Equity compensation has become a defining feature of pay packages at high-growth companies, particularly across technology and artificial intelligence. Headlines about record stock-based compensation have reinforced the perception that equity grants automatically translate into wealth. In reality, equity compensation is far more nuanced, and misunderstanding how it works can create financial risk rather than opportunity.
On a recent episode of Lead-Lag Live, Melanie Schaffer sat down with equity-compensation specialist Kaitlyn Walsh to break down what employees actually receive when they are granted incentive stock options, where the key decision points arise, and why timing, taxes, and record-keeping matter far more than most people realize.
Equity Is a Right, Not Ownership
One of the most important clarifications Walsh makes is that incentive stock options do not represent ownership in a company. Instead, they provide the right to purchase shares at a predetermined price in the future. Every vesting event creates a choice, not a reward, and the responsibility for that decision rests entirely with the employee.
This distinction is often overlooked, especially at early-stage or high-growth firms where equity is framed as a substitute for cash compensation. The intent is alignment. Employees are granted the opportunity to participate in future value creation if the company grows and if they act deliberately along the way.
Understanding Fair Market Value and Strike Prices
Because companies issuing incentive stock options are typically private, their shares do not trade on public markets. Walsh explains that fair market value is determined through periodic valuations, often updated annually or after material business changes.
The strike price employees pay to exercise their options is tied to this valuation at the time of the grant. Knowing when the valuation was last updated and how close the company may be to a new one can meaningfully affect decision-making, particularly around exercise timing.
Vesting Creates Decisions, Not Guarantees
Vesting schedules are commonly misunderstood as automatic benefits. Walsh outlines a typical structure, such as a four-year vesting period with a one-year cliff, and emphasizes that vesting merely unlocks the ability to act.
The most critical moment often occurs when an employee leaves a company. At that point, any unvested options are forfeited, and vested options typically come with a short window to exercise or lose them. That window can force a real investment decision without the benefit of liquidity.
Taxes and the Alternative Minimum Tax
Incentive stock options are frequently described as tax-advantaged, but only when specific holding requirements are met. Walsh walks through how taxes are generally triggered at the point of sale and why meeting long-term capital gains criteria matters.
She also explains how the alternative minimum tax can apply at exercise, potentially creating a tax obligation before any shares can be sold. This surprise is one of the most common and costly issues employees face when equity planning is left too late.
The Most Expensive Mistake: Poor Documentation
Among the errors Walsh sees most often is inadequate record-keeping. Missing exercise dates or cost-basis information can lead to overpayment of taxes years later. Because equity transactions often span long periods and multiple platforms, employees must maintain their own clear records to avoid unnecessary losses.
Why This Matters Now
As equity compensation becomes more prevalent across industries, understanding how these instruments function is no longer optional. Equity grants are not passive assets. They require awareness, planning, and timely decisions.
This Lead-Lag Live conversation offers a practical framework for thinking about stock options as financial instruments rather than assumptions about future wealth.
Watch the full episode to hear Kaitlyn Walsh explain how employees can avoid common pitfalls and make more informed decisions about their equity compensation.
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