{"id":4299,"date":"2021-12-08T14:31:05","date_gmt":"2021-12-08T22:31:05","guid":{"rendered":"http:\/\/canary.kcprod.info/blog\/?p=4299"},"modified":"2022-12-13T15:29:59","modified_gmt":"2022-12-13T23:29:59","slug":"stock-options-versus-rsu","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/stock-options-versus-rsu\/","title":{"rendered":"Stock Options vs. Restricted Stock Units (RSUs): What’s the Difference?"},"content":{"rendered":"\n

Depending on the company you work for, your compensation may include some form of equity \u2014 likely stock options or restricted stock units (RSUs). In this post, we\u2019ll explain what they are, how they differ, and why you\u2019re likely to be granted fewer RSUs than stock options (all other things being equal).<\/p>\n\n\n\n

What are stock options?<\/h2>\n\n\n\n

Employer-granted stock options give you the option to buy company stock at a certain price at a certain time. Buying the stock is called exercising your options<\/a>. The price you\u2019ll pay to do that is called the exercise price<\/a> or strike price \u2014 this price is set when you are granted your options. Employer-granted stock options can be incentive stock options<\/a> (ISOs) or non-qualified stock options<\/a> (NSOs), and their tax treatment varies<\/a> (more on that below). Stock options are often subject to vesting<\/a>, which means you may need to work at the company for a certain amount of time before you can exercise your options. <\/p>\n\n\n\n

What are RSUs?<\/h2>\n\n\n\n

RSUs are claims for shares of company stock given to employees as a form of compensation. Unlike stock options, you don\u2019t have to pay to exercise RSUs \u2014 once they vest, they\u2019re yours. Historically, RSUs were far more common for employees of public companies than those who work at private companies. But over the last 20 years, RSUs have become much more common at private companies that have closed rounds of financing at large valuations (over $1 billion) when that valuation isn\u2019t likely to be achieved or justified for a few years. Like stock options, RSUs are usually subject to vesting.<\/p>\n\n\n\n

Stock options vs. RSUs<\/h2>\n\n\n\n

Here\u2019s a breakdown of the key differences between stock options and RSUs:<\/p>\n\n\n\n

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RSUs and stock options have very different tax treatment<\/h2>\n\n\n\n

Equity compensation can make your tax situation more complicated, and it\u2019s important to understand what you could owe. Let\u2019s take a closer look at the tax treatment of stock options and RSUs.<\/p>\n\n\n\n

How RSUs are taxed<\/h3>\n\n\n\n

RSUs are taxed as soon as they vest and are liquid. In many cases, your employer will withhold some of your RSUs as payment for taxes owed at the time of vesting. You might also get the option to pay those taxes with cash in order to retain all of your vested RSUs. Either way, your RSUs will be taxed at ordinary income rates which could be as high as 37% at the federal level<\/a> plus Social Security and Medicare taxes, depending on your income. You may owe additional taxes at the state level, depending on where you live.<\/p>\n\n\n\n

How stock options are taxed<\/h3>\n\n\n\n

In contrast, stock options are taxed when you exercise them and\/or when you sell them. This means you might want to exercise your options in a year when you anticipate your tax rate will be relatively low (or you have a lot of harvested losses to use from an investment manager like Wealthfront<\/a>). If you early exercise<\/a> your options before they\u2019ve increased in value and file an 83(b) election<\/a> within 30 days, then you won\u2019t owe any taxes until you sell. <\/p>\n\n\n\n

The rest depends on whether you have NSOs (which are more common) or ISOs. With NSOs, you will be taxed at ordinary income rates on the difference between the exercise price and the current fair market value when you exercise. If you then hold the shares for over a year, any gains or losses going forward will be taxed at the lower, long-term capital gains rate<\/a> (which ranges from 0% to 20%). If you have ISOs, exercising your options is not a taxable event for regular tax purposes. Any increase in value over the  exercise price will be taxed at the long-term capital gains rate when you sell as long as you meet both of the following conditions:<\/p>\n\n\n\n

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  1. You hold the shares for at least two years after they were granted to you.<\/li>\n\n\n\n
  2. You hold the shares for at least one year after exercising them<\/li>\n<\/ol>\n\n\n\n

    You should also be aware of the alternative minimum tax<\/a> (AMT) if you have ISOs. AMT is a separate tax system designed to make sure high earners pay at least a minimum (hence the name) amount of taxes. If you exercise your ISOs and don\u2019t sell them that year, the difference between the exercise price and the fair market value at the time of exercise is subject to AMT even if you didn\u2019t sell any shares. AMT can make filing your taxes far more complicated, which is why we think it\u2019s smart to consider working with a tax professional<\/a> if you think you might be subject to AMT. Whether or not you pay AMT is largely dependent on your income \u2014 in 2021, if you\u2019re a single filer making less than $73,600 or a married couple filing jointly making less than $114,600, you don\u2019t need to worry about it. If you earn more than that, however, you\u2019ll need to calculate your taxes under both systems (AMT and the regular system) and pay whichever amount is bigger. The good news is your AMT payments are credited against the taxes owed upon sale of your options.<\/p>\n\n\n\n

    Why you\u2019ll get fewer RSUs than stock options for the same job<\/h2>\n\n\n\n

    You should expect to receive fewer RSUs than stock options for the same job because RSUs don\u2019t have an exercise price. Let\u2019s look at a hypothetical private company example to illustrate this. Imagine a company with 10 million shares outstanding that just completed a financing at $100 per share, which translates to a $1 billion valuation. If you knew that the company would ultimately be worth $300 per share, then you\u2019d need to issue 11% fewer RSUs than stock options to deliver the same net value to the employee. <\/p>\n\n\n\n

    Here\u2019s a chart to help you visualize this example:<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    You should also keep in mind that RSUs have value independent of how the company performs, whereas stock options can become worth less than the exercise price if the company struggles. Put more simply: RSUs are less risky than stock options.<\/p>\n\n\n\n

    Key takeaways: RSUs and stock options<\/h2>\n\n\n\n

    If you receive equity as part of your compensation, here\u2019s what you need to remember about RSUs and stock options:<\/p>\n\n\n\n