By contrast, restricted stock has value at vesting even if the stock price has not moved since grant or even if it has dropped. Depending on your attitude toward risk and your experience with swings in your company's stock price, the certainty of your restricted stock's value can be appealing.
Stock Options vs RSU (Restricted Stock Units)
By contrast, stock options have great upside potential but can be "underwater" i. This is why restricted stock is often granted to a newly hired executive. It may be awarded as a hiring bonus or to make up for compensation and benefits, including in-the-money options and nonqualified retirement benefits, forfeited by leaving a prior employer. You also may find it easier to appreciate a restricted stock grant because its monetary value in your pocket i. A stock option grant involves more shares than a comparable restricted stock grant an FAQ on this website discusses typical share ratios of restricted stock grants to comparable option grants.
However, stock options may never be worth anything: in the worst case, they may be underwater after vesting and for the remainder of the option term.
With RSUs, when do I get the shares?
Of course, the very essence of restricted stock is that you must remain employed until it vests to receive its value. While you may have between 30 and 90 days to exercise stock options after voluntary termination, unvested grants of restricted stock are often forfeited immediately. Thus, it is an extremely effective golden handcuff to keep you at your company. Unlike a stock option, which requires you to decide when to exercise and what exercise method to use, restricted stock involves fewer and simpler decisions.
When you receive the shares at vesting—which can be based simply on the passage of time or the achievement of performance goals —you may have a choice of tax-withholding methods e. Restricted stock is considered "supplemental" wages, following the same tax rules and W-2 reporting that apply to grants of nonqualified stock options. The most meaningful decision with restricted stock grants is whether to make a Section 83 b election to be taxed on the value of the shares i.
Whether to make this election, named after the section of the Internal Revenue Code that authorizes it, is up to you. If a valid 83 b election is made within 30 days from the date of grant, you will recognize as of that date ordinary income based on the value of the stock at grant instead of recognizing income at vesting.
As a result, any appreciation in the stock price above the grant date value is taxed at capital gains rates when you sell the stock after vesting. While this can appear to provide an advantage, you face significant disadvantages should the stock never vest and you forfeit it because of job loss or other reasons see a related article on the risks of the 83 b election. You cannot recover the taxes you paid on the forfeited stock.
For this reason, and the earlier payment date of required taxes on the grant date value, you usually do better by not making the election. However, this election does provide one of the few opportunities for compensation to be taxed at capital gains rates. In addition, if you work for a startup pre-IPO company, it can be very attractive for stock received as compensation when the stock has a very small current value and is subject to a substantial risk of forfeiture.
Here, the downside risk is relatively small. Unlike stock options, which rarely carry dividend equivalent rights, restricted stock typically entitles you to receive dividends when they are paid to shareholders. With RSUs, your company decides whether to pay dividend equivalents. Unlike actual dividends, the dividends on restricted stock are reported on your W-2 as wages unless you made a Section 83 b election at grant and are not eligible for the lower tax rate on qualified dividends until after vesting.
A related FAQ gives details on the tax treatment of dividends. If you receive restricted stock in place of some or all of the stock options that were granted in prior years, you should adjust your financial and tax planning. While both awards provide an exposure to the value of company stock, they do so in different amounts and in different ways.
Stock Option vs RSU | Top 7 Differences to Learn With Infographics
Moreover, because options give you greater leverage, they carry more risk too. Executives, especially those who are close to retirement, may need to change their stock option exercise strategy for outstanding awards. For details, see another article. In most cases, death either fully accelerates vesting or triggers pro rata acceleration, depending on length of service through the date of death. In some cases, your company has the discretion to vest all or just a portion of the award. Many plans or grant agreements allow you to designate a beneficiary who would be entitled to receive the shares upon your death.
Selected Articles
Otherwise, the shares would pass through the decedent's estate. By contrast, RSUs happen they vest and you now own shares and owe taxes on their value according to a company-dictated schedule. This strategy is not without risk! Holding on to a stock simply to achieve a lower tax rate can be a Very Bad Decision.
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- Vesting RSUs and RSAs.
An RSU is always worth something , unless the company goes bankrupt. An option is worth something only if the market price of the stock is above the strike price of your option. And I love this feature of Restricted Stock Units.
Making decisions is draining. Why do you think I have a uniform of Gap jeans and extra-long t-shirts short- or long- sleeved from Eddie Bauer? Exercising an option typically requires putting money you already possess on the table and risking losing it. If your company is private, then this might be even more important, as putting your own money into private-company stock is even riskier than buying public-company stock. Do decisions stress you out? If so, lean towards RSUs as there are fewer choices there.
- Managing Stock Options and RSU's.
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- How Do Stock Options and RSUs Differ?.
If you prefer certainty over possibly gaining more if the stock price increases, lean towards RSUs. When do the options or RSUs vest?
How to Make Startup Stock Options a Better Deal for Employees
The sooner the options or RSUs vest, the better for you because it reduces the risk of losing the options or RSUs and it can open up some tax strategies. Would the RSUs vest faster than the options, or vice versa? Is your company private or public? So an ISO vs. RSU question. The lower the strike price, the better.
The less money you have to put on the line to own company stock. Be sure to keep some healthy perspective when making this choice: The options vs. RSUs choice will likely be dwarfed by the impact of any company stock on your investment portfolio and your financial situation in general. Please please please remain aware of how much company stock you own, how much of your portfolio is made up of company stock.
R each out to me at meg flowfp. Disclaimer: This article is provided for general information and illustration purposes only.