Equity Compensation at a Private vs Public Company

The form of equity compensation looks the same whether you work at a private startup or a publicly-traded corporation—you receive shares, options, or restricted stock units—but the practical economics diverge dramatically. At a public company, your grant has an immediate market price and can be sold on any trading day. At a private company, your equity may remain illiquid for years, its value uncertain until an acquisition or IPO arrives—or never.

Public company equity: Transparent value and instant liquidity

When a public company grants you stock options or restricted stock units (RSUs), the grant value is set relative to a published market price. The day after your vesting schedule begins—typically over four years—you can sell the vested shares or exercise and hold.

This transparency makes planning straightforward. You know the dollar value of your grant the moment you receive it, and you can adjust your exposure by selling at any point. If the stock rises, your equity stake grows. If it falls, you can cut losses rather than watch paper gains evaporate over years.

Tax timing is also predictable. When you exercise a stock option, you recognize ordinary income equal to the gap between your strike price and the market price at exercise. When RSUs vest, you recognize income equal to the grant-date market price (or, if the company allows, fair market value on vesting). You can file Form 8949 and Schedule D to log your cost basis and capital gains when you later sell.

For most public-company employees, equity is treated as supplemental income—valuable, but not central to your retirement plan. You can adjust your holding based on your risk tolerance and tax situation.

Private company equity: Illiquidity and valuation risk

Private company equity is fundamentally different. Your shares or options exist only in the company’s cap table; there is no external market and no daily price quote. The company’s board of directors, often with the help of third-party valuations, sets a “409A valuation” each year for tax purposes. This valuation is typically far below what early investors hope the company will be worth, and it may stay constant for years even if company progress suggests the true value has changed.

For employees, this creates a waiting problem. You cannot sell your shares (absent a rare secondary market transaction). Your equity is a bet on a binary event: the company goes public, is acquired, or fails. If the company fails or takes longer than expected to exit, your equity is worthless or frozen indefinitely.

Exercise and vesting mechanics

Both public and private companies typically use four-year vesting schedules with a one-year cliff. You receive a grant, but no equity vests until year one is complete. Then, equity vests monthly or quarterly over the remaining three years. If you leave before the cliff, you forfeit the entire grant.

The main difference is what happens after vesting:

• At a public company: You exercise options immediately (if beneficial) or let RSUs settle, then you can sell on the open market. You bear the tax but gain immediate liquidity.

• At a private company: Vesting is a technical event with no practical liquidity. You now own (or can exercise to own) shares, but you cannot sell them. Your equity is locked in the company’s cap table until a corporate event.

Some private companies offer a secondary market—a platform where employees can sell shares to other employees or external investors—but these are rare and often restricted by the company. Even then, a secondary sale at a discount to the latest funding round valuation may be your only path to partial liquidity before an exit.

Tax complications at private companies

Holding equity in a private company creates tax exposure without offsetting liquidity:

Ordinary income on exercise. When you exercise options, the “spread” (the difference between your strike price and the 409A valuation) is ordinary income for tax purposes, whether or not you have sold the shares. If the 409A valuation is $0.10 and your strike is $0.01, and you exercise 100,000 shares, you owe ordinary income tax on $9,000—even if you cannot sell the shares and have no cash to pay the tax.

Section 83(b) elections. Restricted stock and RSU-equivalents are subject to the same vesting cliff. If you want to accelerate income and lock in a lower cost basis, you can file a Section 83(b) election within 30 days of grant, triggering income tax on the grant-date value. This can be smart if you believe the company will grow sharply, but it forces you to pay tax today with no liquid proceeds.

Holding company shares in your estate. If a founder or early employee dies before an acquisition or IPO, their heirs inherit shares in a private company with no market price and no obvious path to liquidate. The executor must argue for a valuation to the IRS, and heirs may be locked into the company indefinitely.

Timing and outcome scenarios

Example: Public company You join at $200/share and receive 1,000 RSUs vesting over four years. After one year, you own 250 vested shares worth $50,000 at the current market price. You need cash for a home purchase, so you sell 100 shares for $20,000. You pay income tax on the $50,000 gain (at ordinary rates, plus long-term capital gains when you sell) and reinvest the remaining 150 shares. The outcome is fluid and within your control.

Example: Private company You join at a 409A valuation of $2/share and receive 10,000 options at a $0.50 strike. Four years pass; the company raises a new round at a $50/share valuation. Your options are in-the-money (you could exercise at $0.50 and own shares worth $500,000), but you cannot sell. If you exercise, you owe ordinary income tax on $495,000 without any sale proceeds. If you wait for an IPO, the shares may be worth far more—or the IPO may never happen. You are locked into the company’s outcome.

Negotiating and structuring

When evaluating equity offers, press for clarity on:

• Liquidity terms: Is there a secondary market? What happens to equity if the company is acquired?
• Strike price (options): Lower strike prices mean less tax at exercise.
• Vesting schedule: Some companies offer partial acceleration upon a change of control.
• 409A valuation: Request a copy and understand how conservative it is.
• Tax withholding: Will the company cover tax withholding at vesting or exercise, or must you pay out of pocket?

Private equity can be extraordinarily valuable if the company succeeds, but it is a leveraged bet on a single outcome. Public company equity is diversified and liquid, making it more predictable as a retirement or savings vehicle.

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