If you’ve received both restricted stock units (RSUs) and stock options from an employer, or you’re comparing benefits in multiple job offers, it’s essential to do your research. RSUs and stock options are key components of your total pay package, but they have significant differences in how they work, their tax implications, and their potential value.
“Both RSUs and stock options are excellent ways to gain exposure to the company you work for,” says Daniel Messeca, a Certified Financial Planner and co-founder of Craftwork Capital in Alexandria, Virginia. However, he notes that “it’s like comparing apples and oranges.”
Understanding the differences between RSUs and stock options can help you determine which may be a more attractive incentive for you.
Understanding RSUs and stock options
RSUs and stock options are forms of equity compensation that employers may offer to attract and retain talented employees. The value of these incentives is tied to the company’s stock performance, aligning workers’ interests with the company’s success.
What are restricted stock units?
Restricted stock units, or RSUs, involve a company promising shares to an employee upon meeting specific conditions, typically including a vesting period. Once vested, ownership of the shares transfers to the employee at no cost, allowing them to sell or hold the shares.
What are stock options?
Stock options involve a company offering to sell a specific number of shares to an employee at a set price known as the strike price. These options also have a vesting period, and upon vesting, the employee can purchase the shares at the strike price, a process known as exercising the options.
There are two types of stock options.
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Incentive stock options,
or
ISOs
, are granted to employees and have specific tax benefits. -
Non-qualified stock options,
or
NSOs
, can be granted to non-employees but lack the tax benefits of ISOs.
RSUs vs. stock options
Let’s compare the key differences between RSUs and stock options.
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Restricted stock units (RSUs)
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No.
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Yes.
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What are the typical stages?
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What is the value based on?
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The market price.
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The bargain element
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Stock options and RSUs are both forms of equity compensation that come with their own set of advantages and disadvantages. Depending on your financial goals and risk tolerance, one may be more suitable for you than the other. According to Messeca of Craftwork Capital, RSUs are more beneficial when you need immediate access to funds. This is because RSUs follow a predictable vesting schedule and retain their value, allowing you to sell them when needed, such as for education expenses or investments.
On the other hand, stock options are a better choice when you don’t require immediate funds and are willing to take on higher risk for potentially higher rewards. Startups and high-growth companies often use stock options as incentives for top talent due to the possibility of significant financial gains if the company succeeds.
When deciding between RSUs and stock options, it’s essential to consider various factors beyond just risk. These include the current value of the company, the vesting schedule, the ease of selling shares, the strike price of options, the type of options (ISOs or NSOs), and whether cashless exercising is an option.
Ultimately, the choice between RSUs and stock options depends on your financial situation, long-term goals, and risk tolerance. By evaluating these key factors, you can determine which type of equity compensation aligns best with your individual circumstances. following sentence in a more concise way:
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