The Difference Between Stock Options and Restricted Stock Units (RSU’s)

Complexity abounds with respect to a RSU or option decision.

Posted on

I met with a client recently who was given the choice of receiving the equity portion of his compensation as a percentage of stock options or restricted stock unit (RSUs). An RSU is a grant valued in terms of company stock, but company stock is not issued at the time of the grant. After the recipient of a unit satisfies the vesting requirement, the company distributes shares or the cash equivalent of the number of shares used to value the unit. Depending on plan rules, the employee or employer may be allowed to choose whether to settle in stock or cash.

The most important variable is how the equivalent number of options is set to RSUs. RSUs are preferred if the same number of options are offered. However, most companies typically offer a third to a fifth of the number of RSU shares than they would have granted in options. This is because the options are worthless if the share price never gets above the grant price during the vesting period. RSUs have greater downside protection but they also limit your upside if you have more options than RSUs.

RSUs are taxed in much the same manner as actual restricted shares. There is no capital gains treatment available at exercise. Employees are taxed at ordinary income rates on the amount received on the vesting date, based on the market value of the stock. The employees may have to make payments of unnecessary taxes under Section 83(b) election if the stock price declines. Taxation of options depends on whether they are incentive stock options (ISO) or non-qualified stock options (NQSO). The rules regarding the taxation of ISOs are complex, especially on the alternative minimum tax. The tax treatment for NQSOs is relatively straightforward.

There are other considerations affecting the decision – the vesting schedule, options expiration, outlook on company’s future, whether this is a public company or private. Complexity abounds with respect to a RSU or option decision. Employees facing this decision should seek a competent financial adviser knowledgeable about these issues.

You've Spent Years Building Your Wealth . . .
Let Me Show You How To Protect It

Sign Up

What's your idea of “retiring well”? Having the lifestyle of your dreams . . . your taxes under control . . . or not outliving your money?

No matter how you define it, you have to plan smart to retire well – and that includes understanding ever-changing tax laws, which impact your wealth, your lifestyle, and your retirement savings.

That's why you need Insights, my free, bi-weekly newsletter that no retiree should be without.

Get real-world discussion about:

  • Wealth protection
  • Estate planning
  • Tax strategies and so much more!

Get Financial Insights

Sign up and we’ll send you our bi-weekly Insights email from a team you can trust, PLUS

  • Rick Rodgers’s 8 New Retirement Realities You Need To Know, an exclusive email series that will help you plan and protect your retirement savings.
  • Timely tax and financial tips
  • Practical IRA and retirement account advice


It's Your Money

Read Rick's articles
Rodgers & Associates
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437