Deciding between Employee Stock Option and Restricted Stock

When you’re granted stock options, you have the option to purchase company stock at a specific price before a certain date. Whether 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. You don’t have to purchase it.

Which is better stock options or restricted stock?

Stock options are only valuable if the market value of the stock is higher than the grant price at some point in the vesting period. Otherwise, you’re paying more for the shares than you could in theory sell them for. RSUs, meanwhile, is pure gain, as you don’t have to pay for them.

What is the difference between restricted stock and ESPP?

Upon vesting, RSUs are assigned a fair market value. The Internal Revenue Service considers RSUs fully taxable upon vesting. After a portion of the stock shares is withheld to pay taxes, the employee receives the balance of the shares and may sell them at their discretion. An ESPP is an employee stock purchase plan.

What is an advantage of a restricted stock plan?

The advantages of restricted stock bonus/purchase plans are (1) the employee can make the §83(b) election; (2) the employee is generally entitled to capital gain treatment on sale of vested stock; and (3) the Company gets a wage deduction without paying cash wages.

What is the difference between restricted stock and common stock?

Restricted stock is given by a corporation, while common stock can be bought and sold at any time. Under Internal Revenue Service guidelines, Special Tax 83(b) election may be made. This makes the recipient of the stock liable for income-tax consequences immediately but establishes a cost basis.

Why do companies give options instead of RSUs?

Companies move from issuing employee stock options to restricted stock units (RSU) as they become larger for at least the following reasons: The value of RSUs are easier to understand compared to the upside of options. The cost to exercising options becomes too large of a burden for employees.

Are RSUs or options better for employees?

RSUs don’t have an exercise price, but stock options do — that’s why you’ll receive fewer RSUs than stock options for the same job. RSUs give you less flexibility when it comes to taxes (both the timing and the rate) than stock options do.

What is better RSU or ESOP?

In case of ESOPs, the employee may not acquire the shares if he fails to exercise the option. On the other hand, in case of RSUs, the employee is guaranteed the shares after the vesting period. ESOPs are paid with only through stocks, whereas RSUs may be paid for by stocks or cash.

Are ESPP and RSU taxed the same?

Restricted Stock Units (RSUs) are taxed differently than other forms of equity comp, such as Options and Employer Stock Purchase Plans (ESPP). Compared to these other forms of equity compensation, the tax treatment of RSUs is pretty straightforward but still important to understand.

What is the difference between RSA and RSU?

Difference between RSA and RSU
An RSA is a grant of company stock, offering employees the right to purchase at a discount, or at no cost on the grant date (i.e. own shares at grant). An RSU is a promise to give employees shares at a future date at no cost (i.e. not own shares at grant).

Why do companies give restricted stock?

RSUs provide an incentive for employees to stay with a company for the long term and help it perform well so that their shares increase in value.

What is the difference between options and RSUs?

Why are RSU taxed so high?

Taxes are usually withheld on income from RSUs.
Since RSUs amount to a form of compensation, they become part of your taxable income, and because RSU income is considered supplemental income, the withholding rate can vary from 22% to 37%.

When should a company switch from options to RSUs?

According to our experts, the ideal time to start transitioning from options to RSUs is around 6-12 months out from a liquidity event. Having that certain timeline is critical because again, RSUs are heavily impacted by the timing of your exit.

Why do startups give options instead of stock?

Stock Options vs. Common Stock
They do this because it helps align interests and puts the business as a whole in the best possible position to succeed. Companies commonly issue stock options to their employees instead of common stock.

When should you exercise stock options?

If you have liquidity, exercising incentive stock options in January or December can be a good strategy. By exercising in January, you can assess your entire tax situation at the end of the year and decide whether to sell the stock before 12/31 to likely avoid the AMT.

Do I pay taxes when I exercise stock options?

You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don’t meet special holding period requirements, you’ll have to treat income from the sale as ordinary income.

Is it better to sell or exercise an option?

Occasionally a stock pays a big dividend and exercising a call option to capture the dividend may be worthwhile. Or, if you own an option that is deep in the money, you may not be able to sell it at fair value. If bids are too low, however, it may be preferable to exercise the option to buy or sell the stock.

How long should you hold stock options?

Assuming you stay employed at the company, you can exercise your options at any point in time upon vesting until the expiry date — typically, this will span up to 10 years.

Can employee stock options be sold?

Typically, ESOs are issued by the company and cannot be sold, unlike standard listed or exchange-traded options. When a stock’s price rises above the call option exercise price, call options are exercised and the holder obtains the company’s stock at a discount.

What do you do with stock options when leaving a company?

You can exercise them before or after leaving your employer in most cases. You just have to follow the rules of your plan. If you decide to exercise the stock options, make sure you understand how they work. If you do this before you turn in your notice to leave the company, you keep your potential choices open.

How do you exercise employee stock options?

Exercise your stock options to buy shares of your company stock, then sell just enough of the company shares (at the same time) to cover the stock option cost, taxes, and brokerage commissions and fees. The proceeds you receive from an exercise-and-sell-to-cover transaction will be shares of stock.

Are employee stock options worth it?

How much your stock options are worth hinges on how much you bought them for at the discounted rate, and how much you sold them for. If a company is growing and the stocks are rising in value, then your stock options will be worth more than you paid for them.

What happens if you don’t exercise stock options?

If you don’t exercise an out-of-the-money stock option before expiration, it has no value. If it’s an in-the-money stock option, it’s automatically exercised at expiration.