Equity Grants: OpenAI & Else - PPU, PIU, RSU explained

OpenAI has sparked fresh interest in employee compensation by offering Profit Participation Units (PPUs)—a unique equity structure modeled after Profits Interest Units (PIUs), typically used by LLCs and LPs. Unlike the stock options and RSUs common in VC-backed tech firms, PIUs allow for profit-sharing above a set threshold without requiring payment or exercise by the recipient. OpenAI’s PPUs are reportedly capped at 10x return and structured with a typical four-year vesting schedule.

PIUs are flexible and customizable, but complex. They can be tax-efficient if structured properly—often requiring an 83(b)* election within 30 days of grant to secure capital gains treatment. However, their novelty means employees and employers alike must tread carefully.

In contrast, more traditional equity grants include:

• Stock Options – Allow employees to buy shares at a fixed price. They come in two types:

  • ISOs (tax-advantaged but limited to employees)

  • NSOs (broader eligibility but taxed as ordinary income at exercise)

• RSUs – No purchase needed; shares are delivered upon vesting and taxed as income. Commonly structured with “double triggers” in private tech companies.

• Restricted Stock – Typically granted to early employees or founders, purchased upfront at low cost and taxed at grant if an 83(b) election is filed.

As more attention turns to OpenAI’s model, companies may explore new ways to structure equity. But whatever the model, understanding the financial and tax implications of equity compensation remains essential.

*The 83(b) election is a tax form you can file with the IRS when you receive equity (like restricted stock or profit interest units) that vests over time. It lets you choose to pay taxes now—when the equity is granted—rather than later, as it vests.

You pay tax upfront based on the equity’s value at grant, even if it hasn’t vested. If the value is low (as it often is early on), your tax bill is small. Future gains are then taxed at the lower capital gains rate when you eventually sell.

Example:

• You’re granted 10,000 shares at $0.01 each (worth $100 total), vesting over 4 years.

• If you file an 83(b), you pay tax on the $100 now.

• If you don’t, and in a few years the shares are worth $10 each, you’ll owe income tax on $100,000 as they vest.