The Key Differences Between Stock Options And Restricted Stock Units: Attracting good talent and keeping good employees can be challenging for companies with all the competition out there.
Hence, as a company employee, your organization may reward you with employee stock options, also known as stock options, or restricted stock units (RSUs) in addition to your regular salary as an incentive to remain part of their team. However, they differ in their advantages, which will be looked at next.
What are Employee Stock Options?
Employee stock options, also sometimes simply called stock options, are not the same as stock options calls and puts.
Instead, they are stock options offered to outstanding employees as appreciation, which they can then use later to make a profit according to the set conditions.
The stock options are priced lower than the actual cost of the stock at the time, so it can be considered a benefit.
As part of the terms, employees may only be eligible to purchase stock options after being with the company for a certain period of, usually, 1-year. This way, they are rewarded for their commitment.
They may also include an expiration date that prohibits employees from continued eligibility for stock options.
What Are Restricted Stock Units?
Restricted stock units are also offered to high-performing employees within the company. However, all the shares are not offered together. Instead, the RSUs are paid according to a preset schedule that determines when employees can take advantage of them.
There is also no stock or transaction pricing involved like stock options. The organization simply obliges to reward an employee with company stock upon meeting certain requirements.
And then, once the requirements are met, the employee will be given actual shares in the company, or they may be given the cash equivalent based on the current stock value, which may be decided by the employee or the company.
When it comes to stock options and RSUs, the main difference is stock options give employees the right to buy company stock at a set date and price, while RSUs grant company stock to employees after they have met the predetermined performance goals or tenure as a company employee.
Each is also taxed differently. With RSUs, only income is taxed and not the capital gains. But with non-qualified stock options, employees are taxed on the grant price and the market price as part of regular income. However, there are also incentive stock options, which are not taxed on the spread but as a preference item for the alternative minimum tax calculation.
In the end, both incentives have their pros and cons, which may make one a better option for you. Therefore, according to SoFi Invest, “when it comes to stock options vs RSU, understanding the differences between them in terms of terms, pricing, and tax implications, can help you make an informed decision if and when you are offered one or both of these workplace perks.”
But either way, having the option to own your company’s stock, especially if you believe in its future, can provide you with lucrative financial returns.