Stock Options Vs. RSUs: How They Differ

When considering your overall compensation, you should pay attention to what’s beyond your paycheck. Stock options and restricted stock units (RSUs) are both super common ways that employers compensate their employees with equity, but companies don’t always do the best job of educating folks on what their holdings are actually worth. The first step towards understanding the value of your equity is simply understanding the ins and outs of what these holdings are and how they work. So, let’s break it down.

RSUs and stock options are both forms of employee equity compensation — or non-cash compensation — offered to an employee by an employer. RSUs and options are generally the most common forms of equity compensation, but they are very different and you will want to approach them with different strategies to maximize your net worth. So, what exactly is the difference between stock options vs. RSUs?

Stock options are probably the most well-known form of equity compensation. A stock option is the right to buy a specific number of shares of company stock at a pre-set price, known as the “exercise” or “strike price,” for a fixed period of time, usually following a predetermined waiting period, called the “vesting period.” Most vesting periods span three to five years, with a certain percentage of options vesting each year (which means you’ve “earned” your shares), though you still need to exercise (i.e., purchase them).

With stock options, if you wait to hit certain milestones, your tax treatment may be better. You could receive favorable tax treatment if you wait for two years from grant date and one year from date of exercise to sell your shares. Once these two milestones are met, any profit you generate from the sale of your stock will be taxed as long-term capital gains. (Note: This holding period is only applicable to ISOs, and you could be subject to taxation when you exercise the share.)

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