Stock options vs. RSU: what’s the difference?
From basic explanations to similarities and differences and questions around vesting and negotiating, we look at stock options vs. RSU from all angles.
Summary
Restricted stock units don’t involve stock or transaction pricing.
With RSUs, companies promise employees stock once specific requirements are fulfilled.
Stock options give you the option of buying equity in the company at a specified price during a specified period.
RSUs and stock options have similarities, such as grant dates and differences, such as exercise price.
What is an RSU?
Properly known as restricted stock units, RSU became fashionable in the 90s and early 2000s. Less complicated than stock options, RSUs don’t involve transaction or stock pricing. Instead, the company promises to give stock in the company to an employee when the employee fulfills a specific requirement, such as length of service or meeting performance requirements.
If you meet the requirements, the company will give you RSUs as shares or as the cash equivalent of the stock’s value at that time. Most RSUs vest for a period of time during which the employee cannot access or otherwise benefit from them.
RSUs can be a good choice if you prefer a more predictable income stream and don’t want to risk a declining stock price. The steadier equity compensation stream they offer isn’t dependent on the stock price at the time of sale or exercise.
What are stock options?
With a stock option, you can purchase equity in a company at a specified price within a specified period of time. You are under no obligation to purchase the shares.
In most cases, one stock option contract represents 100 shares in the company. Stock options usually have a vesting schedule that requires you to work at the company for a certain length of time before you can purchase the stock. Some stock options have an expiration date, after which you cannot exercise your right to purchase stock.
Stock options may be a good choice if the company is a startup or at an early stage of its growth, isn’t profitable yet, and has strong growth potential. You could make significant gains if the company’s stock price rises over time.
What are the key differences between RSUs and stock options?
To fully understand stock options vs RSUs, you need to know about the key similarities and differences between the two. Find out what those similarities and differences are below.
Similarities:
There are a couple of similarities between RSUs and stock options.
| RSUs | Stock options | |
|---|---|---|
| RSUs | Stock options | |
| Grant date | Dated on issuance | Dated on issuance |
| Vesting | Can be vested for any time and for any requirements or milestones | Can be vested for any time and for any milestones or requirements |
Differences:
Looking at RSU vs stock options reveals a few differences between them:
| RSUs | Stock options | |
|---|---|---|
| RSUs | Stock options | |
| Exercise price | No exercise price | Set based on the underlying security’s full market value |
| Payment | Stock or cash | Stock |
| Taxation | Taxed on vested RSUs, treated as regular income or capital gains if you hold stock for more than a year | Stock options treated as regular income, ISOs are preferred instruments for alternative minimum tax |
Can I negotiate for more stock options or RSUs when joining a new job or during compensation discussions?
Yes, you can often negotiate for more stock options or RSUs as part of your compensation package, depending on your position and the company's policies.
Are stock options and RSUs a common form of compensation in companies?
Yes, both stock options and RSUs are commonly used by many companies as part of employee compensation packages. Ensure you understand what an RSU is and what stock options are so that you can make an informed decision if you are offered a choice between the two.
Can I trade or sell my RSUs, or do I need to wait until they fully vest?
You usually need to wait until RSUs vest before you can trade or sell them, but the specific rules may vary depending on your company's policies. To vest fully means that the RSUs have reached the end of the specified vesting period.
During the vesting period, you cannot access, sell, or trade your RSUs. However, once the vesting period is over, you acquire full ownership of those stock units and can sell or trade them as you please.
What happens to my stock options or RSUs if I leave my job before they fully vest?
Unvested stock options typically expire upon leaving the job. This means that you will not be able to buy stock in the company after you leave their employment.
Unvested RSUs may have forfeiture or clawback provisions depending on the company's policies. If a clawback provision is involved, you will need to surrender any gains from restricted stock vesting to the company. One of these provisions could also see you surrender bonuses or incentive compensation you received within a certain period.
What factors should I consider when choosing between stock options and RSUs as part of my compensation package?
Consider factors such as your financial goals, risk tolerance, and your view on the company's growth prospects when deciding which equity-based incentive suits you better. It is also helpful to speak to a financial advisor about choosing RSUs vs stock options.
Need more information?
You want to make the best decision for your money and for peace of mind when it comes to negotiating your compensation package. If you’re given a choice of stock options vs. RSUs, carefully consider their similarities as well as their key differences, associated vesting periods, and the potential implications of clawback or forfeiture provisions. You might find that one option could result in a much better deal for you, while the other could see you lose out.
Get expert financial advice about stock options and RSUs from an advisor you can trust. Simply answer a few questions and let Unbiased match you with an SEC-regulated financial advisor today.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.