Restricted Stock Units (RSUs) are shares of company stock promised to employees upon completion of certain performance or tenure metrics. They are simply another form of compensation awarded by employers to incentivize the employee’s loyalty and efforts towards growing the company.
In practice, RSUs are awarded almost exactly like employer stock options. Either at the onset of employment or on a recurring basis, the employer issues grants of RSUs to employees. Each of these grants then has a specific set of metrics that must be completed before these shares are vested (in other words, ownership is released to the employee). Shares may vest upon reaching a company growth metric or, more frequently, over a stated period of time (the vesting period) – sometimes in lump-sum and others in incremental transfers over the vesting schedule.
Just as non-qualified stock options are only taxable upon exercise (receipt of the shares), RSUs are taxable to the employee only once they vest (when the shares are “received” by the employee).
How Do They Differ
The biggest difference between employer stock options and restricted stock units is the way in which they are valued. While stock options have an assigned strike price (or minimum price at which they have value), RSUs effectively have a strike price of zero. Meaning, no matter the change in value of company stock over the vesting period (and barring bankruptcy), your RSU grant will at least have some value.
It is also essential to mention that RSUs are rarely designed to expire, whereas stock options are required to have an expiration date.
So Which Would I Rather Receive – Stock Options or RSUs?
Both forms of compensation have the potential to be highly lucrative and employees rarely have the option to choose between the two – in fact, they are often offered in tandem. But, for the purpose of our discussion, let’s say you must choose.
There is no one-size-fits-all answer, so I will simply lay out the factors you should consider in making such a decision. If faced with this dilemma, I would strongly encourage you to consult your financial advisor to assess your unique risks and select the best course of action.
Factors For Consideration
- Stock Options are far more volatile due to the leveraged nature of their valuation. There is greater potential for exponential return but also for total loss.
- Due to the strike price associated with a stock option, the value of one RSU share is greater than the value of one option share. However, employers typically offer more stock option shares than RSU shares to offset this difference.
Example:
XYZ Corp Stock is currently
$50 1 RSU Share = $50 Value
1 Stock Option Share (with/ $20 Strike Price) = $30 Value - What are your existing stock holdings in your employer? If you are RSU heavy, you may have a bit more appetite for risk and would choose stock options. If you are stock option heavy, it may be wise to dial back your risk level and select RSUs.
- Unvested RSUs are almost always forfeited upon departure from the employer, while stock options are more often granted continued vesting upon separation.
As with any company, or quite frankly, the stock market in its entirety, it is impossible to predict how your company’s stock will perform. You will not know the correct choice until you’re looking back at the results months or years later.
The best advice is to educate yourself on what is being offered to you, assess the risks, not only related to your employers’ stock but across your entire investment portfolio, and make a decision. If your choice was made using the best information available to you, you have done all that you can. Put your head down, get back to work, and hope for the best. Perhaps you will be fortunate enough to be granted more next year!
