Executive Equity and Liquidity Event Glossary
33 terms that come up when executives and founders work through equity compensation, a merger, an IPO, or another change-of-control event. Each definition stands on its own.
Equity compensation instruments
Restricted Stock Unit (RSU)
A restricted stock unit is a company promise to deliver a share of stock, or its cash value, once a vesting condition is met. Until it settles, an RSU is a contractual right rather than actual stock, so it carries no voting rights and no dividends unless the plan provides dividend equivalents. When the units settle, the full market value of the shares is ordinary compensation income, reported on your W-2 and subject to withholding. For most public-company executives, RSU vesting is the single largest recurring source of unplanned taxable income, and it arrives on the plan's schedule rather than yours.
Restricted Stock Award (RSA)
A restricted stock award is a grant of actual shares that you own from day one but can forfeit if you leave before vesting. Because the shares are real property transferred to you, an RSA is eligible for an 83(b) election — which an RSU is not — and that difference drives most of the planning around it. Without an election, you recognize ordinary income as the restrictions lapse, valued at the stock price on each vesting date. RSAs are most common at private companies and in founder equity, where the grant-date value is low enough that electing to be taxed immediately costs very little.
Incentive Stock Option (ISO)
An incentive stock option is a statutory stock option, available only to employees, that produces no regular taxable income when you exercise it. If you hold the shares long enough after both the grant date and the exercise date, the entire gain from your strike price to the sale price is taxed as long-term capital gain, which is the most favorable treatment available on employee equity. The trade-off is that the spread at exercise is an adjustment item for the alternative minimum tax, so exercising can create a tax bill in a year when no cash changed hands. ISOs are also subject to an annual dollar limit on the value of stock that may first become exercisable as ISOs; grants above that limit are treated as non-qualified options.
Non-Qualified Stock Option (NSO or NQSO)
A non-qualified stock option is a stock option that does not meet the statutory requirements for incentive stock option treatment, so the spread between the fair market value and the strike price is taxed as ordinary compensation income at exercise. That income runs through payroll with income and employment tax withholding, which means the tax event and the reporting arrive together. NSOs can be granted to employees, directors, contractors, and advisors, which is part of why companies use them so broadly. They are less tax-efficient than ISOs but far more predictable, and they do not create alternative minimum tax exposure.
Employee Stock Purchase Plan (ESPP)
An employee stock purchase plan lets employees buy company stock through payroll deductions, typically at a discount of up to 15% off the market price. A tax-qualified plan under Section 423 may also include a lookback, which sets the purchase price using the lower of the stock price at the start of the offering period or at the purchase date — a feature that can make the effective discount considerably larger than the stated one. Tax is generally deferred until you sell, and the split between ordinary income and capital gain depends on how long you hold the shares. A statutory annual dollar limit caps how much stock any employee can purchase, so an ESPP rarely moves the needle on its own for a senior executive, but it quietly adds to an already concentrated position.
Stock Appreciation Right (SAR)
A stock appreciation right entitles the holder to the increase in the company's share price over a set base price, settled in cash or in stock, without requiring the holder to buy anything. Economically it resembles a stock option, but there is no exercise cost and no capital outlay, so the holder never has to fund a purchase. The gain is ordinary compensation income when the right is exercised or settled. SARs are often used alongside options in private companies and in international plans, and cash-settled SARs create a company cash obligation at exercise rather than share dilution.
Non-Qualified Deferred Compensation (NQDC)
Non-qualified deferred compensation is an unfunded, unsecured promise by an employer to pay compensation in a future year, outside the protections that apply to qualified retirement plans. Because the promise is unsecured, you are a general creditor of the company: if the employer becomes insolvent, deferred balances can be lost. Deferral and distribution elections are governed by Section 409A and are generally locked in well before the compensation is earned, with very limited ability to change them later. For executives, an NQDC plan is both a tax deferral tool and a second, concentrated exposure to the same employer that already pays their salary and their equity.
Vesting, timing, and trading restrictions
Vesting cliff
A vesting cliff is a period at the start of a vesting schedule during which nothing vests, followed by a single date on which a large block vests at once. A common structure is a one-year cliff on a four-year schedule, so an employee who leaves at eleven months keeps nothing and one who leaves at thirteen months keeps a quarter. The cliff exists to protect the company from paying equity to short-tenured hires. For an executive weighing a departure or a new offer, the cliff date is often the single most valuable date on the calendar.
Single-trigger acceleration
Single-trigger acceleration is a provision that causes unvested equity to vest automatically upon a change of control, regardless of whether the executive keeps their job. It delivers certainty to the executive but is unpopular with acquirers, who generally want retention leverage after closing, and with proxy advisors. Acceleration also concentrates income into the transaction year and increases exposure to the Section 280G golden parachute rules. Full single-trigger acceleration is relatively uncommon in public-company plans today and is more often seen in founder agreements or negotiated individually.
Double-trigger acceleration
Double-trigger acceleration is a provision under which unvested equity accelerates only if two things happen: a change of control occurs, and the executive is terminated without cause or resigns for good reason within a defined window afterward. It is the prevailing market standard because it protects the executive against being fired after a deal while preserving the acquirer's retention incentive. The details that matter are the definitions — what counts as "cause," what counts as "good reason," and how long the protection window runs after closing. Those definitions are negotiable at hire and effectively frozen once a transaction is underway.
Lockup period
A lockup period is a contractual restriction, usually agreed to in connection with an IPO, that bars insiders from selling their shares for a set time after the offering. Lockups are commonly around 180 days, though staged releases and early-release provisions tied to price or earnings dates are increasingly common. The restriction is contractual, negotiated with the underwriters, and separate from any securities-law restrictions that also apply. For an executive, the practical consequence is that the first legal opportunity to sell arrives on a known date that is often shared with every other insider — which is exactly why the plan for that date should be built before it arrives.
Blackout period and trading window
A blackout period is a stretch of time during which a company's insider trading policy prohibits covered employees from trading in company securities, typically around quarterly earnings. The open stretches between blackouts are the trading windows, and most policies also require senior insiders to preclear individual trades even during an open window. These are company policy restrictions layered on top of securities law, which independently prohibits trading while in possession of material non-public information at any time, window or not. Because windows are short and often collide with vesting dates and personal cash needs, executives who want reliable liquidity generally need a Rule 10b5-1 plan rather than ad hoc window trading.
Rule 10b5-1 plan
A Rule 10b5-1 plan is a written trading arrangement, adopted at a time when the insider has no material non-public information, that sets in advance the amounts, prices, and dates of future trades or provides a formula for determining them. Properly established and followed, it provides an affirmative defense against insider trading liability for trades executed under it. Amendments adopted by the SEC impose conditions including a cooling-off period before trading may begin — for directors and officers, the later of 90 days after adoption or two business days after disclosure of financial results, capped at 120 days, and 30 days for other persons — a certification by directors and officers, limits on overlapping plans and on single-trade plans, and a good-faith requirement. For an executive with a concentrated position and a narrow trading window, a 10b5-1 plan is usually the only practical mechanism for systematic, sizable diversification.
Tax concepts
83(b) election
An 83(b) election is a filing that tells the IRS to tax restricted property in the year it is transferred, based on its value at that moment, rather than as it vests. It converts what would have been ordinary compensation income at each vesting date into capital appreciation, and it starts the long-term capital gain holding period at the transfer date. The election must be filed within 30 days of the transfer, and that deadline has no extension and no reasonable-cause relief. It is most powerful — and nearly costless — when the property is worth very little at grant, which is why founders and early employees with restricted stock file it almost reflexively; it does not apply to RSUs, which are not transfers of property.
Alternative Minimum Tax (AMT)
The alternative minimum tax is a parallel federal income tax calculation that disallows certain deductions and adds back certain items, with the taxpayer owing the higher of the regular tax or the alternative calculation. The item that most often pulls executives into AMT is the exercise of incentive stock options, because the spread between fair market value and strike price is included in the alternative calculation even though it is not regular income. The exemption amount and its phaseout threshold are indexed and change annually, so the size of an exercise that triggers AMT has to be modeled against the current year's figures. Tax paid because of an ISO exercise may generate a minimum tax credit usable in later years, which softens but does not eliminate the cash-flow problem of paying tax on a gain you have not realized.
Qualified Small Business Stock (QSBS, Section 1202)
Qualified Small Business Stock is stock in a domestic C corporation, acquired at original issuance, that meets the requirements of Section 1202 and can therefore have some or all of the gain on sale excluded from federal income tax. Eligibility depends on tests applied to both the company and the shareholder, including a limit on the corporation's gross assets at issuance, an active business requirement, and a minimum holding period. The exclusion percentage, the per-issuer dollar cap, and the required holding period all depend on when the stock was acquired — the rules were amended in 2025 and stock acquired after that change is subject to a tiered structure with partial exclusions available before the full holding period is met. QSBS is frequently the largest single tax variable in a founder's exit, and it can be destroyed years earlier by routine corporate events such as a redemption or a conversion, so status is worth confirming long before a sale.
Section 280G golden parachute
Section 280G is a federal tax regime that penalizes large compensation payments that are contingent on a change of control. If an executive's parachute payments equal or exceed three times their base amount — generally the average of their W-2 compensation over the preceding five years — then the portion exceeding one times the base amount becomes an excess parachute payment, subject to a 20% federal excise tax on the executive and a lost deduction for the company. The three-times figure is a cliff rather than a phase-in, so a modest amount of additional payout can trigger a disproportionately large tax. Privately held companies may be able to avoid the result through a shareholder approval procedure, but that relief is not available to public companies, and the analysis has to happen before the deal closes.
Section 409A
Section 409A governs the timing of deferred compensation, requiring that elections to defer and the schedule for payment be fixed in advance and generally not accelerated or changed. Violations are penalized on the employee, not the employer: the deferred amount becomes immediately taxable, plus an additional 20% tax and an interest charge. Section 409A also underlies the independent valuations that private companies obtain to set option strike prices, because an option granted below fair market value can itself be treated as deferred compensation. Practically, it means a deferral election made years ago dictates when income lands, which is why deferred compensation payouts and a liquidity event can collide in a single tax year without anyone planning it.
Disqualifying disposition
A disqualifying disposition is a sale or transfer of stock acquired through an incentive stock option or a qualified employee stock purchase plan before the required holding periods have been satisfied. The consequence is that part of the gain that would have been capital gain is instead recharacterized as ordinary compensation income, reported on the W-2 in the year of sale. For ISO shares, the ordinary income is generally the spread between fair market value at exercise and the strike price; for ESPP shares, it is generally the discount measured at purchase. Disqualifying dispositions are not always a mistake — deliberately selling early can be the right call to avoid AMT exposure or to reduce concentration — but they should be a decision rather than an accident.
Qualifying disposition
A qualifying disposition is a sale of ISO or ESPP shares that satisfies the statutory holding periods, producing the most favorable tax treatment the plan allows. For incentive stock options, this generally means holding more than two years from the grant date and more than one year from the exercise date, in which case the entire gain from strike price to sale price is long-term capital gain. For a Section 423 ESPP, a qualifying disposition still produces some ordinary income — generally the lesser of the discount measured at the offering date or the actual gain — with the remainder treated as long-term capital gain. The tax benefit of waiting has to be weighed against the market risk of continuing to hold a concentrated position in your employer for that additional time.
Cost basis
Cost basis is the amount treated as your investment in a security for tax purposes, subtracted from the sale proceeds to determine capital gain or loss. For shares acquired through equity compensation, basis includes any ordinary compensation income you already recognized — the value taxed at RSU vesting, or the spread taxed at NSO exercise — not just what you paid out of pocket. This matters because brokerage statements and Forms 1099-B frequently report only the amount paid, which understates basis and, if filed as reported, causes the same income to be taxed twice. Reviewing basis on equity compensation shares before filing is one of the highest-value, lowest-effort checks an executive can make.
Net Investment Income Tax (NIIT)
The net investment income tax is a 3.8% federal tax on the lesser of a taxpayer's net investment income or the amount by which modified adjusted gross income exceeds a statutory threshold. Net investment income includes interest, dividends, capital gains, rents, royalties, and passive business income, but not wages or income from a business in which the taxpayer materially participates. The applicable thresholds are fixed in the statute and are not indexed for inflation, so more taxpayers cross them each year. In a liquidity event, the NIIT sits on top of the capital gains rate on the sale itself, which is why headline capital gains rates understate the true marginal cost of a large sale.
Supplemental withholding rate
The supplemental withholding rate is the flat percentage an employer withholds on supplemental wages such as bonuses, RSU vesting, and NSO exercises, applied instead of the tables used for regular salary. Federal rules provide a lower flat rate for supplemental wages up to an annual threshold and a mandatory higher rate on amounts above it, with the specific rates set by current law and subject to change. The critical point is that withholding is not the same as tax owed: for an executive whose marginal rate exceeds the default flat rate, standard withholding on a large RSU vest can leave a substantial shortfall due at filing. Estimated payments or additional withholding usually have to be arranged deliberately, because payroll will not do it on its own.
Transaction terms
Change of control
A change of control is a defined event — typically a merger, an acquisition of a controlling stake, a sale of substantially all assets, or a turnover of the board — that triggers rights and obligations under compensation plans and employment agreements. The definition is not standard across documents: an executive's equity plan, severance agreement, and deferred compensation plan can each define it differently, and each definition can produce a different result in the same transaction. Whether a specific deal structure constitutes a change of control determines whether equity accelerates, whether severance is payable, and whether Section 280G applies. The time to read those definitions is at hire or at grant, because by the time a transaction is announced they are settled terms.
Escrow
An escrow is a portion of transaction proceeds held back by a third party after closing to secure the sellers' indemnification obligations to the buyer. If the buyer brings valid claims — for a breach of representations, an undisclosed liability, or a working capital shortfall — those claims are satisfied from the escrow before the remainder is released to sellers, typically after a period measured in months to a couple of years. Selling shareholders therefore receive less cash at closing than the headline deal price implies, and the escrowed amount is genuinely at risk rather than merely delayed. Escrow arrangements also raise tax timing questions, including whether installment sale reporting applies and whether part of the eventual release is treated as interest.
Earnout
An earnout is additional purchase price payable to sellers after closing, contingent on the business hitting agreed milestones such as revenue, earnings, or product targets. Earnouts bridge disagreements about what a company is worth by shifting part of the price onto future results, which means sellers keep exposure to the business after they no longer control it. A recurring issue is characterization: an earnout tied to continued employment can be treated as compensation, taxed at ordinary rates and subject to employment taxes, rather than as capital gain purchase price. For a founder or executive receiving one, both the measurement mechanics and the tax characterization deserve review before signing.
Rollover equity
Rollover equity is the portion of a seller's stake that is reinvested into the acquiring entity at closing instead of being cashed out. It is common in private equity transactions, where buyers want management financially committed to the next phase, and it can often be structured to defer tax on the rolled portion until a later exit. The rolled stake is typically illiquid, may sit at a different level of the capital structure than the buyer's own investment, and depends on a second successful exit to realize value. Executives sometimes describe rollover as a second bite at the apple, which is accurate as far as it goes — it is also a decision to keep meaningful net worth concentrated in one private company for several more years.
Tender offer
A tender offer is a structured offer to buy shares directly from existing holders at a set price during a fixed window. In public markets it is a mechanism for acquiring control; in private companies it is most often a company-sponsored or investor-sponsored liquidity program that lets employees and early shareholders sell a limited number of shares without waiting for an IPO or acquisition. Participation is voluntary, but the amount you can sell is usually capped, and the price is set by the offer rather than negotiated. For an executive at a late-stage private company, a tender offer may be the only realistic opportunity to convert paper wealth into diversified assets before an exit.
Secondary sale
A secondary sale is the sale of existing shares by a shareholder to a third-party buyer, as distinct from a primary issuance in which the company sells new shares and receives the proceeds. In private companies, secondary sales are constrained by transfer restrictions, company rights of first refusal, and board approval requirements, and they often price at a discount to the most recent preferred round. The seller recognizes gain based on their own cost basis and holding period, and the transaction may affect QSBS eligibility for the shares sold. Executives should confirm what their stock plan and shareholder agreements permit before negotiating anything, because unauthorized transfers can be void.
Portfolio and concentration
Concentrated position
A concentrated position is a single security that represents a large enough share of a portfolio or net worth that its individual performance, rather than the market's, drives overall results. For executives the exposure usually extends beyond the shares themselves: salary, future grants, deferred compensation, and career prospects can all depend on the same company, so the true concentration is larger than a brokerage statement shows. Concentration is rarely a decision — it accumulates as grants vest and nothing is sold. Reducing it involves trade-offs among tax cost, trading restrictions, and the risk of a single adverse outcome, which is why it is best addressed on a schedule rather than in reaction to news.
Exchange fund
An exchange fund is a partnership into which investors contribute appreciated stock in exchange for a share of a diversified pool, without recognizing capital gain at the time of the contribution. Tax rules shape the structure: participants generally must remain in the fund for seven years to preserve the deferral, and the fund must hold a portion of its assets — commonly cited as at least 20% — in illiquid qualifying assets such as real estate, which the investor takes on as part of the deal. Your original cost basis carries over to the fund interest, so the gain is deferred rather than eliminated, and at redemption you receive a pro-rata basket of securities rather than cash. An exchange fund can reduce single-stock risk without a taxable sale, but it trades liquidity, fees, control, and portfolio composition for that deferral.
Donor-advised fund (DAF)
A donor-advised fund is an account at a sponsoring public charity to which a donor makes an irrevocable contribution, takes a charitable deduction in that year, and then recommends grants to charities over time. Contributing appreciated stock held long-term is generally more efficient than contributing cash, because the donor may deduct the fair market value and neither the donor nor the charity pays capital gains tax on the appreciation. Deduction limits are expressed as percentages of adjusted gross income and differ depending on the asset donated and the type of charity, with excess amounts generally carried forward. For an executive facing an unusually high-income year from a vest or a sale, a DAF allows the deduction to be concentrated in that year while the actual grantmaking decisions are made later.
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