Beginner's Guide to Stock Options and RSUs in 2026

If you feel like you need a translator just to read your offer letter, you aren't alone. 

Between ISOs, NSOs, RSUs, and ESPPs, equity compensation often looks more like a bad hand of Scrabble than a paycheck. We’re here to de-code the alphabet soup.

Here’s what you can expect: 

• Why Equity Compensation Exists
• Basic Terms
• Common Types of Equity Compensation
• Mechanics: Exercising and Vesting
• Associated Risks
• Industry-Specific Example: Aerospace

‍

Why Equity Compensation Exists

Since we’re covering the basics, let’s chat through why equity compensation exists in the first place.

Simply put, equity compensation offers employees the potential to build substantial wealth if their company thrives.

By linking an employee’s potential financial rewards to the company’s stock performance, it can align the interests of employees and the company. 

Imagine the company as a house that the entire team is constructing from the ground up. Employees are the builders. Every “nail” hammered, every “beam” aligned, every “coat of paint” applied represents your daily contributions that make the house stronger, more beautiful, and more valuable over time. The house doesn't build itself overnight; it takes sustained, coordinated effort from everyone, often over years, with challenges testing the crew.

Once the house is complete and beautifully finished, the team sells it on the open market. The higher the quality of the build—thanks to collective hard work—the higher the selling price, creating a big profit after costs. That profit is then shared among the builders according to their stake (just like equity grants): the more integral your role and the greater your consistent contributions, the larger your portion of the proceeds.

And it’s definitely appealing to employees. 

Morgan Stanley's 2025 State of the Workplace Financial Benefits¹ Study shows that 48% of employees strongly agree that equity is the most effective way to keep them motivated and engaged. 34% of them also cite maximizing equity compensation as a top personal financial goal alongside retirement and planning.

Despite its benefits, 55% of employees find making decisions about their equity stressful (according to Carta’s 2022 Employee Stock Options Report). 

Also, not to add to your current stress level, but 2026 is a critical year due to the potential sunset of the Tax Cuts and Jobs Act (TCJA). This could lead to higher income tax brackets (reverting to 39.6%)² and a halved estate tax exemption, making planning urgent.

So if you’re part of that 55%, our hope is that this guide reduces that level of stress. 

‍

Basic Equity Compensation Terms

While we want to make this blog as simple as possible, we do have to use some technical terms that you’ll likely see and hear in conversations around equity compensation. 

We’ll try to keep the definitions as simple as possible (and provide translations for what they actually mean). 

Grant Date — When equity is awarded.

Translation: “Congratulations, you are now the owner of some imaginary shares... that might one day be worth actual money”

Vesting — Earning the equity over time (e.g., 4-year schedule with 1-year cliff).

Translation: Your company’s way of saying, 'We love you, please don’t leave.' It’s often called 'Golden Handcuffs'—they are shiny, but make no mistake, they are designed to keep you stuck in your office chair for four years.

Fair Market Value (FMV) — Current stock price.

Translation: The current "official" stock price your company uses (the one that shows up on your option grant paperwork), basically yelling "This is what your shares would cost today if you could magically buy them right now... which you usually can't, so enjoy the suspense while you watch it climb (or not).” 

Expiration (for options) — Typically 10 years.

Translation: The final "use it or lose it" deadline on your stock options. If the price never gets above your strike price by then, your options expire worthless, and all that's left is a funny story about how you almost became a millionaire... emphasis on "almost."

Cliff — Initial period before any vesting (e.g., 1 year).

Translation: If you leave the company on Day 364 of your first year, you get zero equity. That is a long fall. We recommend sticking around for Day 366

Acceleration — Vesting speedup on events like acquisition.

Translation: It's basically the company going, "Big change coming—here's your equity now so you don't miss out," turning a slow vest into instant (or quicker) ownership and potential payout.

83(b) Election: An early tax election that can save significant taxes on future growth for startups. 

Translation: The "pay me now, tax me cheap" move where you tell the IRS, "Hey, tax me on my equity compensation right when I get it—at today's tiny startup value—instead of waiting for vesting when the shares could be worth a fortune and slap you with massive ordinary income taxes."

Trading Window: The specific times of year employees are actually allowed to sell shares.

Translation: It's the company's way of saying, "Now's your chance to cash out some of that equity before we lock everything down again around earnings season," so you don't accidentally trade on hot non-public info and end up explaining yourself to the SEC. Miss the window, and you're stuck waiting for the next one like it's the only day the DMV is open.

‍

Common Types of Equity Compensation

Now that we’ve exhausted the dictionary definitions around equity compensation terms, let’s talk about the common types. 

There are two common subdivisions of equity compensation: stock options and restricted stock units. 

‍

Here’s a simpler breakdown of all the differences. 

‍

One thing to note here are 10b5-1 plans (or Rule 10b5-1 trading plans). These are pre-arranged, written trading schedules set up in advance by company insiders (like executives, directors, or even some employees with access to sensitive info) to buy or sell company stock on autopilot (without you having to make last-minute decisions that could look shady. 

Another tidbit, the recent SEC updates requiring "cooling-off periods" (typically 90 days for officers) between adopting a plan and the first trade. You can no longer react swiftly to liquidity needs, so early planning is essential.

‍

Mechanics: Exercising and Vesting

The nuts-and-bolts part where your equity actually turns from "promises on paper" into real shares (and hopefully real money), but it comes with timing, cash, and tax gotchas.

Stock Option Exercising and Vesting

For stock options, you have to wait for vesting to unlock the right to buy then exercise by forking over the strike price (plus taxes) to actually own the shares. 

You can pay cash out of pocket, do a cashless exercise (broker sells some shares to cover costs), or same-day sell everything for instant profit. 

ISOs sneak in potential Alternative Minimum Tax (AMT). It’s the sneaky parallel tax system the IRS runs alongside your regular taxes to make sure high earners (or those with certain perks like Incentive Stock Options) don't pay too little overall—it's like the government saying, "Nice try dodging taxes with loopholes, but here's a backup calculation just in case." 

However, hold long enough (1 year post-exercise + 2 years post-grant) and you score long-term capital gains on the whole ride. NSOs hit you with ordinary income tax on the spread right at exercise (hello, bigger W-2). The exercise-and-hold play: pay up front and keep the shares to kick off the capital-gains clock early—risky (money tied up, stock could tank), but jackpot-level reward if it skyrockets, especially with ISOs.

For RSUs, no exercise drama is needed. When they vest, the company just drops the shares (or cash) in your lap for free. Taxes? Ordinary income on the full FMV at vesting, usually handled by your employer selling a chunk of shares ("sell-to-cover") to pay the IRS bill. After that, the remaining shares are yours to hold for more upside or sell when the coast is clear. 

Liquidity planning tip: set up a Rule 10b5-1 plan ahead of time to auto-sell on a schedule (no insider-trading vibes), and watch out for post-IPO lock-up periods (90–180 days of "hands off") that freeze sales. Plan your moves early so you're not stuck watching the price dance while you can't touch anything.

‍

Associated Risks

Equity sounds like free money until reality hits. Here's the dark side that can turn your "jackpot" into a headache (or worse).

Common Risks (for both stock options and RSUs): The stock price can tank hard, wiping out most or all of your paper wealth no matter how vested you are. If you leave the company before full vesting, you forfeit everything unvested. Concentration risk is brutal. Having too much of your net worth tied to one single stock (your employer's) means one bad quarter, lawsuit, or market dip can nuke your finances like putting all your eggs in the company basket and then dropping the basket. Taxes are a minefield: complex rules, surprise bills (especially if you exercise or vest at a high valuation), and potential cash-flow crunches where you owe Uncle Sam big before you can even sell shares to pay him.

Options-Specific Risks: Your options can go underwater (stock price drops below your strike price), making them worthless even if vested. Exercise? You'd literally be paying more to buy something cheaper on the open market. They expire after typically 10 years (or sooner post-termination), so if the stock never recovers in time, you lose the whole grant. For ISOs, the AMT trap can sting. Exercise and hold, and you might owe Alternative Minimum Tax on the spread right away even though you haven't sold anything, creating a real cash bill on unrealized gains. The silver lining? AMT credits often let you reclaim that prepaid tax in future years when you sell (or pay regular taxes), so it's more of a painful timing issue than a permanent loss. Still, many folks get caught short on liquidity and have to borrow or sell other assets to cover it.

RSUs-Specific Risks: You get taxed on the full FMV at vesting as ordinary income, even if the stock price crashes the very next day. Meaning you could pay taxes on a $100/share vest, then watch it drop to $40 and feel like you just donated extra to the IRS. Unlike options, there's no leverage or "strike price discount" upside. Your payout is straight tied to the stock price at vesting (no multiplied gains if it skyrockets post-vest unless you hold), so you miss the asymmetric boom potential that options offer when things go parabolic. It's safer in some ways (no out-of-pocket exercise cost), but it can feel like the company gets the best of both worlds: you pay taxes upfront, and they keep the leverage.

‍

Industry Specific Example: Aerospace 

Let’s break down an example of equity compensation using the Aerospace industry. 

In the aerospace world, equity compensation can feel more like a steady paycheck booster than the wild startup lottery you see in tech, because the industry is mature, heavily regulated, and tied to long government contracts rather than viral growth.

Big players like Boeing (BA) and Lockheed Martin (LMT) typically mix stock options and RSUs, but the split leans heavily on RSUs for most employees. 

Executives and top talent often get a chunk of stock options for that extra upside kick—think bigger potential payout if the company lands massive defense deals, wins new fighter jet programs, or sees commercial aviation rebound hard. One thing to note here are Non-Qualified Deferred Compensation (NQDC) plans, often available to aerospace execs. These can supplement 401(k) caps but carry "credit risk" if the company faces bankruptcy.

For the broader workforce (engineers, program managers, technicians), it's mostly RSUs—predictable, no-strike-price risk shares that vest over 4 years and deliver real value as long as the company keeps chugging along on contracts, even through supply chain headaches or delays. 

An engineer might get RSUs that vest quarterly or annually, turning into actual Boeing or Lockheed stock they can hold or sell (subject to trading windows), providing stable wealth-building amid the industry's slower, more predictable cycles. 

Options shine brighter for key hires or execs when a big win (new contract, successful launch) sends the stock soaring, but they can also sit underwater for years during program overruns or scandals (Boeing's past rollercoaster being a classic example). 

One thing to mention is "Guideline F"  financial issues. Sounds scary, right? These financial issues include excessive debt or unmanaged risk that can jeopardize security clearances. Conservative financial planning is a job requirement in this sector.

Bottom line: Aerospace uses RSUs as the workhorse for retention and alignment in a sector that's reliable but rarely explosive, saving the high-leverage options play for when they really want to motivate big swings in performance.

‍

How a Financial Advisor Can Help

While we hope this guide helped clear up some of the confusion around equity compensation, we realize some of the decisions are tough to tackle alone. 

These are some areas where an advisor can help:

Tax Optimization 

They help time your exercises and sales to cut your tax bill, and in big vesting years, use tools like a Donor Advised Fund to donate appreciated shares or cash—getting you an immediate deduction and dodging capital gains tax while supporting charities.

Estate Planning 

Advisors weave your stock options and RSUs into a legacy plan, using trusts or gifting strategies to pass wealth to heirs more efficiently, often with a step-up in basis at death so your family pays far less tax. Some other areas your financial advisor might know about include GRATs (Grantor Retained Annuity Trusts) for transferring high-growth assets tax-free, and CRUTs (Charitable Remainder Unitrusts) for philanthropic goals and income streams. 

Hedging 

If you’ve got a large chunk of wealth locked in one company’s stock, they set up protective plays like exchange funds (diversify without immediate taxes) or collars (cap downside while keeping some upside) to shield you from big drops without having to sell everything at once. Some other areas your financial advisor should know about include "Zero-Cost Collars" (capping downside while limiting upside) and "Exchange Funds" (pooling stock for diversification) as specific tools advisors use to manage concentration risk without immediate sales.

For any questions, I’d be happy to help you navigate some of these options and complexities. 

‍