the fine print of your equity compensation.

3. Evaluate your company’s prospects

Your knowledge of your company and its latest outlook can help you decide whether to sell or keep your equity share.

4. Make sure your personal portfolio is diversified

Equity compensation can quickly add up to being overly invested in one company or industry. Keeping significant investments in one company, particularly one that is also your employer, could be risky.

5. Understand the tax consequences of exercising your equity compensation

Timing and taxes are often important considerations in determining when and how much you exercise. Your financial advisor, along with your tax advisor, can help you understand your options and the related implications to your taxes.

6. Negotiate

If you are considering a new job and have equity compensation from your current job but are not fully vested, your new employer may be willing to offer additional compensation for the profit you could potentially leave behind. In addition, you may be able to negotiate the form or amount of equity compensation as part of your new job offer, along with your salary.

By carefully reviewing any equity compensation and engaging with a financial advisor and tax planner, you can work to effectively, and proactively, incorporate your compensation into your overall wealth plan.

RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal advisor.

RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.

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