RSUs vs. Stock Options: How to Value What Your Employer Offers

Key takeaways

An RSU is a share delivered at vesting and taxed as wages on its full value; an option is the right to buy at a fixed price and is worth only the spread above it.
Options carry more upside and more risk; a common rule of thumb values an option at a quarter to a third of a share, but the ratio depends on volatility and stage.
RSUs dominate at public companies; options dominate at early startups, where the strike is low and the potential multiple is high.
The tax plan differs completely: RSUs need withholding and sale rules at vest; options need an exercise strategy and, for ISOs, an AMT calculation.

An offer letter that includes equity rarely explains what the equity is worth. It says 4,000 RSUs, or 40,000 options at a $2.50 strike, and leaves the arithmetic to the candidate. The two instruments aren't comparable share for share, and the difference decides both how much the offer is worth and how much risk it carries. So let's compare them properly, and then look at how each one gets handled once it's yours.

What each one is

A restricted stock unit is a promise to deliver a share of stock on a future date, usually on a vesting schedule (four years with a one-year cliff is common). When the unit vests, the share is delivered and its full market value is taxed as wages. An RSU is worth something as long as the stock is worth anything. At a $50 stock price, 4,000 RSUs are $200,000 of value delivered over the vesting period, before tax.

A stock option is the right to buy a share at a fixed strike price for a set period, typically ten years from grant. It vests on a schedule like an RSU, but vesting only gives you the right to exercise; you still have to pay the strike. The option is worth the difference between the stock price and the strike (the spread), and nothing if the stock is below the strike. At a $10 stock price, 40,000 options at a $2.50 strike are $300,000 of spread. At $2.50 they're worth nothing except the hope of a rise.

Valuing them side by side

RSUs are easy: number of units times the current price, discounted for the vesting risk (leave before vest and you forfeit the unvested units) and for the possibility that the price falls.

Options need an estimate of where the stock might go. Financial models (Black-Scholes and its variants) value an option based on the stock price, strike, time to expiration, and the stock's volatility. For an at-the-money option on a volatile stock with years to run, the model value is often 30% to 40% of the share price; for a deep-in-the-money option it approaches the spread; for an option well below the strike it's small. A rough rule used in negotiation is that one RSU is worth three to four at-the-money options, but the ratio is wider for stable companies and narrower for volatile ones.

For private companies, this gets harder. The stock price is the latest 409A valuation or the preferred price from the last funding round, neither of which is a price you can sell at, and the outcome depends on whether the company ever has a liquidity event. An option grant at a seed-stage startup could be worth nothing or many times the offer's cash salary. The honest valuation is a probability-weighted range, not a number, and anyone who gives you a number is guessing.

Risk and upside

RSUs are lower risk: they deliver value across a wide range of outcomes. Options are higher risk and higher potential reward: they deliver nothing across a range of outcomes and multiples of an RSU's value in the best ones. A company's choice of instrument tells you something about its stage. Public and late-stage companies grant RSUs because the stock has a known value and retention is straightforward. Early-stage companies grant options because the strike is low, the potential multiple is large, and RSUs at a company with no liquidity would create tax bills employees can't pay.

For an employee choosing between offers, the instrument is part of the risk profile of the job. An options-heavy offer at a startup is a bet on the company. An RSU offer at a public company is closer to salary paid in stock.

Taxes

Once the grant is yours, tax is the biggest practical difference.

RSUs are taxed as ordinary wages at vest on the full value, with withholding, usually through shares sold or withheld. The withholding is often 22%, below the bracket of most RSU recipients, which leaves a balance due. After vest, the shares are ordinary stock with basis equal to the vest-date value. The decision is whether to hold or sell; our RSU planning post argues for selling most of them promptly. There's no 83(b) election for RSUs.

Options are taxed at exercise, not vest, and the treatment depends on the type. Nonqualified options produce ordinary income on the spread at exercise. Incentive stock options produce no regular income at exercise but an AMT preference, and capital gains treatment if the shares are held for the qualifying periods. The NSO versus ISO post covers the difference, and the ISO and AMT post covers the calculation. The planning is about when to exercise, how many, and with what cash.

Negotiating

Candidates can often negotiate the size of the grant and sometimes the vesting schedule; the instrument itself is usually set by the company's plan. Questions worth asking: the current 409A or preferred price and the strike (for options), the total shares outstanding (so you can compute your percentage), the vesting schedule and cliff, what happens to unvested equity in an acquisition (single or double trigger acceleration), the post-termination exercise window for options (90 days is standard, and it's a real cost), and whether the company allows early exercise. For RSUs at private companies, ask whether they're double-trigger (vesting requires both time and a liquidity event), which delays the tax until there's stock to sell.

Once you have them

An RSU plan is a vest calendar, a withholding check, and a sale rule. An option plan is an exercise strategy over years, an AMT projection, and a cash plan for the strike. Both end at the same question: how much of one company's stock should the household hold? Our concentrated position post answers it. The instrument sets the path. The destination is a diversified portfolio either way.

Where we come in

For clients with equity, we value the grants under realistic scenarios, build the tax plan for each instrument, and set the sale or exercise rules into the equity compensation plan. For clients comparing offers, we run the two packages through the same scenarios so the equity gets compared on expected value and risk, not on the number of units.

Frequently asked questions

Which is better, RSUs or options?

For a given dollar value, RSUs are safer and options have more upside. Neither is better in the abstract. A candidate who believes strongly in the company and can afford the risk may prefer options; one who needs the value to be reliable should prefer RSUs.

Can I choose between them?

Some companies let employees elect a mix at grant. When offered, make the choice with the household's risk capacity and the company's stage in mind, not on the raw number of units.

Do options expire?

Yes, typically ten years from grant, and much sooner after leaving the company (often 90 days). Unexercised options at expiration are worthless. RSUs don't expire; they vest or they're forfeited.

What if the stock drops below my strike?

The options are "underwater" and worth nothing until the stock recovers. Companies sometimes reprice or exchange underwater options, but don't count on it. RSUs in the same decline are worth less, but not nothing.

Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph

This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.