RSU vs Stock Options: Key Differences for Startup Equity Compensation
If you’re offered equity compensation, chances are it’s in the form of either restricted stock units (RSUs) or stock options.
Both are great for building out your portfolio and growing your wealth. But they do differ in a few key ways, and it’s important to understand these nuances as you evaluate compensation packages.
Here, we’ll explore how RSUs and stock options work, how they’re taxed, and the level of risk involved so you can decide which equity option works best for you.
What Is the Difference Between Restricted Stock and Stock Options?
RSUs and stock options deliver values in fundamentally different ways:
RSUs grant actual shares of company stock once certain conditions are met.
Stock options give you the right to buy shares at a set price.
These core differences impact how each one vests, how much risk you take on, and what you'll owe in taxes.
Ownership and How Value Is Delivered
If you’re granted RSUs, you’ll be automatically granted ownership of your shares as they vest. That typically occurs over the course of a few years. Here, the value comes from gaining ownership stake in the company, and since no purchase is required, whatever the stock is worth on vesting day is yours to keep.
Stock options give you the right, but not the obligation, to buy shares at a predetermined price (known as the strike price). If the stock's market price rises above that, you can choose to exercise your options and pay less than their current market value.
Exercise and Vesting
Both RSUs and stock options typically vest over a set period of three to four years, with a one-year cliff (meaning you don't receive any equity until you've been with the company for at least a year). What happens after vesting is where they diverge:
RSUs are settled by the company delivering actual shares to you once vesting conditions are met (without you needing to buy them), though you may still need to make decisions about how taxes are withheld. For example, you may need to decide whether your employer sells a portion of shares to cover the tax bill, or whether you pay out of pocket.
Stock options must be exercised, meaning you’ll have to decide whether to buy the shares. They also come with an expiration date, typically 10 years from your grant date. If you leave the company, vested options typically must be exercised within 90 days of your departure date, or they expire.
Risk and Upside Potential
When deciding between RSUs vs. stock options, it’s wise to consider the risks and upside potential of each. Generally speaking, RSUs tend to be less risky: you’re receiving the shares outright, so there’s no price threshold you need to clear to see a return.
Stock options have a higher risk-reward profile. If the stock price climbs well above your strike price, you can make substantial returns. But if the stock stays flat or drops below your strike price, your options can expire worthless.
Taxes
Tax treatment is one of the most important differences between stock options and RSUs, and it’s worth understanding as you assess compensation packages.
RSUs are taxed as ordinary income at vesting based on your shares' fair market value. Stock options are more nuanced: NSOs (Non-Qualified Stock Options) are taxed as ordinary income at exercise, while ISOs (Incentive Stock Options) sidestep regular income tax at exercise but may trigger the alternative minimum tax (AMT). Any gains beyond that are subject to capital gains tax when you sell.
How Do Stock Options Work?
Stock options give you the right to purchase company shares at a predetermined price (strike price) after vesting. If and when the company’s share price exceeds the strike price, exercising your options can mean walking away with a significant return. Here's a closer look at what makes stock options attractive, and where they can fall short.
Benefits and Drawbacks of Stock Options
When conditions are favorable, stock options offer some distinct advantages over other forms of equity compensation. Here’s why you might opt for an equity comp package with stock options:
High upside potential: A high-growth company may see its stock price skyrocket well above your strike price, in which case stock options can deliver outsized returns.
You control the timing: You have some flexibility over when you exercise, giving you more control over your situation. This can be helpful for tax strategy planning.
Early exercise opportunity: Some companies allow for early exercise, which can start the clock on long-term capital gains treatment and reduce your tax burden.
That said, stock options aren't without their downsides. Here's where they can fall short:
They can expire worthless: If your company’s stock never exceeds the strike price, your options have no value. This makes it especially important to critically evaluate a company's growth potential before accepting an offer.
Exercising costs money: Unlike with RSUs, you’ll have to pay for your shares, so you’ll want to make sure you have the cash on hand and that you're confident the investment is worth making.
Tax complexity: ISOs, NSOs, and AMT exposure mean stock options require more planning than RSUs. For this reason, it’s worth consulting a financial advisor who understands the complexities of equity compensation.
How Stock Options Are Taxed
Incentive stock options (ISOs) and non-qualified stock options (NSOs) are taxed differently:
NSOs: The spread between your strike price and the market price is taxed as ordinary income at exercise. Any gains thereafter are subject to capital gains tax when you sell.
ISOs: You won't owe regular income tax at exercise, but the spread may trigger the AMT. If you meet the required holding periods (at least two years from the grant date and one year from the exercise date), gains are taxed at the long-term capital gains rate when you sell.
Given the complexity, it's worth working with an equity tax planning professional to help you decide when to exercise.
How do RSUs Work?
With RSUs, you automatically receive a tranche of shares as the RSUs vest, typically over the course of 3 or 4 years. Unlike stock options, you don’t need to purchase RSUs.
Benefits and Drawbacks of RSUs
RSUs are relatively straightforward. Here’s why they may be preferable:
Guaranteed value: As long as the stock price is above zero, your RSUs are worth something at vesting. There's no price threshold to clear or purchase required.
Simplicity: RSUs vest and convert to shares automatically, with no decisions required on your end.
Predictable income: Because RSU value is tied directly to the stock price at vesting, they're easier to plan around than stock options.
However, there are a few drawbacks to keep in mind with RSUs:
Later-stage grant timing: RSUs are usually introduced closer to an IPO or during later funding rounds after a significant portion of the company's early, explosive growth has already been captured. Therefore, they naturally have less remaining upside potential compared to options granted in the earliest days.
Less control over timing: Unlike with stock options, you don’t get to choose when a tax event is triggered.
Concentration risk: If a large portion of your compensation is in RSUs, you may end up overconcentrated. Be sure to talk to your financial planner about how and when to diversify.
How RSUs Are Taxed
RSUs are taxed as ordinary income at vesting, based on the fair market value of your shares on that date.
Your employer typically withholds taxes automatically. When you sell, any gains above that vesting-day value are subject to capital gains tax, short- or long-term, depending on your holding period.
For a deeper look at how to manage your RSU tax liability, visit our RSU tax planning guide.
RSU vs. Stock Option: Which Is Better?
When determining whether RSUs or stock options are “better,” there’s no easy answer.
RSUs are the safer, more predictable choice. They’re ideal if you value stability and a guaranteed return at vesting. Stock options offer more upside, but come with more risk and complexity.
As you evaluate restricted share units vs. stock options, you’ll want to factor in your risk tolerance, financial goals, and tax situation. A financial advisor can help you think through your specific circumstances and build a suitable strategy.
Optimize RSU and Stock Option Strategies With Citrine Capital
When making decisions around equity compensation, it’s worth working with an advisor who understands the complexities of this area of financial planning. At Citrine Capital, we help Bay Area professionals build resilient, tax-efficient portfolios that reflect their goals, timeline, and risk tolerance. Request a meeting today to get started.
Stock Options vs. RSU FAQs
Questions about employee stock options vs. RSUs? Read on for more info.
Are RSUs better than stock options?
RSUs are simpler and less risky than stock options, though they may not offer the same upside potential. Stock options have higher upside potential but come with more complexity and risk, making them more attractive at early-stage companies with strong growth prospects. The right choice depends on your risk tolerance, financial goals, and the company.
How are RSUs and stock options taxed?
RSUs are taxed as ordinary income at vesting. Stock options depend on the type: NSOs are taxed at exercise, while ISOs may trigger AMT but offer more favorable long-term treatment.
About The Author
Kiersten Peshek, CFP® is a Lead Wealth Advisor at Citrine Capital, a San Francisco-based wealth management and tax preparation firm serving tech professionals, founders, and business owners. They specialize in equity compensation, LGBTQ+ financial planning, and FIRE (Financial Independence, Retire Early) strategies.
As a career changer, Kiersten brings a unique blend of analytical insight and empathy to client relationships. Since joining the financial planning profession in 2020, they’ve been passionate about helping clients align their finances with their values to create more fulfilling, purpose-driven lives.