Executive Summary
What is Equity Compensation for Startups vs Public Companies?
[Answer based on research]
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Key Differences in Equity Compensation: Startups vs. Public Companies
Equity compensation in startups (typically private C-corps) emphasizes tax-deferred options like ISOs and early-exercise RSAs with 83(b) elections to align with uncertain valuations, while public companies rely heavily on RSUs taxed at vesting on established market prices, per IRS Section 409A, Section 83, and Section 422.Treasury Regulation §1.409A-1 26 U.S. Code §83 26 U.S. Code §422
Core Tax Treatments by Vehicle
| Equity Type | Startups (Private) | Public Companies | Key IRS Rules & Thresholds |
|---|---|---|---|
| ISOs | No regular tax at grant/exercise; AMT on spread (FMV - exercise price) at exercise. Qualifying disposition (held 2 yrs from grant, 1 yr from exercise) yields LTCG. $100,000 annual limit on exercisable value. | Similar, but less common due to liquidity; public FMV simplifies AMT calc. | 26 U.S. Code §422(a); AMT per Form 6251 |
| NSOs | Ordinary income on spread at exercise; company deducts amount. | Same; taxed at vesting-like events on public FMV. | Treasury Regulation §1.83-7; W-2 reporting |
| RSAs | 83(b) election (filed within 30 days of grant) taxes grant-date FMV (often low, e.g., $0.01/share) as ordinary income; future appreciation as LTCG if held >1 yr post-83(b). No election: tax at vesting FMV. | Rare; immediate vesting on public FMV. | 26 U.S. Code §83(b); Rev. Proc. 2012-29 |
| RSUs | Uncommon pre-IPO; taxed at settlement/vesting on FMV as ordinary income (W-2). No 83(b). | St |
Footnotes
Primary Sources
| Source | Type | URL |
|---|---|---|
| Treasury Regulation §1.409A-1 | Reference | https://www.law.cornell.edu/cfr/text/26/1.409A-1 |
| 26 U.S. Code §83 | Reference | https://www.law.cornell.edu/uscode/text/26/83 |
| 26 U.S. Code §422 | Reference | https://www.law.cornell.edu/uscode/text/26/422 |
| 26 U.S. Code §422(a) | Reference | https://www.law.cornell.edu/uscode/text/26/422 |
| Form 6251 | Reference | https://www.irs.gov/pub/irs-pdf/f6251.pdf |
Disclaimer: This guide discusses legal tax optimization strategies only. Tax evasion is illegal and is never recommended. This content is for educational purposes and does not constitute tax, legal, or financial advice. Tax laws vary by jurisdiction and change frequently. Always consult a qualified tax professional (CPA, tax attorney, enrolled agent) before making decisions based on this information. The authors accept no liability for actions taken based on this content.