The Four Most Important Types of Equity Compensation: Before and Beyond the IPO
If you work for a private company that plans to eventually go public, a significant portion of your compensation may come in the form of equity.
Four of the most common awards are non-qualified stock options (NQSOs), incentive stock options (ISOs), restricted stock units (RSUs) and performance stock units (PSUs). They differ in their vesting requirements, tax treatment and planning opportunities.
Non-qualified stock options (NQSOs)
NQSOs give you the right to purchase shares in your company at a fixed price, known as the strike price. NQSOs only have intrinsic value when current share price increases above the strike price, because the NQSO allows you to buy shares at the lower price.
Incentive stock options (ISOs)
The primary difference is tax treatment. Exercising an NQSO generally triggers ordinary income on the spread between the strike price and the fair market value at exercise. By contrast, exercising an ISO generally does not create ordinary income for regular tax purposes at exercise, although the spread may be treated as income for alternative minimum tax purposes. If the required holding periods are met, the appreciation above the exercise price may generally be taxed as long-term capital gain upon sale.
Restricted stock units (RSUs)
An RSU is a promise from your employer to deliver company shares to you at a future date; generally, each RSU represents one share.
Typically, these conditions include a time-based component, meaning you need to remain employed at the company for a specified period of time in order for your RSUs to vest. However, many private companies impose a “double trigger” that sets another condition in addition to time vesting. The second condition is often a liquidity event, such as an IPO or acquisition, that must be completed for full vesting.
Performance stock units (PSUs)
PSUs are similar to RSUs but include an additional performance requirement. Similar to RSUs, they only vest if you remain employed at your company for a set length of time. The key difference in vesting is your company must also meet predetermined business metrics before shares are issued.
Common concerns for pre-IPO executives and employees
As a private company comes closer to an IPO, merger or acquisition, it’s natural for executives and employees to become increasingly focused on understanding their equity compensation and how it fits into their broader financial picture.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for
J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: “The four most important types of equity compensation: Before and beyond the IPO,” J.P. Morgan Private Bank, Sept. 29, 2026.
