Once you understand the types of equity and their tax implications, you have many of the tools you need to evaluate an offer that includes equity compensation, or to evaluate equity you currently have in a company.
In summary, you have to determine or make educated guesses about several things:
Equity value. This can be estimated by the value the company may have in the future, and the number of shares you may own.
Percentage ownership. As we’ve mentioned, knowing how many shares of stock or stock options you have is meaningless unless you know the number of outstanding shares. What matters is the percentage ownership of the company the shares represent, including the details of how the total is counted.
Vesting. Understand when you will receive the equity, as well as whether you’re able to exercise stock options (and pay the associated costs and taxes), and whether you can do all this before your exercise window expires.
Tax. Tax concerns are inseparable from the value of equity. Know the tax implications of your possible grant, exercise, vesting, and sale, in terms of ordinary income tax, employment tax, long-term capital gains, and alternative minimum tax.
That’s a lot, and even so, decisions are uncertain, but it is possible to make much more informed decisions once you have this information.
The value of equity you cannot yet sell is a reflection of three major concerns:
How well the company is doing now—that is, how profitable it is, or how many customers it is attracting.