RSUs or Stock Options: Which is Better?

Historically a staple of startups and tech firms, restricted stock units (RSUs) are now finding a home in a wider range of employee incentive plans, alongside stock options.

Nike, for instance, allows employees to choose from RSUs, nonqualified stock options, or a 50/50 mix of the two.

So, what should you do if you’ve been offered these options? Let’s break it down.

What Are RSUs and Stock Options?

RSUs are a type of equity-based compensation, where employees are granted units that convert to shares after a vesting period. These shares can be sold or held indefinitely once vested.

Nonqualified stock options, on the other hand, give employees the right to purchase company shares at a set price after a vesting period. These options expire 10 years after being granted.

How Do They Compare?

Risk & Return

Stock options rely on a rise in a company’s stock price to hold value — RSUs don’t.

With options, if the stock price stays the same or drops below the grant price, your options become worthless. But with RSUs, as long as the stock price is above $0, your shares will always have some value.

The value of stock options can vary: the higher the stock price above the grant price, the greater your potential gain. In contrast, RSUs have a fixed value based on the stock price at the time they vest.

Bill Gates famously highlighted this volatility, saying, “Either [an employee] can buy six summer homes or no summer homes. Either he can send his kids to college 50 times, or no times.”

This uncertainty is why companies like Microsoft now offer the less risky RSUs. Other companies, including Nike, have followed suit, often giving employees five times as many stock options as RSUs to account for this added risk.

Taxes

RSUs are taxed as ordinary income when they vest, and the taxable amount is based on the market value of the shares at that time.

With stock options, a portion is also taxed as ordinary income—the stock price at exercise less the grant price. Unlike RSUs, though, stock options are not taxed until you exercise the option to own the shares. This means you have some flexibility—you can control when taxes are assessed by determining when to exercise the option.

Which Choice Is Best for You?

Let’s consider three hypotheticals:

Jeff

Jeff, 54, is preparing for retirement next year: His stock options will continue to vest as planned, but RSUs won’t. If Jeff retires with unvested RSUs, he’ll forfeit them — meaning he’ll only be able to collect the RSUs that vest in year one and lose the ones from years two, three, and four. 

If he’s okay with the higher risk, stock options might be the better option for him.

Sarah

Sarah, 38, just finished a kitchen remodel and took out a $100,000 home equity line of credit (HELOC) to fund it. While she has savings in a 401(k), her other savings are limited, and she’s relying on her annual bonus to pay off the HELOC. 

For Sarah, RSUs are probably the better choice, as they offer a more predictable income to cover her immediate cash needs. If she went with stock options and they had no value at vesting, she might not have the funds to pay off her loan.

Perry

Perry, 42, is saving more than he’s spending and has nearly $500,000 in his 401(k). He doesn’t have much in savings, but he’s not facing any immediate cash needs. What he doesn’t have, though, are investments outside of his 401(k). Since his retirement savings are tied up and inaccessible without penalties, he wants to start building a diversified portfolio. 

RSUs are likely the best option for Perry. Once they vest, he can sell them and start building a portfolio that gives him more flexibility and access to the broader market.

We’re Here to Help

Choosing between RSUs, stock options, or a mix of both comes down to your personal goals, risk tolerance and tax situation. What works for one person might not be the best choice for someone else.

If you have questions or want to discuss your options in greater detail, reach out to Vista. As always, we’re here to help.