What is the difference between a stock option and a RSU? (2024)

What is the difference between a stock option and a RSU?

When you're granted stock options, you literally have the “option” to purchase company stock at a specific price before a certain date. Whether, and when, you actually purchase the stock is entirely up to you. RSUs, on the other hand, grant you the stock itself once the vesting period is complete.

Is it better to take stock options or RSU?

Stock Options or RSUs: Which Is Better? These two forms of stock compensation have their pros and cons. Stock options may be riskier than RSUs, but options allow you to time the tax while RSUs don't.

Why switch from options to RSU?

The reasons for transition may vary, but often come down to competitive pressures or a diminishing available share pool. Some will also make the case that this type of award is more easily understood by employees, and hence more valued, as it resembles a share of stock more than a traditional stock option.

Should I sell RSU or options first?

In a silo, selling RSUs as they vest often makes sense, but the decision can be complicated if you have other forms of equity, namely employee stock options. In a down market post vest, exercising and selling employee stock options and keeping vested RSUs may lead to a higher terminal value.

What is the difference between stock options and performance share units?

One of the main differences between stock options and PSUs is that PSUs are tied to specific performance goals, rather than just the passage of time. This means that the recipients of PSUs must meet certain targets for the units to vest and be converted into shares of company stock.

Why are RSUs taxed so high?

RSUs are considered a form of compensation and are included in your taxable income when they vest. Because RSU income is considered supplemental, the withholding rate can vary between 22% and 37%. Usually, your employer will liquidate a percentage of the shares to cover the withholding requirement.

Should I ask for more base salary or RSU?

Some job seekers are willing to accept a lower base salary for the potential long-term gains of RSUs, while others prefer the security of a higher base salary. It's important to carefully assess the company's financial health, industry trends, and your own financial situation before making a decision.

Why do companies give RSU instead of salary?

RSUs are appealing because if the company performs well and the share price takes off, employees can receive a significant financial benefit. This can motivate employees to take ownership. Since employees need to satisfy vesting requirements, RSUs encourage them to stay for the long term and can improve retention.

What happens to RSU if stock price goes down?

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If the price is higher, then your RSUs will be worth more. If the price is lower, the RSUs will be worth less. The value of your RSUs will increase or decrease at the same rate as the stock price itself.

Do you pay taxes on RSU?

Restricted stock units

Typically, the date you take ownership of the actual shares, known as the vesting date, is based on either time or performance. When you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares.

Should I sell RSU immediately or hold?

On one hand, selling RSUs immediately allows us to diversify our investments, reduce risk associated with holding too much company stock, and make use of the proceeds for other essential purposes. On the other hand, holding onto RSUs allows potential capital appreciation if the company performs well in the long run.

What is a good RSU offer?

A good RSU offer is one that should incentivize you to put your best foot forward. One of the primary purposes of offering employees company equity is to encourage them to feel as though they have a stake in the company.

Why are my RSUs vested but not sellable?

RSUs are generally subject to a vesting schedule, meaning the stock does not fully belong to the employee until such a time it is vested. During the vesting period, the stock cannot be sold.

How does stock option work?

In short, a stock option gives you the right to buy company shares at a pre-set price that's hopefully lower than the current share price. In this article, we'll talk about what employer stock options are, how they work, and how to calculate what your stock options might be worth.

How does RSU compensation work?

A restricted stock unit (RSU) is stock-based compensation issued by an employer. A vesting period exists before the RSU converts to actual common stock. Until then, it has no monetary worth. Once the RSU converts to stock, the stockholder may pay taxes on its value.

What is the difference between a share and an option?

Holders of share purchase rights may or may not buy an agreed number of shares of stock at a pre-determined price, but only if they are an existing stockholder. Options, on the other hand, are the right to buy or sell stocks at a pre-set price called the strike price.

Why are my RSUs taxed at 40%?

Before the vested shares are actually deposited into a broker account for you by your employer, a certain percentage of your RSU compensation will be withheld for tax purposes. Similarly to a cash bonus, typically about 40% will be withheld for federal, state, local, social security, and medicare taxes.

Should I count RSU as income?

The RSUs are assigned a fair market value (FMV) when they vest. Restricted stock units are considered income once vested, and a portion of the shares is withheld to pay income taxes.

Should RSUs be on W2?

Yes. At vesting, RSU income is reported on your W2, and any taxes withheld are included as well. RSUs are like options with a $0 strike price. So, a RSU share is always at least as valuable as one stock option.

How can I take advantage of RSU?

RSUs vest over a predetermined period based on a vesting schedule and/or other performance milestones. Once you achieve those key events, you have access to the stock, which you can then hold or sell. RSU vesting schedules are critical to understand, but each company structures them differently.

How do I get the most out of my RSU?

Do you lose RSUs when you leave a company?

Usually, you'll lose all the RSUs that have not yet vested at the time of your resignation. They'll be forfeited back to the company, and you'll walk away with nothing for those unvested units.

Can you refuse RSU?

In a restricted stock unit plan, your company offers you an economic interest measured by your company's stock, and makes payment to you at a future date or event specified in your own grant agreement and company plan. Under most plans, you will have to decide whether to accept or reject the grant.

Do you get dividends on RSU?

Since shares are not issued until vesting, RSUs don't pay dividends. However, an employer may provide employees with dividend equivalent payments on unvested RSUs. These equivalents are typically held in an escrow account to pay for tax withholding or purchase additional shares.

What are the disadvantages of restricted stock?