The key insight:
The quantity on the offer letter is the least informative number in the grant. Vesting, strike price and leaver terms decide what it is actually worth.
An equity grant is the part of a senior offer most candidates evaluate least rigorously, and it is frequently the largest single element by value. The quantity on the offer letter, a number of options or units, is close to the least informative figure in the whole package. What decides whether it is worth a great deal or very little sits underneath it: the vesting schedule, the strike price or entry valuation, and what actually happens to it if you leave before it fully vests.
This guide sets out the instruments themselves, options, RSUs, phantom equity and performance shares, how vesting actually works, and the method for turning a grant into a number you can compare against a cash alternative. It sits alongside our guide to total reward, which covers the whole-package method, and our guide to GCC total compensation, which covers the wider allowances layer specific to Gulf packages. This one stays with the equity instruments themselves, wherever in the world the offer sits.
If you want the calculation done rather than estimated by eye, the Compensation Calculator on AssessYou models an equity grant into the same annual figure as the rest of your package; create a free account and run your offer through it.
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The four instruments, and what actually decides their value
Not all equity is the same thing wearing a different label. Four structures cover almost every senior grant.
| Instrument | What it is | What decides its value | Where it is most common |
|---|---|---|---|
| Stock options | The right to buy shares at a fixed strike price in future | The gap between the strike price and the value at exercise; worthless if the company is worth less than the strike | Listed companies, private equity-backed businesses, growth-stage companies |
| Restricted stock units (RSUs) | A promise of actual shares once vesting conditions are met, no purchase price | The share value at vesting; retains value even if the company falls, as long as it stays above zero | Listed companies, more established private companies |
| Phantom equity / shadow shares | A cash payout linked to a notional equity stake at a defined trigger event, no real ownership | Whether a genuine trigger event and a transparent valuation method exist | Private and family-owned businesses that do not want to dilute real ownership |
| Performance share units (PSUs) | Shares or cash that vest only if performance conditions are met, over a set period | The difficulty and clarity of the performance targets, and the payout curve between threshold and maximum | Listed companies, increasingly private equity-backed businesses |
Options carry the most upside and the most risk, because they can be worth nothing if the company's value does not clear the strike price. RSUs are the most predictable, because they hold some value as long as the company is worth anything at all. Phantom equity is the hardest to value from the outside, because its worth depends entirely on a trigger event and a valuation method that may or may not be clearly defined. Performance shares add a second layer of uncertainty on top of the company's value: whether you personally, or the business, clears the bar the grant is conditioned on.
How vesting actually works
Vesting is the mechanism that turns a headline grant into something you actually own over time, and it is where most of the real terms live.
The most common structure for time-based equity is vesting over three to five years, often with a one-year cliff. Nothing vests in the first year; at the twelve-month mark a portion, commonly a quarter, vests immediately, and the rest vests monthly or quarterly after that. The cliff exists to protect the company from granting real value to someone who leaves within months, and it means a grant is worth nothing at all if you leave before the first anniversary.
Performance-linked equity vests differently: against company or personal targets over a defined period, commonly three years, rather than purely against the calendar. A grant that is nominally worth the same as a time-based one can be worth a great deal less in practice if the performance bar is set unrealistically high, or a great deal more if it is set conservatively, which is why the target itself deserves as much scrutiny as the quantity.
Two vesting questions matter more than any other when you are evaluating an offer. What happens to unvested equity if you leave, voluntarily or otherwise, and what happens to vested-but-unexercised options if you leave a company with private stock, where there is often no ready market to sell into. Both answers are frequently buried in plan documents rather than the offer letter, and both can move the real value of a grant by a wide margin.
Valuing a grant: the method
Converting an equity grant into a number you can actually compare against cash follows the same logic as valuing any other variable element of a senior package, set out in full in our guide to total reward.
Take the expected value at a realistic future valuation, not the number in the illustration, which is almost always the most optimistic case the company can reasonably show you. Subtract the strike price for options; for RSUs and phantom equity there is no purchase price to subtract. Divide by the number of years to full vesting to annualise it. That figure is the starting point, not the answer, because it still needs a risk discount.
The discount should be built from the same four questions every time. What is the entry valuation or strike price set against, and is that basis current or dated. What is the vesting schedule, including the cliff. What happens to the grant on a good leaver exit and on a bad leaver exit, because the two are frequently treated very differently and the difference is rarely obvious from the offer letter. And, wherever you can get an answer, what has actually paid out to someone who joined on a similar grant a few years earlier, because a payout history is worth more than any projection.
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Calculate my package →Private company equity versus public company equity
The two are different instruments wearing the same name, and conflating them is one of the more expensive mistakes senior candidates make.
Public company equity has an observable market price, which means valuing it is mostly arithmetic: current share price, strike price, vesting schedule, done. Private company equity has no such price. Its value rests entirely on the company's own valuation, set at a funding round or an internal process that may be months or years old, and on a trigger event, an IPO, a sale, or an occasional buyback programme, that has to actually happen for the equity to become cash. A grant with no defined trigger event is a promise with an undefined payment date, and it should be valued and discounted accordingly, however impressive the headline number looks.
This is exactly the trap our guide to GCC total compensation flags for the region's family-owned and private groups: a notional LTIP that references a percentage of company valuation with no clear mechanism for realisation is difficult to treat as real compensation until the mechanism is defined. The same caution applies globally, not just in the Gulf.
Tax treatment: check locally, do not assume
How equity is taxed varies significantly by jurisdiction and by instrument, options and RSUs are frequently taxed at different points and different rates even within the same country, and the rules change often enough that a generic explanation is not a safe basis for a real decision. The reliable approach is the same wherever you are: get the tax treatment for your specific instrument, in your specific jurisdiction, from someone qualified to advise on it, before you rely on a headline number net of tax that nobody has actually checked.
The most common mistakes
Taking the illustration at face value. The number in the offer deck is almost always the optimistic case. Build your own, more conservative scenario before you compare it to a cash alternative.
Not asking about leaver terms until you are already leaving. Good leaver and bad leaver treatment should be a question you ask before you accept the offer, not one you discover on your way out.
Ignoring the cliff. A grant that looks generous over four years is worth nothing if you do not clear the first twelve months, which matters more than usual in a market where average tenure at senior level keeps shortening.
Treating equity as risk-free upside. It is a genuine part of compensation, and it is also the most volatile part. How much of your total reward you are willing to hold in a form that can be worth substantially more, or nothing, is a decision about your own position, not just about the offer.
Once you know what a grant is actually worth, on your terms rather than the illustration's, the wider question of how it fits your total package is worth answering properly. Beyond the numbers, how equity is granted at your level often signals how the organisation already rates your readiness for more scope, and it is worth knowing where you genuinely stand as a leader before that conversation, not only where you stand on pay. Take the free Leadership Psychometric, a 50-question leadership profile built by executive recruiters, to see how you compare to other senior professionals in your market.
Key takeaways
- The quantity on an equity grant is the least informative figure. Vesting, strike price or entry valuation, and leaver terms decide what it is actually worth.
- Four instruments cover most senior grants: stock options, RSUs, phantom or shadow equity, and performance share units, each with a different mechanism for creating and losing value.
- Vesting most commonly runs three to five years with a one-year cliff; performance-linked equity vests against targets rather than purely the calendar.
- Value a grant by taking a realistic expected value, not the illustration, subtracting any strike price, annualising over the vesting period, then discounting for leaver terms and, wherever possible, actual payout history.
- Private company equity depends on a defined trigger event and a transparent valuation method; without both, discount heavily regardless of the headline figure.
For more on building a full package comparison, see our guide to total reward, or the full Salary & Market Data collection.
Frequently asked questions
- What is equity compensation?
- Equity compensation is a form of pay tied to the value of a company rather than paid entirely in cash. It includes stock options, restricted stock units, phantom or shadow equity, and performance share units. Instead of a fixed amount, its value depends on the company's future worth, the terms of the grant, and whether the conditions attached to it, usually a vesting schedule, are met.
- What is the difference between stock options and RSUs?
- A stock option gives you the right to buy shares at a fixed strike price in future, so it only has value if the company's worth rises above that price. A restricted stock unit is a promise of actual shares once vesting conditions are met, with no purchase price attached, so it retains some value even if the company's worth falls, as long as it is above zero. Options carry more upside and more risk; RSUs are more predictable.
- How do you value a stock option grant?
- Take the expected value at a realistic future valuation, not the number in the illustration, subtract the strike price, then divide by the number of years to full vesting to get an annualised figure. The two questions that matter most are what the entry or strike price is set against, and what happens to unvested and vested-but-unexercised options if you leave, because both can move the real value by a large margin.
- What is phantom equity or a shadow share?
- Phantom equity, also called a shadow share, pays you a cash amount linked to the value of a notional equity stake at a defined trigger event, without giving you an actual ownership stake in the company. It is common in private and family-owned businesses that do not want to dilute real ownership. Its value depends entirely on there being a genuine, defined trigger event and a transparent method for calculating the payout; without both, it can be difficult to realise in practice.
- How long does equity typically take to vest?
- The most common structure is vesting over three to five years, frequently with a one-year cliff, meaning nothing vests until the first anniversary, after which a portion vests immediately and the rest vests monthly or quarterly. Performance-linked grants instead vest against company or personal targets over a set period, commonly three years, rather than purely on the calendar.
- Should I trade base salary for a larger equity grant?
- Only once you can answer four questions with confidence: the vesting schedule, what happens to unvested equity if you leave, the entry valuation or strike price, and what has actually paid out to people who joined a few years earlier on a similar grant. If those answers are hard to get, that difficulty is itself the answer, and the safer assumption is to discount the grant heavily rather than take it at face value.
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