Stock Options vs RSU (Restricted Stock Units)

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Differences Between Stock Options and RSU

The key difference between Stock Options and RSU is that in stock option the company gives an employee right to purchase the company’s share at the predetermined price and the date, whereas, RSU i.e. restricted stock units are the method of granting the company’s shares to its employees if the employee matches the mentioned performance goals or complete the specific tenure in the company as an employee.

Stock-Options-vs-RSU

Talking about the stock option means employee stock options and not options (call and put options). The stock option is given to high-performing employees as a part of remuneration. They can use these shares and make a profit later as per the terms & conditions of the stock options.

For example, if a company hires a new CEO and offers him 20,000 stock options. The company determines the term of the stock option in such a way that the CEO would be able to exercise his rights on the stock options after three years from his joining date. Now the CEO receives the stock options at a flat rate of $4 per share. His purpose would be to increase the stock price as much as he could in the next three years. Then, after three years, he can sell his stocks, let’s say at $15 per share, and can make a profit of $11 per share. That is a huge profit.

Often stock options are offered to employees who perform exceedingly well. And also, stock options are given at a discount rate (less than the price of the stock at that time) so that the stock option can be considered a reward.

On the other hand, the restricted stock unit is offered to keep exceptional employees in the organization. But the way RSUs are constructed is different. RSUs are paid per a vesting schedule and don’t offer all the shares together.

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Stock Options vs RSU Infographics

Options-vs-RSU

Stock Options vs. RSU Video

Key Differences

  • The first key difference is shareholders’ rights. In the case of stock options, the employee receives the full right of the shareholders. On the other hand, in the case of restricted stock units, the employee doesn’t receive the full right.
  • The stock option offers both voting rights and dividend rights. In the case of restricted stock units, voting rights are not given, and even dividends are not paid.
  • The payment during settlement is always stock in the case of stock options. On the other hand, the payment during settlement can be cash or stock.
  • After the vesting period, the stock option becomes the common stock. But for the RSUs, the settlement is done once the vesting period is over.

Example

For example, Jay is a great employee, and his organization wants to keep him. To entice him, the company decided that they would pay Jay 2000 RSUs but as per the vesting schedule of 400 shares each year for the next five years. Jay stays in the organization for the next two years; he would only get 800 shares.

There’s another part of RSUs that we need to understand. When RSUs are offered, they also create capital gain and income taxes. Companies don’t pay capital gain taxes and income taxes. The employees who are offered RSUs need to pay the taxes.

If we take the example of Jay and let’s say that each RSU can be sold at $10 per share, he has been offered (2000 * $10 per share) = $20,000.

And if the capital gain and income taxes turn out to be $5000, Jay would only receive = ($20,000 – $5000) = $15,000 after selling off the RSUs.

Comparative Table

Basis of comparisonStock OptionsRSUs
Offered dateStock options can be issued any time after the issuance.Restricted stock units can also be issued any time after the issuance.
Shareholders’ rightThere’s a full right of the shareholders offered.There’s a restricted right of the shareholders offered.
Voting rightsGiven.Not given.
Dividends paidYes.No.
Settlement after vestingAfter the vesting period is over, stock options become common stock, and it depends on the employee how she wants to exercise that option.In the case of RSUs, terms are followed, and the shares offered are settled. The settlement can be deferred for receiving tax benefits but to a certain extent.
Payment during settlementStock.Cash/Stock.
Tax treatmentIn the case of the stock option, taxes are paid at the time of sale at the long-term capital gain rate (for qualifying disposition). Otherwise, for non-qualifying disposition, taxes are paid at the time of sale at the income tax rate.In the case of RSUs, taxes are based on vesting. If at the time of settlement, the company grants stocks, and the employee keeps the stock for more than 12 months, then capital gains treatment can be possible.

Conclusion

As you can understand, restricted stock unit and stock options are offered so that the companies can hold on to extraordinary employees. But both of these options are quite different, and their scope is diverse too. That’s why understanding them separately is essential and allows us to think before applying.