What Are RSUs?

Instead, the company simply commits to giving an employee stock in the company when a certain requirement is fulfilled. RSUs can be awarded for meeting performance requirements or for being at the firm for a set length of time. The company may dictate whether the employee gets actual stock or the cash equivalent. Or, it may be up to the employee to decide. There are pros and cons to both stock options and RSUs. Your choice will depend largely on your personal preferences, as well as a few outside factors.

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Taxes are an important factor to consider. Only income taxes apply to RSUs, meaning the capital gains tax is not a factor.

Vesting RSUs and RSAs

On the other hand, two types of stock options exist: non-qualified stock options NSOs and incentive stock options ISOs. For NSOs, you are taxed on the difference between the market price and the grant price. This is called the spread, and it is taxed as regular income. This means it is subject to income tax and payroll taxes, like Social Security and Medicare. The other factor to consider is how you think the company will be doing in the future. 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.

For this reason, companies tend to offer fewer RSUs than traditional stock options.

The Great Benefits Of Restricted Stock And Restricted Stock Units (RSUs)

If you have to choose, think about whether you want to risk the share prices getting high enough to make taking the risk on stock options worthwhile or if you prefer the relative safety of RSUs. Stock options are when a company gives an employee the ability to purchase stock at a predetermined price at a given time.

This may occur on a vesting schedule, where a number of shares become available each year over a series of years. Conversely, RSUs are grants of stock that a company gives to an employee without any purchase.

As we explained in the aforementioned blog post, holding on to your RSUs is equivalent to making the decision to buy more of your company stock at the current price. In contrast, options are not taxed until they are exercised.

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If you exercise your options before the value of the options has increased and file an 83 b election see Always File Your 83 b then you will not owe any taxes until they are sold. If you exercise your options after they increase in value, but before you are liquid, then you are likely to owe an Alternative Minimum Tax. We highly recommend you consult with a tax advisor before making this decision.

Restricted Stock Units (RSUs): What You Need to Know

Most people do not exercise their options until their employer has gone public. At that point it is possible to exercise and sell at least enough shares to cover the ordinary income tax owed on the appreciation of the options. The good news is, unlike RSUs, you can defer the exercise of your options to a point in time when your tax rate is relatively low. For example you might wait until you buy a house and are able to deduct most of your mortgage payment and real estate taxes. Or you might wait until you benefit from tax losses harvested by an investment management service like Wealthfront.

RSUs and stock options were designed for very different purposes. We strongly believe that with a better understanding of how their use has evolved you will be able to make better decisions on what constitutes a fair offer and when to sell. We are also very aware of how complex and specific your own decision-making can be so please feel free to follow up with questions in our comment section —they are likely to prove helpful to others as well.

Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This blog is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Graphs and other images are provided for illustrative purposes only. Our financial planning services were designed to aid our clients in preparing for their financial futures and allows them to personalize their assumptions for their portfolios.

While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront cannot ensure the accuracy or completeness of data provided by clients or third parties. Investment advisory services are only provided to investors who become Wealthfront clients. For more information please visit www.

He serves as a member of the board of trustees and chairman of the endowment investment committee for University of Pennsylvania and as a member of the faculty at Stanford Graduate School of Business, where he teaches courses on technology entrepreneurship.

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Prior to Wealthfront, Andy co-founded and was general partner of Benchmark Capital, where he was responsible for investing in a number of successful companies including Equinix, Juniper Networks, and Opsware. View all posts by Andy Rachleff. History of the Stock Option in Silicon Valley More than 40 years ago a very intelligent attorney in Silicon Valley designed a capital structure for startups that helped facilitate the high-tech boom. Facebook changed everything In Facebook decided to engage a corporate partner to accelerate its advertising sales while it built its own sales team.

What are RSUs? RSUs and stock options have very different tax treatment The final major difference between RSUs and stock options is the way they are taxed. We are here to help RSUs and stock options were designed for very different purposes. Learn more about our products. Subscribe to our blog. Please fill out this field. You've successfully subscribed to our blog. Disclosure Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Related tags career advice , career planning , employee compensation , RSUs , selling plan , stock options.