What is the difference between stock options and RSUs? This ultimate guide to stock options vs RSU covers everything you need to know to become a savvy investor. Over the past few years, many Silicon Valley tech companies have used corporate inventory incentives such as limited inventory units and stock options.

 

 

Both stock options and RSUs can make your trading strategy more dynamic. Many Silicon Valley startups use these equity rewards programs as cost-effective employee benefits plans so they can have loyal employees.

In the world of finance, many tech experts believe that Facebook has increased the popularity of RSU stock options. In 2007, Microsoft decided to invest $200 million in Facebook at a valuation of $4 billion. The extremely high ratings made it difficult for Facebook to attract new employees until it offered more attractive RSU contracts.

We most likely don’t know what a limited stock unit is, often through our trading community and experience. In this step-by-step RSU guide, you’ll need to decide which decision to make by purchasing limited stock units.

In one of this Equity Options vs RSU Guide, we will cover RSU and the difference between RSU and Equity Options.

What is a restricted stock unit?

Simply put, a Restricted Stock Unit (RSU) is a subsidy of company stock once invested. At this point, you may be scratching your head over all this new tech terminology. Let’s go through this and related topics step by step.

Let your imagination run wild and follow the typical story of millennials for an interactive explanation of RSU stock options.

Let’s say Joe just got a job at a big company. It’s a large publicly traded tech company that Joe can be compensated for with some shares he can’t sell yet. These shares that Joe gets are called restricted stock units or RSUs.

Also learn how to swing trading options.

The date Joe receives these limited stock units is called the grant date. However, Joe cannot sell the RSU until certain conditions are met. This is due to the investment schedule set by the tech company before Joe sells the stock.

Tech companies have two options for how they structure their investment timelines.

  • Gradual Schedule – A type of vest that allows Joe to receive a small amount of vest over three to five years. For example, if Joe’s tech company uses a 5-year timeline, Joe will receive 20% of the stock each year.
  • Cliff Schedule – A type of vest that allows Joe to receive his full stake after a specified period of service. In cliff vesting, Joe usually gets his full share after working for a period of time. When Joe negotiates the full compensation package, we discuss how long he worked.

It’s a win-win situation for both employee Joe and the tech company employer. Meanwhile, tech companies can guarantee that Joe will stay with the company for a long time. This usually means increased productivity and consequently increased profits.

Joe, on the other hand, works for a tech company and can get a bigger paycheck if he gets motivated, invests once and sells. Joe must work for a tech company for a designated investment timeline in order to own the stock.

Vest’s need is to limit RSU stock options.

When owning a stock vest, Joe can either sell the stock or hold the stock if he believes the stock’s price is likely to go much higher.

As the name suggests, an RSU is a restricted form of stock or restricted stock certificate. In the financial world, RSUs are also referred to as letter stocks or restricted securities.

Example of how RSU works

Let’s say Joe gets 1,000 shares when the share price is $10 per share. Joe also agrees to a 4-year incremental investment period, which means he can invest 250 shares each year over the 4-year investment period.

At the end of the year, shares are priced at $11 per share. The 250 shares are now worth $2,750 (250 shares x $11).

Let’s assume that at the end of year 2, the stock price depreciates at $9.50 per share. The other 250 shares are worth $2,375 (250 shares x $9.50).

*Note: The difference between an RSU and a stock option is that even if the share price is lower than the price on the grant date, the share price still has value based on the current market price.

At the end of year three, the third slice for 250 shares was valued at $15 per share. The stock is now valued at $3,750 (250 shares x $15).

Currently, the last 250 stocks are trading at $20 in the final year of the investment period, when the stock price continues to rise. The stock is currently valued at $5000 (250 shares x $20).

The initial 1,000 shares of RSU resulted in a profit or net income of $13,875.

Let’s take a look at what is the difference between stock options and RSUs with the same example.

In lieu of receiving an RSU, you have access to stock options on up to 1,000 shares of your employer. At the end of year 4, considering everything like in the previous example, you’ll have $20,000 back (1,000 shares x $20).

 

 

What is the difference between an RSU and a stock option

The difference between an RSU and a stock option is that while an RSU limits downside, it also limits downside. Equity options, on the other hand, maximize upside, and become worthless if the stock price does not rise above the subsidy price during the IPO schedule.

Limited stock units can also be configured in such a way that you get all the benefits of stock options. In this sense, between RSUs and stock options, RSUs are more versatile than stock options.

The last major difference between RSUs and stock options is tax options. RSUs are taxed at the normal rate of income. However, stock options have a more complex taxation system. Learn how to avoid the tax pitfalls of RSUs here.

Limited stock units and options

The company can determine the limited stock units and options portion of the compensation plan. Equity options are another common form of equity compensation. A contract is an agreement that provides terms to purchase a specific number of shares at a set price. The hope is that the company’s value and stock will grow over time.

Now, if the stock price depreciates, you don’t lose anything because you don’t own the stock. You simply have the option to purchase them.

It’s like a free lunch!

If you evaluate the stock price, you have a rising advantage and profit potential. However, if the share price depreciates, nothing is lost.

You might also like this guide on the advantages of futures vs options.

Two types of stock options can be distinguished.

  • Incentive Stock Options or ISO.
  • Unqualified options.

You don’t need to go deeper into this subject. We just want to build a foundation that helps build wealth.

Advantages and disadvantages of limited inventory units

Since there is a lot of confusion about the advantages of RSU, let’s take a quick look at the advantages and disadvantages of RSU. The main benefits of limited stock units are:

  • Both employees and employers want the company to succeed.
  • Employees can receive additional compensation for their work.
  • The higher the stock price, the more money you make.

Limited stock units can have some drawbacks.

  • Restricted inventory unit tax is income tax.
  • You can make less money if the stock goes down.
  • You may lose your US Equity shares at the close.

Conclusion – RSU Options – RSU

As an investor, you have to ask yourself if you are not employed by a particular company. Would you go to the open market and buy those stocks yourself? When you work for a company, you can often become emotionally attached to it, which can distort your view of the stock’s value.

The company you work for, especially if it’s a start-up, can see the stock price rise considerably. If the company you work for ends up becoming a tech giant and selling stock in the process, you could be making millions of dollars in profits.

For more information on options trading, read this training on how to trade stock options for beginners.