A recruiter explains equity types to a candidate: "We offer RSUs — when they vest, you receive actual shares, no purchase required. The alternative is stock options: you have the right to buy shares at a fixed price called the strike price. If the stock goes up, you profit from the spread. ISOs have favourable tax treatment but expire if you leave; NSOs can be granted to contractors too." What is the key difference between an RSU and a stock option (ISO or NSO)?
RSU (Restricted Stock Unit): a promise to deliver actual company shares on a vesting date. No purchase required. Tax: treated as ordinary income on the vesting date (value = shares × market price). Value at vest = shares × stock price — never negative. Stock Option (ISO / NSO): the right to buy shares at a fixed price (the strike price, set at FMV on the grant date). ISO (Incentive Stock Option) — favourable tax treatment if holding periods are met; only for employees; subject to a $100K annual exercise limit. NSO (Non-Qualified Stock Option) — taxed as ordinary income on exercise; can be granted to employees, contractors, and directors. Key vocabulary: Spread — (current price − strike price); your pre-tax profit on exercise. Underwater option — strike price exceeds current market price; worthless to exercise. 409A valuation — an independent appraisal of a private company's FMV used to set strike prices legally. ESPP (Employee Stock Purchase Plan) — employees buy company shares at a discount (typically 15%) through payroll deductions.
2 / 5
An engineer describes their grant at a new job: "I have 120,000 RSUs on a standard 4-year vesting schedule with a 1-year ___. That means if I leave in month 11, I receive nothing. On my first anniversary, 25% vests immediately. After that, the remaining 75% vests monthly — about 2,500 units each month — over the next 36 months." Which word correctly completes the blank?
Cliff: the minimum period that must pass before any equity vests. If you leave before the cliff, you receive zero equity — regardless of time served. The cliff aligns incentives and ensures genuine commitment before ownership begins. Standard structure: 4-year vest / 1-year cliff: 25% vests on the first anniversary; then 1/48th per month for the remaining 36 months. Why not the other options? Lock-up: a post-IPO restriction preventing insiders from selling newly public shares (typically 180 days). Holdback: a portion of funds withheld in M&A deals pending conditions. Tranche: a portion of equity that vests together at a specific date — technically each monthly vest is a tranche, but it does not fill the blank in context. Related vocabulary: Double-trigger acceleration — full vesting requires two events: acquisition AND involuntary termination. Protects the employee after a company sale. Single-trigger acceleration — vesting accelerates on acquisition alone (less common; creates perverse acquirer incentives).
3 / 5
A tech lead compares two job offers: "Company A pays £130K base, no bonus, £200K in RSUs over 4 years. Company B pays £150K base, 10% target bonus (£15K), and £80K RSUs over 4 years. At 100% bonus attainment, A's annual TC is £130K + £50K equity = £180K. B's annual TC is £150K + £15K OTE + £20K equity = £185K." What does OTE (On-Target Earnings) mean?
OTE (On-Target Earnings): base salary plus target variable compensation (bonus, commission) assuming 100% of performance goals are met. Most commonly used in sales and revenue-generating roles. Formula: OTE = Base + Target Bonus/Commission. TC (Total Compensation): the complete annualised value of all pay components. Formula: TC = Base + Target Bonus + Annualised Equity + Other (pension contributions, ESPP discount, benefits). Comp vocabulary: Comp band — the salary range defined for a specific level (e.g., Senior Engineer L5: £95K–£140K base). P50 / P75 — market percentiles. P50 = median pay for that role; P75 = top quartile. Useful benchmarks from Glassdoor, Levels.fyi, and Radford surveys. Annualised equity — total equity grant ÷ vesting years; used to compare grants of different sizes and schedules. Refresh grant — additional equity granted annually to retain employees after initial grants begin to run out. Signing bonus — a one-time payment on joining; often subject to a clawback clause if you leave within 12–24 months.
4 / 5
Match the definition to the correct term:
"A structured annual or bi-annual period during which performance reviews, promotion decisions, merit increases, and market adjustments are processed company-wide — typically resulting in updated comp bands and individual salary changes."
Which term best matches this definition?
Focal cycle (also called focal review or performance cycle): the company-wide period — typically annual or bi-annual — during which performance reviews are completed, promotion decisions are finalised, merit increases are applied, and market adjustments are made. All changes usually take effect on a single date. Related levelling vocabulary: Merit increase — a salary raise awarded for strong individual performance during the focal cycle, distinct from a promotion increase. Market adjustment — a pay rise to bring an employee's salary in line with current market rates — not tied to performance. Common when comp bands are updated upward. Promo packet — documentation of an engineer's scope and impact compiled to support a promotion case; reviewed by a committee during the focal cycle. L3–L9 — common engineering level numbering. L3 = junior, L5 = senior, L6 = staff, L7 = principal, L8+ = distinguished/fellow. Liquidity event — an event (IPO or acquisition) that allows shareholders to convert private equity into cash. Relevant for private company equity holders who cannot sell shares on an open market until then. Vesting schedule — the timeline defining when equity tranches vest; not a review period.
5 / 5
A startup engineer asks why their options were priced at a specific strike price: "The options were granted with a strike price equal to the FMV at the grant date — that's the 409A valuation price. If I exercise now and the current share price is £8 but my strike is £2, my spread is £6 per share. An ESPP would let me buy shares directly at a 15% discount without needing options." What is a 409A valuation and why does it matter for stock option holders?
409A valuation: an independent appraisal of a private company's fair market value (FMV), required under US tax code Section 409A. Purpose: stock options must be granted at or above FMV to avoid being treated as deferred compensation — which would trigger immediate tax liability. Companies refresh 409A valuations at least annually or after major events (funding rounds, acquisitions). Equity options vocabulary: FMV (Fair Market Value) — the price at which an asset would change hands between a willing buyer and seller. For private companies, determined by the 409A. Strike price (exercise price) — the fixed price at which an option holder can buy shares, set at FMV on the grant date. Spread — the difference between the current share price and the strike price; the option holder's pre-tax gain on exercise. Underwater option — strike price exceeds current FMV; the option has no intrinsic value. Happens when a company's valuation falls after the grant date. ESPP (Employee Stock Purchase Plan) — a programme allowing employees to purchase company shares at a discount (typically 15%) through payroll deductions, without needing options. Liquidity event — an IPO or acquisition that creates a market for private shares, enabling holders to convert equity to cash.