Equity vs. Salary: What’s the Real Value of Your Total Compensation Package?

For startup founders and early employees, compensation is rarely straightforward.
Between salary, bonuses, stock options, RSUs, and other incentives, determining the total value of your compensation package can be complex. In many cases, the equity component carries both the most potential and the most risk.

I often see people weighing these details and contemplating the decision over and over. A big part of the decision is the phase of life that the individual is in. The challenge is that salary provides certainty while equity represents possibility.

Evaluating these two components side by side requires more than comparing numbers; it requires analyzing valuation, liquidity, tax treatment, and risk.

This guide breaks down how to assess your total compensation like an investor, not just an employee.

1. Understanding the Core Trade-off

In a startup environment, employees often accept below-market salaries in exchange for equity. That trade-off makes sense in theory: lower immediate income in exchange for long-term upside. However, few people quantify what that upside actually looks like.

At early stages, your ownership percentage may look meaningful, but the probability of exit is low. By later stages, the risk decreases, but so does the size of the equity award. The right balance depends on your personal financial situation and risk tolerance.

2. Salary: The Certainty Component

While it may not carry the same excitement as equity, salary provides two key benefits:

1. Predictability: Income to cover living expenses, savings, and taxes.
2. Liquidity: Immediate cash flow that enables financial flexibility and investment diversification.

In most cases, your base salary should comfortably support your lifestyle without relying on future liquidity events. If it doesn’t, your financial plan is overexposed to your employer’s success, and that’s an unnecessary concentration risk.

3. Equity: The Potential Component

Equity represents participation in your company’s future growth. But its value depends on several variables:

• Valuation: The higher your company’s valuation, the higher the strike price for your options.
• Dilution: Each funding round typically reduces employee ownership as new investors come on board.
• Liquidity: Until an IPO, acquisition, or secondary sale occurs, your shares are illiquid, meaning their value is theoretical.
• Preferences: Investors are usually paid first. If your company sells for less than the total amount of invested capital plus preferences, common shareholders may receive little or nothing.

In other words, equity’s value is conditional.

What’s written in your offer letter is not your final equity. It’s what remains after preferences, dilution, and taxes.

4. Tax Treatment: The Deciding Factor in Real Returns

Equity compensation often comes with complex tax consequences that can significantly impact your real after-tax returns. Understanding the distinctions among types of equity is essential:

• Incentive Stock Options (ISOs): The most tax-advantaged option if you meet holding requirements, but they come with AMT complexity.
• Non-Qualified Stock Options (NSOs): Simpler structure but taxed as ordinary income at exercise.
• Restricted Stock Units (RSUs): No exercise decision required, but they create immediate tax liability at vesting.

Incentive Stock Options (ISOs)

ISOs offer preferential tax treatment: no tax at exercise and long-term capital gains rates if you hold shares for one year post-exercise and two years post-grant. This can reduce your federal rate from 37% to 20%. The trade-off is AMT complexity. The spread at exercise is an AMT preference item that can trigger a large tax bill despite no cash in hand. Coordinating exercise timing with AMT thresholds is critical for high-value grants.

Non-Qualified Stock Options (NSOs)

When you exercise NSOs, the spread between the strike price and the fair market value is taxed immediately as ordinary income, regardless of whether you sell. This creates a cash flow challenge if you hold the shares. Future gains are taxed as capital gains upon sale. NSOs avoid AMT complications but offer no preferential tax rates on the initial spread.

Restricted Stock Units (RSUs)

RSUs vest automatically and are taxed as ordinary income at vesting, whether or not you can sell. Many companies withhold shares to cover taxes, which reduces the amount you receive. For private companies, this means owing taxes on illiquid shares. RSUs are simple, but they offer no capital gains treatment and no timing control.

Timing matters. Exercising or selling at the wrong time can cost hundreds of thousands in unnecessary taxes. You’ll want to coordinate decisions with your income, AMT exposure, and state residency.

5. Liquidity and Diversification Strategies

When a liquidity event finally occurs, whether through IPO, acquisition, or secondary sale, many employees find themselves “equity rich, cash poor.” This is where planning becomes essential.

Key strategies include:

• Secondary Sales: Selling a portion of vested shares before an IPO can provide liquidity while maintaining upside exposure.
• 10b5-1 Plans: Pre-scheduled selling programs can allow post-IPO sales while complying with insider trading regulations.
• Tax-Efficient Diversification: Donor-advised funds, qualified small business stock (QSBS) exclusions, and installment sale structures can reduce or defer taxes.
• Portfolio Rebalancing: Transition from concentrated company stock to a diversified investment portfolio that aligns with long-term goals.

The goal isn’t to sell everything. The goal is to convert part of your concentrated risk into lasting financial independence.

6. How to Evaluate Your Total Compensation Like an Investor

To assess whether your offer (or current package) makes sense, approach it analytically:

1. Model Realistic Exit Scenarios: Project outcomes at conservative, base, and optimistic valuations. Include dilution, taxes, and vesting schedules.
2. Understand the Timing of Value Creation: When will you realistically see liquidity? A 0.5% stake in a private company that stays private for 10 years is less valuable than 0.1% in a company likely to go public in three.
3. Quantify Risk-Adjusted Value: Use a probability-weighted approach. If there’s a 25% chance of exit, multiply your projected after-tax value by 0.25. That’s your expected value.
4. Balance Income and Equity Exposure: Your salary should fund your lifestyle and savings goals; your equity should be viewed as speculative upside, not guaranteed compensation.

7. The Advisor’s Perspective

For many startup professionals, equity compensation is the biggest financial opportunity of their careers, but it is also the most misunderstood.

The difference between a paper millionaire and a real one can come down to timing, tax planning, and disciplined execution.

Smart planning involves:

• Modeling the after-tax value of your equity at different valuations.
• Coordinating exercise timing with AMT and income thresholds.
• Establishing a liquidity strategy before your company goes public or is acquired.

At that point, the goal isn’t just to maximize value; it’s to preserve it.

That’s because a liquidity event shouldn’t just create wealth; it should secure it.

Final Thoughts

Startup equity can be a powerful wealth-building tool, but only when understood in context. Salary gives you stability; equity gives you potential.

The key is knowing how those two components fit into your overall financial plan.

Before your next negotiation or liquidity event, take the time to quantify your compensation the same way investors do. Understand valuation, risk, taxes, and timing.

It’s not just about how much you earn. It’s about how much you keep.