Startup equity can be a game-changer—or a tax trap.
Whether you’re at a hot Series B startup or just cleared your one-year cliff, understanding your equity is one of the highest-leverage financial decisions you’ll make. But most people delay dealing with it until it’s too late (read: 90 days after quitting).
This guide breaks down how to think about your equity like a pro—from option types to tax strategies—so you can take confident, wealth-building action.
What is startup equity, really?
Startup equity is ownership. Specifically, it’s your piece of the pie—usually granted as stock options (ISOs or NSOs) or restricted stock—in exchange for helping build the company. When your startup grows, your equity can grow with it.
But unlike salary or RSUs at public companies, startup equity is messy. It’s illiquid, complex, and often concentrated. That’s why having a plan matters just as much as having the shares.
When should I start thinking about equity planning?
If any of these sound familiar, it’s time:
- You’ve been granted ISOs or NSOs and don’t quite get how they work
- You’re fully vested but haven’t exercised anything yet
- You’re leaving the company and staring down a 90-day clock
- A tender offer, acquisition, or IPO might be on the horizon
- Your equity now makes up more than 20% of your net worth
In other words: the earlier, the better. Especially if you want to avoid surprise tax bills or missed opportunities.
How do I know what kind of equity I have?
This is the starting line. Your option grant paperwork should tell you:
- What kind of equity: ISO, NSO, RSU, or restricted stock
- Your strike price (the cost to buy one share)
- Vesting schedule (what’s yours vs. what’s still vesting over time)
- Expiration dates (especially post-termination windows)
Most common: ISOs if you’re a full-time employee. NSOs if you’re an advisor or contractor. RSUs if your company’s later stage.
What’s the difference between ISOs and NSOs?
ISOs are reserved for employees, while NSOs can be granted to anyone - including advisors or contractors. When you exercise ISOs, there’s typically no immediate tax due, though it can trigger the Alternative Minimum Tax (AMT). In contrast, exercising NSOs is treated as ordinary income and taxed immediately.
If you meet the required holding periods, gains from selling ISOs are taxed at favorable long-term capital gains rates. NSOs, however, are taxed based on how long you hold the shares after exercise. ISOs can impact your AMT calculation but offer better tax treatment when managed correctly, whereas NSOs do not trigger AMT but also lack preferential tax benefits.
How should I think about exercising?
Think of exercising like turning dials - not flipping switches.
The best strategy usually isn’t “all in” or “wait forever” - it’s a thoughtful plan that balances:
- Tax impact (especially AMT)
- Liquidity (do you have the cash to exercise + pay taxes?)
- Concentration risk (how much of your net worth is in one equity?)
- Time horizon (how long until potential liquidity?)
Example: Let’s say you have 25,000 vested ISOs at a $0.10 strike. The 409A is $5.00, and you’re still employed.
Instead of exercising everything, you might:
- Exercise 10,000 shares this year (low AMT cost)
- Start the long-term capital gains clock
- Revisit next year based on income and 409A shifts
- Keep equity exposure under 25% of your net worth
It’s not about maximizing upside at all costs—it’s about making smart, flexible moves over time.
How do I model AMT exposure?
When you exercise ISOs and hold the shares, the spread between the strike price and the 409A becomes an AMT adjustment—meaning it can push you into paying the Alternative Minimum Tax.
Basic example:
- 10,000 shares
- Strike price: $1
- FMV at exercise: $11
- Paper gain: $100,000
- This $100K is added to your AMT income—even if you don’t sell
If the stock later drops, you could owe taxes on gains that no longer exist. That’s why modeling is so important.
How do I create an equity exercise plan?
Use this 4-part framework:
1. Start Small, Model Frequently
Use year-end tax modeling tools (or a tax pro) to find how many shares you can exercise without tripping AMT. Prioritize early exercises when FMV is low.
2. Ladder Exercises Over Time
Spread exercises across tax years to manage AMT and smooth risk. For example:
- Year 1: Exercise 10,000
- Year 2: Another 15,000 if FMV holds
- Year 3: Pause or accelerate depending on liquidity events
3. Diversify at Liquidity
If your company offers a tender or IPO, consider selling enough to:
- Cover taxes
- Rebalance your portfolio
- Fund near-term goals (home, emergency fund, etc.)
Target: Keep post-exit equity exposure under 25% of your liquid net worth.
4. Keep Dry Powder
Never exercise more than you can afford to cover in taxes.
General rule: Have 1.5–2x the exercise cost saved in cash. You don’t want to sell at a bad time just to pay a tax bill.
What are the most common mistakes people make?
Let’s call them out:
- Exercising without understanding AMT
- Waiting too long and missing the tax-efficient window
- Holding too much in one company
- Not planning ahead of a 90-day window
- Assuming “more upside” = “do nothing”
The smarter move? Think of your equity like an investment. You wouldn’t bet your whole portfolio on one stock. This is no different.
Who should get serious about startup equity planning?
- Early employees at high-growth startups (Series A–D)
- Founders with meaningful ownership
- People facing a 90-day post-exit exercise window
- Anyone whose startup equity is worth 20–30%+ of their total wealth
This isn’t about trying to outsmart taxes. It’s about protecting and unlocking one of the biggest potential drivers of your net worth.
Quick Answers: Startup equity questions
"Should I exercise my ISOs if I might leave the company?" Consider it, especially if the spread is small. You typically have only 90 days post-termination to exercise, which creates time pressure and potential tax complications.
"How much AMT will I owe if I exercise?" It depends on your income, the spread, and other factors. Use tax modeling software or consult a professional—AMT calculations are complex and mistakes are expensive.
"What if my company's 409A valuation keeps going up?" This makes early exercise more attractive from a tax perspective, but also increases your concentration risk. Consider exercising in tranches over time.
"Should I sell immediately after exercising ISOs?" Depends on your situation. Holding for one year after exercise (and two years after grant) qualifies for long-term capital gains treatment, but increases concentration risk.
Can Titan help with startup equity planning?
Yes. If you're a Titan client with startup equity, we can:
- Model AMT scenarios for different exercise strategies to optimize your tax situation
- Create a multi-year exercise plan that balances tax efficiency with risk management
- Coordinate equity decisions with your overall investment and liquidity strategy
- Plan diversification strategies for liquidity events like tender offers or IPOs
Startup equity planning requires integrating tax strategy, risk management, and long-term wealth planning into a cohesive approach that evolves with your company's growth.
Ready to get a plan in place?
Titan helps high-earners make sense of messy startup equity. From AMT modeling to diversification strategies, we’ll build a plan tailored to your goals and tax situation. Talk to an advisor.
About Titan
Titan is a modern Registered Investment Advisor (RIA) helping high-earning professionals navigate complex money decisions. With a dedicated advisor and access to proprietary strategies and alternative investment options, we're your go-to wealth team for everything from RSUs to retirement. Learn more at www.titan.com.
