Compensation & Equity Vocabulary

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.

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).

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.

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.

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.

Sarah is questioning whether the compensation band reflects the potential future equity rewards – specifically RSUs – that the engineer might receive. This highlights a key consideration in salary negotiations and long-term financial planning within companies offering stock options or RSUs. Options A, C, and D are related to other aspects of compensation but not directly tied to the impact of equity grants.

Alex is worried about stock dilution – when a company issues new shares, increasing the total number of outstanding shares and potentially decreasing the value of existing shares, especially unvested RSUs. This is a common concern for employees holding equity that could be affected by future capital raises or acquisitions.

The strike price is the predetermined price at which David Miller has the right to buy shares when they vest. It's a crucial element of stock option and RSU plans – representing the initial value of those shares at the time of grant, offering a potential profit if the share price increases beyond that level.

Mark is recognizing that competitive equity packages are a critical tool for attracting and retaining skilled engineers in a competitive tech market. Offering RSUs or stock options alongside salary demonstrates commitment to employee success and provides potential for long-term financial rewards – a key differentiator when negotiating compensation.

An ESPP allows employees to purchase company stock at a discounted rate, often over time. This is a common benefit offered by companies and provides a convenient way for employees to invest in their employer's success without the immediate volatility of open-market trading – aligning with the description provided.