Equity Compensation Explained: When Stock Actually Beats Cash Salary
By
Samara Garcia
•
Feb 23, 2026
You’re an AI engineer staring at two offers. One is Big Tech with $340k in cash and liquid RSUs. The other is a Series B startup with $210k and 0.2 percent in equity. On paper, they look incomparable. In reality, one may be clearly better.
That gap comes down to details most engineers are never taught to evaluate, like vesting, strike price, dilution, and taxes. In the 2024 to 2026 AI hiring boom, equity has become the main way startups compete with Big Tech, especially for LLM and ML infrastructure talent.
This article will demystify equity compensation from the ground up. You’ll learn the difference between ISOs, NSOs, RSUs, and RSAs. You’ll see concrete scenarios where stock can realistically beat cash, and where it absolutely won’t. And you’ll discover how Fonzi helps AI talent navigate these choices with transparency, speed, and leverage.
Key Takeaways
Equity compensation grants you an ownership stake in a company through stock options, restricted stock units, or other instruments, a value that can dramatically outpace cash salary when the company grows quickly, but only if you understand vesting, dilution, and tax timing.
AI/ML engineers at early-stage startups typically receive 0.5–1.5% equity at Seed, 0.2–0.75% at Series A, and 0.1–0.3% at Series B/C, though these figures vary widely based on role seniority and company trajectory.
Stock tends to beat cash when you join a company that can plausibly 10–50x in valuation, your grant size remains meaningful after expected dilution, and you stay long enough to vest most of your equity.
Fonzi AI’s Match Day forces companies to be transparent about both salary and equity ranges upfront, reducing guesswork, eliminating lowball offers, and giving you leverage to compare multiple competing offers simultaneously.
Fonzi uses bias-audited AI to surface high-signal matches based on skills and portfolio quality, not pedigree shortcuts, while humans still make all final hiring decisions.
What Is Equity Compensation? (And How It Differs From Salary)
Equity compensation is non-cash pay that grants you an ownership interest in a company. Instead of receiving additional dollars in your bank account, you receive company shares, or the right to purchase them, whose value is tied directly to company performance and eventual exit outcomes like an IPO or acquisition.
Here’s how equity-based compensation differs from salary:
Salary is guaranteed, liquid, and taxed as ordinary income every pay period. If you’re earning $200,000 base, you know exactly what hits your account each month. There’s no upside tied to company growth, but also no downside risk.
Equity compensation is speculative, often illiquid for years, and taxed differently depending on type (ISO, NSO, RSU, RSA) and when you exercise or sell. The value could be life-changing if the company succeeds, or worth nothing if it fails.
Here’s the tradeoff in plain terms. A public cloud company offers $80,000 a year in RSUs. A Series B AI infrastructure startup offers 0.15 percent in options at a $3 strike price. The RSUs are predictable. The options are a bet. If the startup reaches a $5 billion valuation, that stake could be worth over $7 million pre-tax. If it fails, it is worth zero.
Equity is common in AI startups because cash is scarce, and competition for rare skills like LLM infrastructure and training systems is fierce. Ownership is the one lever startups have that Big Tech cannot easily match.
Types of Equity Compensation AI Engineers Actually See
While textbooks list dozens of equity instruments, AI and ML talent typically encounter four main types in real offers: ISOs (Incentive Stock Options), NSOs (Non-Qualified Stock Options), RSUs (Restricted Stock Units), and RSAs (Restricted Stock Awards). At public companies, you may also see employee stock purchase plans.
The core variables you must understand for any equity grant are:
Ownership percentage (what fraction of the company do you own after dilution?)
Vesting schedule (when do you actually earn the equity?)
Strike price (for options, what do you pay to convert them to shares?)
Liquidity expectations (when can you actually turn this into money?)
A later section includes a table comparing how each type behaves across early-stage versus late-stage companies. For now, know that Fonzi’s profile and recruiter support help candidates decode these terms before Match Day, so you never waste interviews on misaligned compensation packages.
Stock Options: ISOs vs. NSOs
Stock options give you the right, but not the obligation, to buy company shares at a fixed strike price, usually set to the fair market value on the grant date. For U.S. C-Corps, this is typically the 409A valuation.
Incentive Stock Options (ISOs):
Available exclusively to employees (not contractors or advisors) at U.S. companies
Potential for long-term capital gains treatment if you meet holding requirements: hold shares for at least 2 years from the grant date and 1 year after exercise
No ordinary income tax at exercise, but the “bargain element” (spread between exercise price and FMV) can trigger Alternative Minimum Tax (AMT)
Annual exercise limits apply ($100,000 in value per year based on grant-date FMV)
Non-Qualified Stock Options (NSOs):
More flexible, available to employees, advisors, international team members, and late-stage hires
Taxed as ordinary income on the spread at exercise, regardless of whether you sell
The company gets a corresponding tax deduction
No AMT concerns, but a higher immediate tax burden
Example in brief: you receive 20,000 options at a $2 strike when the 409A is also $2. Three years later, the shares are worth $15. Exercising costs $40,000 and yields stock worth $300,000, a $260,000 gain. With ISOs, that gain may trigger AMT. With NSOs, it is taxed immediately as ordinary income.
For engineers joining Seed through Series C AI startups, options are the norm. Fonzi surfaces strike price and 409A details early so you can evaluate real outcomes before investing time in interviews.
Restricted Stock Units (RSUs)
RSUs are promises to deliver actual company stock (or the cash equivalent) upon vesting. Unlike options, there’s no strike price; you don’t pay anything to receive your vested units.
Key characteristics of restricted stock units RSUs:
Common at public or late-stage pre-IPO companies, where share value is more stable and liquid
Standard vesting pattern: 4 years with a 1-year cliff, then quarterly or monthly vesting thereafter
Tax hits at vesting based on fair market value; you owe ordinary income tax on the full value of shares received, even if you can’t sell them immediately
One-for-one delivery: if you’re granted 1,000 RSUs and they fully vest, you receive 1,000 shares (minus any shares withheld for taxes)
Consider this example: a late-stage AI platform company in 2025 grants you $120,000 per year in RSUs, vesting quarterly over four years. At a $50 share price, that’s 2,400 shares annually, or 600 shares per quarter. The value is relatively predictable; you know what the shares trade for, and you can likely sell some immediately to cover tax liabilities.
Compare this to a Series A startup offering options with much larger potential upside but zero liquidity until an exit event. The RSU package offers a lower ceiling but a higher floor. The startup equity offers the opposite.
Restricted Stock Awards (RSAs)
Restricted stock awards grant you actual company shares upfront, subject to vesting over time or upon milestones. They’re different from RSUs because you own the shares immediately; you just forfeit unvested shares if you leave.
Key points about restricted stock:
Typically used for founders and the first 3–5 hires at Seed-stage AI startups before any priced round
Often granted at a very low purchase price (sometimes fractions of a cent per share)
You can make an 83(b) election within 30 days of the grant to be taxed on the current (low) fair market value rather than the higher value at vesting
Grants you immediate voting rights and shareholder status
The 83(b) election is particularly powerful at early stages. If you join a Seed-stage company and receive 100,000 shares at $0.001 per share, filing an 83(b) election means you pay tax on $100 of value now. Any future appreciation is taxed as capital gains when you sell. Without the election, you’d owe ordinary income tax on the full FMV at each vesting date, which could be dramatically higher.
Restricted stock awards become rarer as companies mature and valuation rises. At Series A and beyond, the tax and administrative complexity make them impractical for most new hires.
Employee Stock Purchase Plans (ESPPs)
Stock purchase plans (ESPPs), are programs offered primarily by public companies that let employees use after-tax payroll deductions to purchase company stock at a discount, commonly 5–15% below market value.
What AI engineers should know about ESPPs:
Common at large cloud providers, public AI-adjacent companies, and late-stage pre-IPO firms
Qualified plans under Section 423 cap purchases at $25,000 per year and offer tax benefits similar to ISOs
Non-qualified versions lack these tax advantages and vary in discount generosity
Typically structured with offering periods of 6–24 months, with purchase dates at the end of each period
If you’re weighing a public tech company against a startup, include the ESPP value in your total compensation comparison. A 15% discount on company stock purchases can add meaningful financial benefits; historical data suggests 10–30% annualized returns in favorable market conditions.
How Equity Compensation Works in Practice: Grants, Vesting & Liquidity
Equity mechanics matter more than the headline percentage. A 0.5% grant can be misleading if vesting is long, the exercise window is short, or liquidity is years away.
Before signing, get the basics in writing: grant date, number of options or units, strike price or FMV, and the plan documents that define vesting, exercise rules, and restrictions. Verbal promises mean nothing without paperwork.
Most AI and tech startups use four-year vesting with a one-year cliff. If you leave, you typically have just 90 days to exercise vested options or lose them, though some startups offer longer windows. And remember, equity only turns into cash at an exit or secondary sale, which may take many years or never happen at all.
Vesting Schedules and Cliffs for AI Talent
Understanding your vesting schedule is non-negotiable. Here’s how it works:
Vesting is the schedule on which you actually earn your equity, typically starting from your start date rather than your offer-sign date
Cliff is the initial period (usually 12 months) during which you vest nothing; if you leave before the cliff, you forfeit all equity
Post-cliff vesting usually proceeds monthly or quarterly until you’re fully vested
Date-based example: You join an AI startup on July 1, 2025, with a 4-year vesting schedule and 1-year cliff. On June 30, 2026, you own 0% of your grant. On July 1, 2026, you instantly vest 25% (the cliff). From August 2026 through July 2029, you vest an additional 2.08% monthly until you reach 100%.
Acceleration clauses can change this timeline:
Single-trigger acceleration: Your equity accelerates (partially or fully) upon a company acquisition, regardless of whether you stay employed
Double-trigger acceleration: Acceleration requires both a change of control AND termination within a specified window (typically 12 months)
Senior AI researchers and founding engineers should negotiate for at least partial acceleration. Fonzi’s recruiters can help frame these asks professionally without damaging your candidacy.
Exercising Options and Understanding Strike Price
For stock options, “exercising” means paying the strike price to convert your vested options into actual shares. This is not automatic; it requires cash and a deliberate decision.
Key concepts:
Strike price (exercise price): The fixed cost per share you must pay. Example: 25,000 options at a $3 strike require $75,000 to fully exercise.
Exercise window: Options typically expire 90 days after termination. If you can’t exercise in time, you lose them, even if they’re worth millions on paper.
Early exercise: Some companies allow you to exercise unvested options before they vest, starting your capital gains holding period earlier. This can reduce future tax liabilities but increases risk if the company fails.
The post-termination window often traps mid-career engineers. Imagine you’ve worked at a startup for five years, accumulated $500,000 in paper value, and decide to leave for a new opportunity. With a 90-day exercise window and a $150,000 exercise cost, you must find that cash immediately, or forfeit everything.
Before accepting any offer, ask:
Is early exercise allowed?
What is the post-termination exercise window?
What is the expected timeline for liquidity?
When Stock Actually Beats Cash: Realistic Scenarios for AI Engineers
The question every AI engineer asks: when does equity actually outperform a higher-cash offer? The answer requires modeling specific scenarios, not just hoping for the best.
Let’s compare two hypothetical 2025 offers for an LLM infrastructure engineer:
Factor | Series A AI Startup | Large Public Tech Company |
Base Salary | $190,000 | $230,000 |
Equity (Annual Value) | 0.25% options, $4 strike | $90,000 RSUs |
Total Stated Comp | ~$190,000 + equity upside | $320,000 |
Liquidity | None until exit (5-8 years) | Immediate quarterly vesting |
Company Valuation | $80M post-money | $200B market cap |
Now model three outcomes for the startup over 6 years, assuming 30% dilution from future funding rounds:
Worst case (company fails): Your 0.25% is worth $0. You earned $190k × 6 = $1.14M in salary. The public company offer would have yielded ($230k + $90k) × 6 = $1.92M. Net difference: -$780,000.
Base case ($1B exit): Your diluted 0.175% stake is worth $1.75M pre-tax. Add $1.14M salary = $2.89M total. Public company: $1.92M. Net difference: +$970,000.
Best case ($10B exit): Your diluted stake is worth $17.5M pre-tax. Total with salary: $18.64M. Net difference: +$16.7M.
Stock tends to beat cash when:
The company can plausibly increase its valuation by 10–50x
Your grant size remains meaningful after expected dilution
You stay long enough to vest most of your equity grant
You can afford to treat the equity as a high-upside, high-risk asset rather than counting on it for near-term expenses
For many mid-career AI professionals, the right answer is a thoughtful mix: solid base salary that covers your financial considerations, plus equity you can genuinely afford to lose.
How to Evaluate a Startup Equity Offer Beyond the Headline Number
When a recruiter says “we’re offering 25,000 options,” that number means nothing without context. Here’s your evaluation checklist:
Calculate your ownership percentage:
Ask for the fully diluted share count (total shares including option pool and convertible instruments)
Divide your grant by fully diluted shares: 25,000 / 25,000,000 = 0.1%
This is your current ownership; it will decrease with future funding rounds
Understand the valuation and dilution trajectory:
Ask for the latest post-money valuation (e.g., $100M post-money at Series A)
Understand the current option pool size and planned expansion
Model expected dilution: assume 15-25% dilution per funding round through Series C
Review the fine print:
Vesting schedule and cliff dates
Post-termination exercise window (90 days is standard; longer is better)
Early exercise rights
Acceleration clauses (single-trigger vs. double-trigger)
Apply rough benchmarks by stage:
Stage | Typical Senior IC Equity Range | Notes |
Seed | 0.5% – 1.5% | Higher risk, higher ownership |
Series A | 0.2% – 0.75% | Still meaningful upside |
Series B | 0.1% – 0.3% | Lower risk, lower ownership |
Series C+ | 0.05% – 0.15% | Closer to late-stage dynamics |
These are ballparks, not guarantees. AI/ML specialists often command 1.5–2x these norms, given talent scarcity in 2024–2026.
Tax Basics: How Equity is Taxed vs. Cash Salary
Note: This section provides general guidance, not legal or tax advice. Consult a qualified tax professional for personalized tax advice.
Cash compensation is straightforward: taxed as ordinary income each pay period. Equity taxation is far more complex, varying by type, jurisdiction, and timing.
Salary taxation:
Ordinary income rates (up to 37% federal in the U.S., plus state and local)
Payroll taxes (FICA up to wage base)
Deducted from each paycheck automatically
Stock options (ISOs and NSOs):
ISOs: No ordinary income tax at exercise, but the bargain element can trigger AMT. If you meet holding requirements (2 years from grant, 1 year from exercise), gains are taxed at long-term capital gains rates (0–20% plus 3.8% NIIT).
Non-qualified stock options: Taxed as ordinary income on the spread at exercise, regardless of whether you sell. Subsequent appreciation is capital gains.
RSUs:
Taxed as ordinary income at vesting based on fair market value
Many companies withhold shares to cover tax liabilities
Later appreciation is taxed as capital gains when sold
RSAs:
Without 83(b) election: taxed as ordinary income at each vesting date based on FMV
With 83(b) election: taxed on grant-date value (often minimal), converting all future appreciation to capital gains
The tax consequences of large exercises or vesting events can be severe. Imagine 10,000 RSUs vesting at $100 per share ($1M value) while you’re at a private company with no way to sell. You owe roughly $400,000 in taxes without any liquid shares to sell.
Any candidate considering a large exercise, major RSU vest, or relocation between jurisdictions should talk to a tax professional before making decisions.
Inside Fonzi Match Day: A High-Signal Path to Equity-Backed Offers
Fonzi Match Day is a structured, 48-hour hiring event designed to deliver multiple, equity-transparent offers fast. Instead of weeks of scattered interviews, you get curated introductions to vetted AI startups and high-growth companies that commit to real salary and equity ranges upfront.
How it works
Apply and get vetted: A short, rigorous review focused on real work that advances your AI/ML engineering career, not pedigree, keywords, or school names.
Smart matching: You’re paired with roles that align with your skills, preferences, and compensation targets.
48-hour sprint: Interviews, feedback, and offers happen quickly, often within two days.
Full transparency: Salary and equity ranges are known before the first call.
What companies commit to
Fast responses during the window, no ghosting.
Honored comp ranges, no late-stage surprises.
Priority treatment, Match Day candidates aren’t pipeline filler.
Fonzi handles scheduling and follow-ups so you can focus on interviews. The result is multiple comparable offers at once, clearer equity terms, and stronger leverage, without the usual hiring chaos.
Summary
Equity can deliver real upside in AI, but only if you understand the mechanics behind it. Vesting, dilution, strike price, and taxes determine whether a stock is valuable or worthless.
Equity beats cash when the grant is meaningful, the company’s trajectory is strong, and you can tolerate risk. For most AI engineers, the smart move is balance: enough cash for stability, plus equity you can afford to treat as high-risk upside.
Fonzi AI makes this comparison practical by requiring upfront salary and equity ranges and delivering multiple offers in a single 48-hour Match Day, so you can evaluate options side by side and decide with clarity.
Ready to see what your skills are worth in the current AI market? Apply to Fonzi as a candidate, complete your profile, and join the next Match Day to compare equity-backed offers from companies that have already committed to transparency.
FAQ
What is equity compensation, and how is it different from salary?
Should I accept a lower salary for more equity at a startup?
How is equity compensation taxed compared to a regular salary?
What are the different types of equity compensation (ISO, NSO, RSU, RSA)?
How much equity compensation is standard for engineers at different startup stages?
