Equity Compensation 2026 — RSU vs ISO vs NSO vs ESPP Decision Tree

RSU (Restricted Stock Unit) is a PROMISE to deliver shares at vesting; you pay tax at full Fair Market Value at vest as ordinary income. ISO (Incentive Stock Option) is the RIGHT to BUY shares at a fixed strike price; you pay nothing at vest, but exercising triggers AMT consideration on the bargain element (FMV - strike). RSUs cannot lose value below vest-time FMV (you got real shares). ISOs can become worthless if company tanks. Practical: public company employees almost always get RSUs; pre-IPO startup employees get ISOs (sometimes NSOs above the $100K/year ISO cap).

When you exercise ISOs and HOLD the shares (vs immediately selling), the IRS adds the BARGAIN ELEMENT (FMV at exercise minus strike price) to your AMT income. Example: you exercise 10,000 ISOs at $5 strike when FMV is $50; bargain element is $450,000. Even though you have NO cash, IRS treats this as $450K of AMT income — 28% of which ($126K) is owed in cash. If the company drops to $5/share later, you still owe the $126K but the shares are worthless. This has bankrupted real people. Mitigations: exercise in tax years with low ordinary income; spread exercises across multiple years; exercise + sell same-year (disqualifying disposition removes AMT but loses LTCG benefits); use Form 6251 to model AMT before exercising.

For founder restricted stock at near-zero FMV: ALMOST ALWAYS YES. File within 30 days of grant. You pay tax on the (typically tiny) current FMV; all future appreciation becomes long-term capital gains when sold. Without 83(b), you pay ordinary income tax at each vesting on the full FMV at that moment — which can be huge if company grows. For options (ISO/NSO), 83(b) is for EARLY-EXERCISE plans (uncommon outside very early-stage startups). For RSUs, 83(b) is generally not available. CRITICAL: 30-day deadline is ABSOLUTE; missing it cannot be cured. File via certified mail, get return receipt, keep copy + receipt forever.

For most employees at companies offering 15% lookback discount: YES, max contribution. The 15% discount is essentially risk-free return if you sell at purchase. Math: 15% discount = 17.6% return on capital ($85 buys $100). If your company allows immediate sale at purchase, this is free money. CAVEAT 1: required holding for "qualifying disposition" (better tax treatment) is 2 years from grant + 1 year from purchase — most people don't bother chasing that. CAVEAT 2: company stock concentration risk; if your salary already depends on company performance, doubling down via ESPP increases risk. Mitigation: max ESPP, then sell immediately at each purchase, diversify proceeds. CAVEAT 3: cash flow — ESPP withholds from each paycheck; ensure you can afford it without credit.

At vesting: ordinary income tax on full FMV at vest date + Social Security (6.2% up to $176,100 cap 2026) + Medicare (1.45% uncapped) + additional Medicare 0.9% if wages over $200K single / $250K MFJ + state income tax. EFFECTIVE TOP RATE: ~50%+ in California for high earners. Companies typically default to 22% federal withholding which is INSUFFICIENT for anyone in 32%+ bracket — additional tax owed at filing. Mitigations: (1) bump withholding via additional W-4 or estimated tax payments. (2) Sell shares at vest to fund tax (auto-sell-to-cover); leaves you with ~50% of vest as net shares. (3) For California + other high-tax states, consider state-tax migration before next big vest event (see Levyio Migration Calculator).

Three good moments: (1) WHEN COMPANY IS LIQUID — you can immediately sell some shares to cover the AMT cash. (2) IN A LOW-INCOME YEAR — sabbatical, between jobs, or after layoff; AMT pain is lower when ordinary income is low. (3) IN PARTIAL EXERCISES SPREAD ACROSS YEARS — instead of exercising all 50K options in one year (massive AMT trap), exercise 10K/year over 5 years. AVOID: exercising in your highest-income year, exercising right before company valuation drops, exercising entire grant when liquidity is uncertain. ALSO CONSIDER: post-employment 90-day exercise window vs the 10-year extended window some companies offer (negotiate this in offers). ALWAYS run AMT calc on Form 6251 before pulling the trigger; consider hiring CPA for grants over $100K bargain element.

With RSUs: you already paid ordinary income tax on FMV at vest; if you held and stock dropped, selling now triggers a CAPITAL LOSS. Capital losses can offset capital gains + up to $3,000/year of ordinary income, with carryforward indefinitely. SCENARIO: 1,000 RSUs vested at $100 = $100K wages taxed at vest. Stock now $40; selling 1,000 shares = $40K proceeds + $60K capital loss. The $100K wages tax is not refunded, but the $60K loss offsets future gains. Lesson: SELL AT VEST to lock in the value already taxed. Do NOT hold "to recover" — emotional attachment to company stock is a common wealth-destroyer. With ISOs: if not exercised, just walk away with no tax owed. If exercised + held + dropped, AMT was already paid on bargain element — limited recovery via AMT credit carryforward.

State tax stacks on federal at vesting/exercise. California top rate 13.3% means total federal+state can hit 50%+ on RSU vests for high earners. The TIMING question: if you vest while California-resident but live in Texas at exercise, which state taxes? Most states use a "domicile + workdays" rule: if you earned the equity while California-resident, California claims tax even if you exercise post-move. Strategy: time exercises BEFORE moving to ensure both vest tax + exercise tax fall in the same state. Many tech employees plan moves around equity events. See Levyio State Tax Migration Calculator for state-by-state analysis. Critical: California aggressively audits "tax migrations" with 200+ days of physical presence still triggering CA residency claims.