Equity Compensation Glossary

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10b5-1 Plan

This is a pre-arranged trading plan that lets employees with access to inside information sell company stock on a set schedule. A plan adopted in good faith, at a time when you have no material nonpublic information, provides an affirmative defense against insider trading claims. The plan sets the amount, price and timing of sales in advance (or a formula for them), and a broker executes the trades without your further input. A mandatory waiting period applies before the first trade: 30 days for most employees and 90 to 120 days for directors and officers. Changing the plan generally restarts that waiting period, and early terminations can weaken the legal protection. These plans typically allow sales to continue during blackout periods, which helps with managing liquidity when stock is a significant portion of your compensation.

83(b) Election

This election allows you to accelerate tax payments to when equity is received, instead of when it vests. It applies to restricted stock awards (RSAs) and early-exercised stock options. It involves significant risks, but can end up saving thousands of dollars in taxes by minimizing ordinary income treatment on gains. It requires deciding before you know how your equity will perform, since it must be filed within 30 days of the equity transfer. As a result, you could pay tax on equity that never provides any economic benefit.

A

Alternative Minimum Tax (AMT)

Whenever you file your taxes, two calculations are run: your regular tax and a parallel alternative minimum tax. You pay whichever is higher. Most people never owe AMT unless a specific event triggers it. With equity compensation, the most common trigger is exercising ISOs and holding the shares past year-end: the unrealized gain is the difference between your strike price and the stock's value at exercise counts as income for AMT, even though it isn't taxed under the regular system. Beginning in 2026, AMT also reaches more high earners because the exemption phases out sooner and faster.

Alternative Minimum Tax Credits

When AMT is triggered by a timing item like an ISO exercise, the tax code treats it as a prepayment of tax rather than an additional tax. The AMT you pay generates a credit that carries forward indefinitely. In later years when your regular tax exceeds your tentative minimum tax, you can use the credit to reduce your regular tax down to that minimum. Without careful planning, it can take many years to recover the full credit.

B

Blackout Periods

These are windows set by a company's insider trading policy during which covered employees cannot buy or sell company stock. They exist to prevent trading while employees may know more than the public. Scheduled blackouts typically begin a few weeks before the end of each quarter and lift one to two trading days after earnings are released. Companies can also impose unscheduled blackouts around major events. Who is covered varies: some companies restrict all employees, others only those with access to sensitive information. Trades under a 10b5-1 plan adopted earlier, during an open window, can generally continue through a blackout. Even in an open window, you cannot trade if you personally hold material nonpublic information.

C

Capital Gains (Short-Term v. Long-Term)

When you sell an asset for more than your cost basis, the difference is a capital gain. If you hold the asset for one year or less, the gain is short-term and taxed at ordinary income rates, up to 37% in 2026. If you hold it for more than one year, the gain is long-term and taxed at a preferential rate of 0%, 15% or 20%, depending on your income. High earners pay an additional 3.8% net investment income tax on both types, for top federal rates of 40.8% and 23.8%. For equity compensation, the holding period starts when RSUs vest or options are exercised, not at grant.

Cashless Exercise

One of the most common challenges with stock options is the cash required to exercise them. You need cash to pay the exercise price, and often to cover taxes as well. In a cashless exercise, a broker exercises your options and immediately sells shares to cover those costs, so you pay nothing out of pocket. You can sell all of the shares and receive the net cash (a same-day sale), or sell only enough to cover the costs and keep the rest (sell-to-cover). This generally requires a market for the shares, so it is mostly available at public companies. For ISOs, the shares sold this way lose their favorable tax treatment and the gain on them is taxed as ordinary income.

Concentration Risk

This is the risk of having a large proportion of your investment portfolio in a single stock or a small number of stocks. It is extremely common when a significant part of your compensation is equity, and it is compounded by the fact that your salary and future grants depend on the same company. Holding shares longer can earn better tax treatment, but a decline in the stock can cost more than the tax saved. Professional guidance can help you decide when the risk of holding outweighs the tax benefit.

Cost Basis

Cost basis is the starting value used to calculate capital gain or loss when you sell stock. For ordinary purchases it is what you paid. For equity compensation it is what you paid plus any amount already taxed as compensation income, so the basis of RSU shares is generally their fair market value at vest. This matters because brokers are not permitted to include that compensation income in the basis they report on Form 1099-B, so the reported basis is often too low or even zero. If it isn't corrected on your tax return, you pay tax on the same income twice.

D

Discount (ESPP)

A tax-qualified (Section 423) employee stock purchase plan can let employees buy company stock at a discount of up to 15% from its fair market value. If the plan includes a look-back, the discount is applied to the lower of the stock price at the start of the offering period or on the purchase date, which can make the effective discount much larger than 15% when the stock has risen. Without a look-back, the discount is applied to the price on the purchase date. In 2026, there is also a limit of $25,000 of stock that the discount can be applied to per employee.

Dispositions of ESPP (Qualified/Disqualified)

A disposition is a sale, gift or other transfer of shares bought through an employee stock purchase plan. It is qualifying if it occurs more than two years after the offering date and more than one year after the purchase date; otherwise it is disqualifying. Both types produce some ordinary income and some capital gain. In a qualifying disposition, the ordinary income is limited to the lesser of your actual gain or the plan discount measured at the offering-date price, and the rest is long-term capital gain. In a disqualifying disposition, the full discount you received at purchase is ordinary income, even if the stock has since fallen, and the rest is capital gain or loss. These rules apply to tax-qualified (Section 423) plans.

Dispositions of ISOs (Qualified/Disqualified)

A disposition is a sale, gift or other transfer of shares acquired by exercising incentive stock options. It is qualifying if it occurs more than two years after the grant date and more than one year after the exercise date; otherwise it is disqualifying. In a qualifying disposition, the entire gain over the exercise price is taxed as long-term capital gain. In a disqualifying sale, the spread at exercise (or your actual gain, if less) is taxed as ordinary income, and any remaining gain is capital gain. Holding for a qualifying disposition can trigger AMT in the year of exercise and leaves you exposed to a decline in the stock, so the tax savings are not always worth the wait.

Donor Advised Funds (DAFs)

A DAF is a charitable giving account held at a sponsoring public charity. You contribute cash or assets, take the charitable deduction in the year of the contribution, and recommend grants to charities over time. Contributing appreciated stock held for more than one year avoids capital gains tax and gives an itemized deduction for the stock's full market value, subject to income-based limits. This makes a DAF useful for "bunching" several years of giving into a single high-income year, such as the year of an IPO or a large vest. Contributions are irrevocable, and grants can only go to qualifying charities.

Double Trigger Vesting RSUs

These are RSUs that require two conditions before they vest: a time-based service requirement and a liquidity event, such as an IPO or acquisition. They are common at private companies because they prevent you from owing tax on shares you cannot yet sell. No tax is due until both conditions are met. The trade-offs are that the RSUs can expire if no liquidity event occurs within a set period, often about seven years, and that years of grants can vest at once, creating a large tax bill in a single year with withholding that may not cover it. Review these terms carefully with a tax professional when evaluating an offer from a private company.

E

Early Exercise

Some companies, mostly early-stage private ones, let employees exercise stock options before they vest. The shares you receive remain subject to vesting, and the company can buy back unvested shares if you leave. Early exercise is usually paired with an 83(b) election, which must be filed within 30 days of the exercise. With the election, you are taxed at exercise, when the gap between your exercise price and the stock's value is often small or zero, and later appreciation is taxed as capital gain. The risk is that you pay the exercise price, and possibly tax, for shares that may never vest or may lose their value.

Employee Stock Purchase Plan (ESPP)

A company program that lets you buy company stock through after-tax payroll deductions, which accumulate over an offering period and are used to purchase shares on set dates. A tax-qualified (Section 423) plan can offer a discount of up to 15% and limits purchases to $25,000 of stock per calendar year, valued at the start of the offering period. In a qualified plan you owe no tax at purchase, and you may receive more favorable tax treatment at sale if you meet the holding periods for a qualifying disposition. Many plans also include a look-back, which applies the discount to the lower of the stock price at the start of the offering period or on the purchase date. Not every plan is tax-qualified, so check which type your employer offers; in a non-qualified plan the discount is taxed as income when you buy.

Equity Compensation

Compensation paid in company stock, or in rights to acquire it, rather than cash. The main types are restricted stock units (RSUs), stock options (ISOs and NSOs), employee stock purchase plans (ESPPs) and restricted stock awards (RSAs). They differ in potential benefit, how much cash you need to put in, when you are taxed and how.

Exercise Date

The day you buy the shares you are entitled to under your option agreement. The stock's value on this date determines the taxable spread, and the date starts your holding period for capital gains.

Exercise/Strike Price

This is the fixed price per share you pay to buy stock when you exercise your options. It is typically set at the stock's fair market value on the grant date. For a public company, that is the market price. For a private company, it is based on a 409A valuation, an independent appraisal of the company's common stock. Because the price is set at the grant-date value, your options only have value if the stock rises above it. If the stock is at or below the exercise price, the options are "underwater."

Exercising

This is the act of buying the stock your vested options entitle you to at the exercise price. Whether it makes sense depends on the stock's current value. If your exercise price is $10 and the stock is worth $8, exercising would cost more than the shares are worth. If your exercise price is $1 and the stock is worth $8, exercising gives you a $7 gain per share. At a public company you could sell immediately to lock in that gain, or hold and hope the stock keeps appreciating. At a private company you generally cannot sell right away. Options that are never exercised eventually expire, often soon after you leave the company. Exercising can also trigger tax, so an advisor can help you decide whether and when to exercise, and whether to hold or sell.

F

Forfeiture Risk

The risk of losing equity compensation you have been granted before it becomes fully yours. The most common cause is leaving the company before your equity vests. You can also forfeit vested options if you do not exercise them within a set window after leaving, often 90 days, and double-trigger RSUs if no liquidity event occurs before they expire.

G

Grant Date

The date your company awards you equity compensation and sets its terms, including the vesting schedule. For stock options, the grant date sets the exercise price and starts the clock on the option's expiration and the two-year ISO holding period. For RSUs, it sets the number of shares that will vest over time. Receiving a grant is generally not a taxable event.

H

Holding Period

The amount of time a stock is held to determine long term or short term capital gains upon sale. This can also be used to describe the time period between the grant of equity and the vesting date.

I

Incentive Stock Options (ISOs)

The more tax-advantaged of the two types of stock options, available only to employees. You owe no regular income tax when you exercise, and if you hold the shares long enough for a qualifying disposition, your entire gain is taxed as long-term capital gain. The trade-offs are that exercising and holding can trigger AMT, you need cash to exercise, and you carry the risk of the stock falling while you hold. Only $100,000 of ISOs, valued at grant, can become exercisable in any one year, and ISOs generally must be exercised within three months of leaving the company to keep their tax treatment. A tax specialist can help you plan around AMT, holding periods and the cash needed to exercise.

Initial Public Offering (IPO)

The first time a company's stock is available for purchase and sale on a public stock exchange.

N

Net Investment Income Tax

An additional 3.8% federal tax on investment income, such as capital gains, dividends, interest and rental income, for people whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). It applies to the lesser of your net investment income or the amount by which your income exceeds the threshold. Income from RSU vesting or option exercises is not itself subject to the tax, but it raises your income and can push your investment gains above the threshold.

Non-Qualified Stock Options (NQSOs)

Stock options that do not receive the special tax treatment of ISOs. When you exercise, the difference between the stock's value and your exercise price is taxed as ordinary income, with payroll tax and withholding for employees, whether or not you sell the shares. Any gain after exercise is capital gain. The tax treatment is simpler than for ISOs because there are no AMT considerations or special holding periods. Unlike RSUs, which are taxed automatically at vest, NQSOs let you choose when to trigger the tax by choosing when to exercise.

R

Restricted Stock Awards (RSAs)

A grant of actual company shares that are subject to vesting. Unlike RSUs, which are a promise of shares in the future, you own RSA shares from the grant date, typically with voting rights, but unvested shares can be forfeited or bought back by the company if you leave. By default you are taxed at ordinary income rates as the shares vest, on their value at that time. RSAs are eligible for an 83(b) election, filed within 30 days of the grant, which lets you pay tax on the value at grant instead so that later appreciation is taxed as capital gain. RSAs are most common for founders and early employees, when the share value is low.

Restricted Stock Units (RSUs)

A promise from your company to deliver shares of stock once vesting conditions are met. A common schedule is four years, with 25% vesting after the first year and the rest quarterly. When RSUs vest, the market value of the shares is taxed as ordinary income, with payroll taxes. Companies typically cover the withholding automatically by selling or holding back some of the shares (sell-to-cover). Federal income tax is usually withheld at a flat 22%, which is often less than high earners actually owe, so you may owe additional tax when you file and could face underpayment penalties. Your cost basis in the shares is their value at vest, and any gain or loss after that is capital gain or loss.

V

Vesting

The point at which you have met the conditions of your equity award and it becomes yours to keep. Conditions are usually time-based, such as a period of continued employment, but can also include performance goals or a liquidity event. For RSUs and RSAs, vesting means you own the shares outright, and it is generally a taxable event (unless you filed an 83(b) election on RSAs). For stock options, vesting gives you the right to exercise and is not itself taxable.

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