Equity & Compensation Glossary
Definitions for the equity terms that appear in offer letters and grant agreements, with the trade-offs that matter for actual outcomes.
Vesting
Vesting is the process by which equity awards become "earned" by the employee. Standard US startup vesting: four years with a one-year cliff, monthly thereafter. If you leave before the cliff, you forfeit everything. After the cliff, you keep what's vested at termination. Vesting protects the company from giving away large equity grants to employees who leave shortly after joining; it also creates retention pressure as employees get closer to the next vesting milestone.
Variants: monthly vesting from the start (no cliff), back-loaded vesting (more shares vest in years 3 and 4 — used at later-stage companies for retention), and time-based vs. milestone-based (rare in employee grants but common in founder shares post-acquisition). Acceleration provisions (single-trigger or double-trigger) modify vesting on a change of control.
Cliff
The cliff is the bright-line vesting threshold. With a one-year cliff on a four-year grant, no shares vest at all for 12 months; on the cliff date, 25% (one year's worth) vests at once. After the cliff, vesting continues monthly (or quarterly) on the original schedule. Employees who depart before the cliff forfeit all of their grant; those who reach the cliff keep what's vested.
Cliffs serve two purposes: they protect against quick-leaver dilution, and they give the employer a low-friction way to part with bad fits in the first year (the equity claim is straightforward — none). For employees, the cliff is a real consideration: leaving in month 11 vs. month 13 is the difference between zero equity and 25% of the grant.
ISO (Incentive Stock Option)
Incentive Stock Options are a US tax-favored option type. Granted only to employees (not contractors or directors as such), with a $100,000 per year limit on the value that can vest in any one year (excess vests as NSOs). On exercise, ISOs don't trigger ordinary income tax — but the spread between strike and FMV at exercise is an AMT (Alternative Minimum Tax) preference item, which can produce surprising tax bills in high-spread years.
If the employee holds ISO-acquired shares for at least one year after exercise AND two years after grant before selling, the entire gain (above strike) is taxed at long-term capital gains rates — the most favorable outcome. Selling earlier is a "disqualifying disposition" that converts the spread at exercise into ordinary income. ISOs are most valuable for employees who can hold post-exercise; they're less useful for employees who plan to sell quickly on exit.
NSO / NQSO (Non-Qualified Stock Option)
NSOs (also NQSOs) are the default option type for non-employees and the overflow type when ISO limits are exceeded. On exercise, the spread (FMV minus strike) is taxed as ordinary income immediately, with employer payroll tax withholding. The employee then has a tax basis equal to FMV at exercise; subsequent appreciation is taxed at capital gains rates when the shares are sold.
NSOs are tax-disadvantaged compared to ISOs because the spread is taxed at ordinary income rates rather than potentially at long-term capital gains. They're also less complex (no AMT considerations) and have no holding-period requirements for ordinary income vs. capital gains treatment. Many companies grant NSOs even to ISO-eligible employees because the simplification is worth the tax inefficiency in some structures.
RSU (Restricted Stock Unit)
An RSU is a promise to deliver shares (or cash equivalent) on a future date subject to vesting. Unlike options, RSUs require no exercise — the shares (or cash) are delivered automatically at vesting. RSUs are the standard equity vehicle at public companies and increasingly at late-stage private companies because they have value even if the stock price falls — an option with strike above current price is worthless, but an RSU still delivers the share.
RSUs are taxed as ordinary income at vesting — the FMV of the delivered shares is wages. Companies typically withhold a portion of the shares at vesting to cover the tax. Subsequent appreciation is capital gains. Private-company RSUs often have a "double trigger" — they don't deliver until both vesting and a liquidity event (IPO or acquisition) — to avoid creating taxable income employees can't sell shares to cover.
Strike price
The strike (or exercise) price is the price at which an option can be converted to a share. For ISOs and NSOs in the US, the strike must be at or above the 409A fair market value at grant date — strikes below FMV trigger severe tax penalties under IRC Section 409A. As the company's value increases over time, later grants get higher strikes; early employees who joined at low valuations have meaningfully more leverage on appreciation than later employees.
Strike price determines the option's intrinsic value: max(0, FMV − strike). An option with a $2 strike is in-the-money when FMV is above $2; an option with a $20 strike isn't intrinsically valuable until FMV exceeds $20. See the option value calculator for the math.
Exercise window
Standard exercise window: 90 days after termination of employment to exercise vested ISOs. Unexercised options after 90 days expire (or convert to NSOs if the company allows extended exercise). The 90-day rule comes from IRS requirements to maintain ISO status; NSOs aren't subject to this constraint but typically follow it by default.
The 90-day window is a real problem for many employees — especially those with significant strike-price-times-shares to fund. A late-stage employee with $200K of strike to pay and no liquid market for the shares often cannot exercise within 90 days, effectively forfeiting their vested equity. Some companies offer extended exercise windows (5-10 years), which converts ISOs to NSOs but preserves the option. The trade-off is real and worth asking about at offer time.
Acceleration (single-trigger and double-trigger)
Single-trigger acceleration vests unvested equity on a single triggering event — typically a change of control (acquisition). The result: founders and key employees keep all their equity in an acquisition regardless of when it happens. Acquirers dislike single-trigger because it removes retention leverage post-acquisition.
Double-trigger acceleration requires two events: a change of control AND a termination (typically without cause or for good reason) within a defined window post-acquisition. Double-trigger is the modern standard for senior employees and founders because it protects against being fired post-acquisition while preserving retention for those who stay. Acceleration percentages vary: 100% for founders, 25-50% for executives, lower or none for line employees.
Cap table
The capitalization table (cap table) lists every shareholder, the type of shares they hold (common, preferred series A, preferred series B, options, warrants), the number of shares, and the resulting ownership percentages. A clean, current cap table is one of the most-requested items in fundraising and M&A diligence; a messy cap table can delay or kill deals.
Cap tables are managed in spreadsheets (founder-owned companies) or in equity platforms like Carta and Pulley. Common errors that cause problems later: missing convertible notes or SAFEs, missing option grants, vested-vs-outstanding confusion, pool-vs-allocated mix-ups, and stale 409A valuations. See the cap table calculator for dilution math.
Common vs. preferred stock
Common stock is the default share class — held by founders, employees (after option exercise), and other ordinary holders. Preferred stock carries additional rights and is typically held by investors. Common rights given to preferred: liquidation preference, dividend preference, board representation, anti-dilution protection, pro-rata rights, information rights, and voting protections on key decisions.
Preferred shares trade at higher prices than common in private financings because they're worth more (the additional rights). The 409A valuation of common typically applies a discount of 30-60% to the preferred share price, reflecting common's lack of these protections and lack of liquidity.
Founder shares and 83(b) election
Founders typically receive restricted stock (not options) at company formation, subject to vesting. Without the 83(b) election, the IRS treats each vesting tranche as taxable income at the FMV at the time of vesting — which can produce a large tax bill in years when the company has appreciated significantly. The 83(b) election, filed within 30 days of the grant, lets the founder pay tax on the entire grant immediately at grant-date FMV (typically near zero for newly-formed companies).
Filing 83(b) is one of the most consequential tax decisions a founder makes. Missing the 30-day window is a common, expensive error — there's no extension. Documentation: signed election letter, sent to the IRS by certified mail, with a copy retained. Consult an attorney; the upside of doing this right is large and the downside of doing it wrong is permanent.