RSU vs Option Stock – Whats the difference?
There are various benefits associated with the employee share schemes, for example;
- The opportunity to buy shares of the company at a discount price
- The opportunity to buy shares in the future (right or option to buy)
Stock option is a company’s stock offered to the employees to buy in future at a price agreed now. In most cases, the value of these stocks tends to increase by large amounts thus, making stock options worth a lot by most of the employees. Upon purchasing stock options, one becomes a shareholder of a company immediately.
In some cases, a company can come to an agreement with its employees to give the value of certain number of stocks in future (known as Restricted Stock Units) without necessarily receiving any money from them.
Under such arrangements, there are usually a number of conditions taken up by both parties. One such condition is vesting. This must occur before an RSU holder receives the promised share value. RSU settlements occur either in stock or money equivalent to the stock value. In an event that the recipient of the RSU receives the promised stock then they immediately become shareholders.
Differences between RSUs and Stock options are as follows:
Vesting: Completely vested after a promised period for RSU and stock option.
Term: Options are only valid for 10 years after the grant date. Upon vesting, RSUs become actual shares and an individual can chose to either sell or hold them.
Taxation: At the time of the exercise, regardless of whether an individual or a company sells or holds shares, stock options are taxed as income. In addition, gain made in an event one chooses to sell their shares is also taxed whereas, RSU is taxed when vested.
Value over Time: If the stock price rises above grant price then an options value increases. If it does not rise (stock price) or remains within its initial value, then options will not have any value. RSUs on the other hand, have value regardless of whether the stock price rises or not.
So which one is best? Well, it all comes down to the company where an employee works as well as its financial performance. In addition to these two, the amount of risk an employee is willing to take also plays a major role in selecting the best choice. If you, as an employee, prefer safe investments then RSUs present a nice investment choice and if you are an employee who does not mind the risk associated with investment then you can go with stock options.
Other than employees, the company you chose to place your investment is also important. For example, if the company is large and mature, then you can go with RSUs because in most cases these companies do not tend to have huge surges. If a company is relatively new and showing high signs of growth then stock options are a nice option as they are bound to increase in future.