You’re weighing two job offers. Both companies offer competitive salaries and good benefits. But one is an early-stage startup offering stock options. The other is a mature public company offering restricted stock units (RSUs).
The equity packages look impressive on paper. But which one actually offers better value? Which aligns with your financial goals and risk tolerance?
Understanding the fundamental differences between RSUs and stock options can help you make an informed decision. These two forms of equity compensation work differently, carry different risks, and come with distinct tax implications. Most importantly, each creates unique opportunities and challenges for building and protecting wealth.
This guide examines RSUs versus stock options in detail. You’ll learn how each type works, when companies typically offer them, and how to evaluate their potential value. You’ll also discover the critical risks of concentrated equity positions and why professional guidance matters.
What are RSUs?
Restricted stock units represent a company’s promise to give you shares in the future. Think of RSUs as a delayed gift of company stock. You don’t pay anything to receive RSUs. Once they vest according to the schedule, the shares become yours automatically.
Public companies and late-stage private companies typically offer RSUs. These companies have established valuations and more predictable growth trajectories. RSUs make sense at this stage because employees can easily understand their value.
Most RSU grants follow a vesting schedule. A typical schedule vests 25% of shares annually over four years. Some companies use cliff vesting where shares vest all at once. Others use monthly or quarterly vesting after an initial cliff period.
When RSUs vest at a public company, you receive actual shares immediately. You can sell them right away or hold them. The choice is yours. The value equals the stock price multiplied by the number of vesting shares.
Private company RSUs work differently. Most pre-IPO companies use double-trigger vesting, meaning two conditions must be met: both a time-based requirement and an event, usually an IPO. Until both triggers occur, you don’t actually own the shares and can’t sell them.
What are Stock Options?
Stock options give you the right to buy company shares at a predetermined price called the strike price or exercise price. This price stays fixed regardless of how the actual stock price moves over time.
Early-stage, high-growth startups benefit from offering stock options, as these stocks are likely to surge in value quickly. Startups use options because they allow employees to participate in potentially massive upside without requiring the company to issue shares immediately.
Options follow vesting schedules similar to RSUs. But vesting alone doesn’t give you shares. Vesting gives you the right to buy shares at your strike price. Actually purchasing the shares is called exercising your options.
Two types exist. Incentive stock options (ISOs) receive preferential tax treatment if you meet certain holding requirements. Non-qualified stock options (NSOs) don’t qualify for special tax treatment but have fewer restrictions.
The value of options depends entirely on appreciation. If your strike price is $5 and the stock trades at $50, each option is worth $45. But if the stock trades below $5, your options are “underwater” and essentially worthless.
Options often expire 10 years after grant, though terms vary by company. If you leave the company, you commonly have just 90 days to exercise vested options, though some companies now offer extended exercise windows.
Startups vs. public companies
Growth-stage, pre-IPO startups typically offer stock options, while later-stage startups and public companies offer RSUs. This pattern exists for good reasons.
Early startups face uncertainty. Their valuations can swing wildly. Stock options align with this high-risk, high-reward environment. Employees who join early accept lower salaries in exchange for options that could become extremely valuable if the company succeeds.
As companies mature and approach IPO, they often switch to RSUs. Companies typically offer fewer RSUs than stock options because RSUs deliver the full value of a share, not just the appreciation above an exercise price.
Public companies almost exclusively use RSUs for regular employees. The stock has an established market price. Employees can sell shares immediately upon vesting. The value proposition is clear and straightforward.
This divide matters when evaluating offers. A startup offering options essentially asks you to bet on dramatic growth. A company offering RSUs provides more certain, if potentially smaller, rewards.
Key differences between RSUs and Stock Options
Upfront costs
RSUs require no payment. The shares transfer automatically when they vest. You receive the full market value without spending anything.
Stock options require cash to exercise. You must pay the strike price times the number of options. For valuable options at successful companies, this can mean tens or hundreds of thousands of dollars.
Risk profile
RSUs carry minimal risk. They maintain value unless the stock price drops to zero. Even if the stock falls 80% from your grant date, your RSUs still have value.
Options carry greater risk. Stock options typically offer higher upside potential but can become worthless if the stock price never exceeds the strike price. If the startup fails, your options expire worthless. Even at successful companies, options can end up underwater if growth doesn’t meet expectations.
Tax timing and control
RSUs trigger taxes immediately at vesting. The market value counts as ordinary income. Your employer withholds shares to cover taxes, though some allow cash payment. You cannot control or defer this taxable event.
Options provide more tax flexibility. ISOs trigger no regular tax at exercise, though alternative minimum tax (AMT) may apply. NSOs trigger ordinary income tax on the spread between strike price and market value at exercise. You control when to exercise and trigger taxes.
Value certainty
RSU value is transparent. Multiply vesting shares by current stock price. A grant of 1,000 RSUs with stock at $100 equals $100,000 in value.
Option value requires calculation and speculation. Subtract strike price from current price, multiply by options. But future value depends entirely on stock appreciation, which no one can predict accurately.
Risks of concentrated stock positions
Whether you receive RSUs or options, successful equity compensation often leads to concentrated stock positions. Many employees eventually hold 30%, 50%, or even 70% of their net worth in company stock.
According to Wall Street research, approximately 40% of stocks in the Russell 3000 since 1980 suffered a permanent decline of more than 70% from their peak values. Research from Harvard Business School shows that the typical individual stock has return volatility approximately twice that of a well-diversified portfolio.
A concentrated stock position generally means holding more than 10% of a portfolio in a single stock. Beyond this threshold, portfolio risk increases dramatically. Your financial future becomes tied to one company’s performance.
Consider real-world consequences. Employees who built wealth at companies like General Electric or IBM watched their net worth plummet when these once-dominant companies struggled. Workers at Enron, Lehman Brothers, or Washington Mutual lost everything.
Why professional guidance matters
Managing concentrated positions requires careful planning and disciplined execution. Advisors help you navigate the interplay between diversification timing, tax optimization, and risk management.
Several key risks demand attention. Market volatility can cause sharp fluctuations in a single stock. Company-specific events like poor earnings, regulatory issues, or management changes can trigger severe losses. Industry disruption can affect even strong companies.
Advisors help you navigate critical decisions about timing and diversification. They can develop systematic selling programs to reduce concentration over time while managing tax consequences. They help coordinate stock sales with other financial events like retirement or major purchases. Most importantly, they provide an objective perspective when emotional attachment to company stock clouds judgment.
The IRS supplemental withholding rate sits at 22% for amounts up to $1 million, but many employees owe more based on their total income and state taxes. Advisors help you calculate actual tax liability and set aside appropriate reserves.
Emotional attachment often prevents employees from diversifying company stock. You believe in the company. You work there. You see the potential. An objective third party helps you separate employment loyalty from investment strategy.
Common equity compensation mistakes to avoid
Insufficient tax withholding
If companies withhold at the standard federal supplemental rate of 22% on RSUs under $1 million, but you’re in a higher tax bracket like the 37% federal bracket, you’ll face a significant shortfall. This gap between withheld and owed taxes catches many employees off guard.
This withholding gap affects employees at all income levels. The withholding appears on your pay stub when RSUs vest. Your actual tax bill arrives months later. Plan accordingly.
Market risk after vesting
Stock prices can fall dramatically after RSU vesting. If shares drop before you sell enough to cover taxes, you might owe more than your remaining shares are worth.
For example, RSUs that vest at $100 per share might drop to $40 before you can sell shares for tax payments. This leaves you owing taxes on $100 per share while holding shares worth $40. Employees at several major tech companies faced this scenario during market downturns.
Misunderstanding vesting and timing
Employees regularly forfeit value through overlooked details. Some leave companies days before vesting dates. Others misread plan documents or miss exercise deadlines.
Read your equity agreements carefully. Mark vesting dates on your calendar. Understand what happens if you leave. Know your post-termination exercise window for options. These details matter enormously for your financial outcome, and working with an equity compensation specialist can help you navigate this complexity.
Comprehensive financial planning for equity compensation
Your equity compensation touches every aspect of your financial life. Understanding these connections helps you make better decisions. Whether you’re dealing with RSUs vs stock options, these planning areas demand careful attention. Key planning areas include:
- Cash flow management – Vesting schedules drive your liquidity needs. You need reserves for tax payments on RSUs and funds for exercising options. Major purchases should align with liquidity events when possible.
- Retirement strategy – Large equity positions might enable earlier retirement, but concentration risk could derail plans if the company struggles. Selling equity in retirement often triggers lower tax rates than selling during peak earning years.
- Estate planning – Stock options may provide stepped-up basis opportunities for heirs. RSUs that vest after death trigger ordinary income tax for beneficiaries. Proper structuring saves your family significant taxes.
- Portfolio diversification – Employees with tech stock holdings shouldn’t load their 401(k) with more tech exposure. Diversification across sectors and asset classes reduces overall portfolio risk.
- Insurance protection – Your needs grow when income and wealth depend on one company. Disability insurance protects against lost earning capacity. Life insurance ensures your family’s security.
These planning areas interconnect in complex ways. A decision that optimizes taxes might increase investment risk. What works for cash flow might complicate estate planning. Professional guidance helps you balance these competing priorities effectively.
The bottom line on RSUs vs Stock Options
RSUs and stock options serve different purposes in the equity compensation landscape. Early-stage startups offer options to provide potentially massive upside for employees willing to accept risk. Mature companies offer RSUs for more predictable value with less complexity.
When comparing offers, consider your personal situation alongside company prospects. Young professionals might embrace the option lottery ticket. Those with families and financial obligations often prefer RSU certainty.
Your risk tolerance matters. Can you afford to lose the option value entirely? Do you have cash to exercise options? Will concentrated positions keep you awake at night? Answer these questions honestly.
The tax implications differ significantly between RSUs and stock options. RSUs create immediate tax obligations at vesting. Options let you control timing but require careful planning around AMT and capital gains. Understanding these differences prevents costly surprises.
Receiving equity compensation marks the beginning of a journey, not the end. Success requires ongoing attention to concentration risk, tax planning, and diversification strategy. The decisions you make about exercising options, selling RSUs, and managing concentrated positions shape your financial future.
Most employees benefit from professional guidance navigating equity compensation complexity. The interplay between taxes, risk management, and financial planning demands expertise. The stakes are too high for guesswork.
Take time to understand your equity grants fully. Read the fine print. Know your vesting schedule. Understand the tax implications. Consider how equity fits into your broader financial picture. Make informed decisions based on facts, not emotions or speculation. Your future self will thank you for the careful attention you pay today.
