Your RSUs Aren't Free Money — Here’s What the Offer Letter Doesn’t Tell You

You just landed a senior engineer role at a hot tech company. Base salary is decent, but the real prize is the equity: 10,000 RSUs, vesting over four years. You do the napkin math—at the current stock price, that’s an extra $400,000. Nice, right?

Not so fast. That number on the offer letter is a starting point, not a guarantee. And the tax bill coming three years from now might take a bigger bite than you expect.

The Two Numbers That Matter Most

Most engineers focus entirely on the "fair market value" (FMV) of the stock on the grant date. But equity compensation introduces two separate financial realities:

• The grant value – what the company says it’s worth at the moment they give it to you.
• The realized value – what you actually pocket after vesting, taxes, and (sometimes) a stock price that has wandered far from day one.

If you’re at a late-stage private startup or a public company, the gap between those two can be massive. And it’s rarely in your favor by default.

The RSU Tax Trap Nobody Warns You About

RSUs (restricted stock units) are simple: they’re shares of stock you get after a vesting schedule. But the IRS doesn’t treat them like a bonus.

When your RSUs vest, that value is ordinary income — added to your W-2. If your company’s stock has gone up since the grant, you’re paying income tax on the full vest-date value, not the grant-date value. And because RSUs are often withheld to cover taxes (usually 22% for federal), you might end up with a surprise under-withholding if you’re in a higher bracket.

Example: You get 1,000 RSUs vesting at $100/share = $100k of income. Your company withholds 22% ($22k). But your effective marginal rate is 32%? You now owe an extra $10k at tax time. The IRS doesn’t send a thank-you note.

ISO Options: The Trap That Looks Like a Jackpot

Incentive Stock Options (ISOs) sound better: no tax at exercise, just capital gains later. But that’s if you play by the rules — and the rules are weird.

• The AMT monster: Exercising ISOs and holding the shares (instead of selling immediately) triggers the Alternative Minimum Tax. That paper gain on exercise can generate a tax bill before you’ve sold a single share. Engineers have famously owed tens of thousands in AMT on options they never cashed out (and sometimes watched become worthless).
• The ISO “poison pill”: If you don’t hold the shares for at least one year after exercise and two years after the grant date, your “ISO” converts to a nonqualified option. Ordinary income rates. Oops.

Liquidity is Not the Same as Value

At a public company, you can sell RSUs the day they vest. At a private company, you’re stuck.

Private company equity is illiquid by design. You cannot sell it to a random buyer. The only ways to cash out: - An IPO or acquisition (if you’re still employed) - A secondary market sale (often at a steep discount) - The company’s own buyback program (if they have one)

Many engineers treat private stock as if it’s cash-equivalent. It’s not. A 10x paper gain means nothing if you can’t sell a single share for two more years — and the market turns.

The Cliff and the Golden Handcuffs

Standard vesting is 4 years with a 1-year cliff. That means you get zero equity if you leave before month 12. After the cliff, the shares vest monthly or quarterly.

But here’s the part that stings: if you leave after year two, you forfeit all future unvested shares. That’s often worth more than the salary you’ll get at the next job. The “golden handcuffs” are real — and they’re designed that way.

What Engineers Actually Need to Do

The Bottom Line

Equity compensation isn’t free money. It’s a form of compensation that shifts risk and timing complexity from your employer to you. The offer letter shows you the upside. It never shows you the tax bill, the liquidity trap, or the opportunity cost of staying too long.

Treat your equity like an investment in a single, non-diversified asset — because that’s exactly what it is. And never, ever let “it might be worth a lot later” justify ignoring what it costs you now.