Tax Implications of Working for a Startup (Equity Compensation)

Startup Equity Compensation and Taxes

Types of Equity Compensation

Stock Options

• Incentive Stock Options (ISOs): No regular tax at grant or exercise; capital gains on sale if holding requirements met
• Non-Qualified Stock Options (NSOs): Ordinary income on the spread when exercised

Restricted Stock Units (RSUs)

• Taxed as ordinary income when they vest
• FMV at vesting = income regardless of whether you sell

Restricted Stock Awards (RSAs)

• Taxable when restrictions lapse (same as RSUs) unless Section 83(b) election is filed

Section 83(b) Election

Elect to pay tax now (at current low value) rather than at vesting (when value may be much higher).

• Must be filed within 30 days of receiving the restricted stock
• Risky if company fails (you paid tax on value that becomes worthless)
• Potentially huge savings if company succeeds

Early Exercise + 83(b)

Exercise ISOs early (when spread is zero) and file 83(b) election:

• Start the clock on long-term capital gains holding period
• Minimize or eliminate ordinary income and AMT risk

QSBS (Section 1202)

If the startup qualifies, gains on stock held 5+ years may be 100% tax-free (up to $10M).

Liquidity Events

• IPO: Stock becomes liquid; tax planning opportunities around the lockup period
• M&A: May trigger ordinary income on unvested acceleration

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Startup employee with equity? The stakes are high — tax planning at each stage is critical.