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  • Nick Burgess

RSU's vs Stock Options: The Ultimate Guide

The following article is for entertainment and educational purposes only, and should not be considered financial advice. Please contact a licensed financial professional for individualized financial advice. Some links below may be affiliate links that generate a small commission for the site at no additional cost to you.


RSU's vs Stock Options

Navigating a new job offer at a private company or public company often involves decoding complex equity compensation plans. You might encounter terms like Restricted Stock Units (RSUs) and Employee Stock Options, which can seem as mysterious as the stock market itself. So, if you're considering a job with both of these options, how do you decide?

In the battle of RSU's vs Stock Options, a closer look at these forms of stock-based compensation will make it easier to determine which could be a better choice.

graphs with a notebook on top that reads "Employee Stock Option"

Understanding RSUs

RSUs are a form of stock compensation provided as part of a job offer. When RSUs vest according to a predetermined vesting schedule, the employee receives actual company shares. The vesting period is usually spread over a period of time and may be tied to performance goals, such as reaching specific revenue targets.

While RSUs give employees a vested interest in the company's success, they usually don't come with voting rights. This means an RSU holder may not have a say in the company's decision-making process.

The tax treatment of RSUs is straightforward: they are taxed as regular income on the vesting date. The taxable amount is the fair market value of the shares, not the grant price, which is the value on the grant date. A financial advisor can provide valuable investment advice to navigate this process.

Demystifying Employee Stock Options

Employee Stock Options differ from RSUs in that they provide the right (but not the obligation) to purchase a specific number of shares at a predetermined price, known as the strike price or exercise price. This purchase can occur on a future date, before the expiration date.

There are two types of stock options: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). ISOs, which come with potential long-term capital gains, are usually more favorable for tax purposes. However, ISOs can trigger the Alternative Minimum Tax (AMT), which can complicate your tax situation. NSOs, while simpler, are taxed as ordinary income at the point of exercise.

Key Differences Between RSU's and Stock Options

Several key differences set RSUs and stock options apart. For one, RSUs have value regardless of the company's stock price direction after the grant date. In contrast, options only have value if the company's stock price exceeds the strike price.

Secondly, stock options need to be exercised using your own money. This is not the case with RSUs, which automatically convert into shares or a cash equivalent upon vesting.

Lastly, you usually receive fewer RSUs than options. For example, a company might give 1,000 options for every 250 RSUs, as each RSU represents a direct value.

RSU's vs Stock Options: Which is Better?

Deciding which is the best choice depends on your financial goals, your expectations for the company's success, and your risk tolerance.

Options can offer a significant upside if the company's stock price dramatically increases. Early-stage startup employees often find them to be one of the best ways to share in the company's success since they can purchase shares at a discounted price and sell at a much higher price.

On the other hand, RSUs provide more security but less upside. They're often a good idea if you prefer stability over the gamble of a big payout.

Bottom Line

The world of equity compensation can be complex. It's important to remember that what worked for one person might not work for another.

If you're considering a job offer that includes RSUs or stock options, take time to understand how they align with your long-term financial goals. This might involve talking to a financial advisor or someone familiar with investment management.

Finally, remember that equity compensation is just one form of compensation. A high number of stock options or RSUs might seem attractive, but always consider the complete package: salary, benefits, and the potential for professional growth.

In the early 2000s, stock options were the norm, and RSUs were the exception. This brutally backfired on many during the Dot Com Bubble, when employees saw both stock options and RSU's disintegrate, without enough thought into base salary to keep them afloat. Today, both forms of compensation are common, and understanding them is critical to maximizing your total compensation. Ultimately, the decision between RSUs and options should align with your personal financial goals and risk tolerance.


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