Your offer letter mentions RSUs. Your friend at another company got stock options. You nod along in conversations about equity comp, but if someone asked you to explain the actual difference, would you be able to? You’re not alone, these two get lumped together constantly, but they work in fundamentally different ways.
The Core Difference
An RSU (restricted stock unit) is a promise of actual shares. Once it vests, you own stock, no action required, no money paid. A stock option is a right to buy shares at a fixed price (called the strike price or exercise price) at a later date. You have to actively exercise it, and pay for it, to actually own anything.
That single distinction, “you get shares” versus “you get the right to buy shares”, explains almost every other difference between the two.
🔑 KEY CONCEPT
RSUs have value the moment they vest, since you already own the stock. Stock options only have value if the company’s stock price rises above your strike price, and you still have to pay to exercise them.
How Taxation Differs
RSUs are taxed as ordinary income the moment they vest, based on the stock’s fair market value that day. Your employer withholds taxes automatically, similar to a bonus.
Stock options are taxed differently depending on the type. Non-qualified stock options (NSOs) create ordinary income when you exercise them, based on the difference between the strike price and the current market price. Incentive stock options (ISOs) can qualify for more favorable capital gains treatment, but only if you meet specific holding period requirements: you must hold the shares for at least two years from the grant date and one year from the exercise date, both conditions must be met. ISOs can also trigger the alternative minimum tax (AMT), a separate tax calculation worth understanding before you exercise.
⚠️ WATCH OUT FOR
With options, you can owe taxes on paper gains you haven’t actually realized in cash yet, especially with ISOs and the AMT. This catches people off guard far more often with options than with RSUs.
Risk and Value Look Different Too
RSUs hold value as long as the company’s stock price is above $0. Even if the stock drops significantly, your shares are still worth something.
Stock options only have value if the stock price rises above your strike price. If the company’s stock is trading below your strike price (“underwater”), your options are currently worthless, though they could regain value if the price recovers before they expire.
This is why RSUs are often described as lower risk, and options as higher risk with higher potential upside. Neither is inherently better, it depends on your risk tolerance, your belief in the company’s growth, and your overall financial picture.
Who Typically Gets Which
Larger, established public companies (think most large tech companies) tend to grant RSUs, since their stock is already valuable and relatively stable. Earlier-stage or private companies, especially startups, tend to grant stock options, since the stock has more room to grow (and more risk of going to $0).
At a private company, exercising options locks up real cash with no guarantee of when, or whether, you’ll be able to sell those shares. That liquidity risk is worth factoring into any offer comparison, not just the potential upside.
If you’re comparing offers between a large public company and an early-stage startup, you’re likely comparing RSUs to options, which makes a true apples-to-apples comparison harder than it looks on paper.
Tax treatment and equity structures vary by company and by individual circumstances; the examples below are illustrative. Work with a tax advisor or financial planner to evaluate your specific offer.
A Few Examples
Example 1: RSUs. You’re granted 400 RSUs, vesting over four years. When 100 shares vest at a $50 stock price, you receive $5,000 of taxable income, and you own 100 shares outright, no action needed on your part.
Example 2: NSOs. You’re granted options to buy 1,000 shares at a $10 strike price. The stock rises to $25, and you exercise 200 shares. You pay $2,000 to exercise (200 shares x $10), and the $3,000 difference (200 shares x $15 spread) is taxed as ordinary income.
Example 3: ISOs and the AMT. You’re granted ISOs with a $5 strike price, and the stock is now worth $30. If you exercise and hold rather than immediately selling, you may not owe regular income tax on the spread, but that same spread can trigger the AMT, a separate calculation that could still create a tax bill, even without selling a single share.
What Should You Do About It?
- Know which one you actually have. Check your offer letter or equity plan documents; don’t assume based on what a friend or colleague received.
- Understand your vesting or exercise timeline. RSUs vest on a schedule; options usually have both a vesting schedule and an exercise window after you leave the company.
- If you have options, know your strike price and current valuation. This tells you whether your options currently have real value.
- Ask about the AMT if you have ISOs. This is a common surprise, and worth reviewing with a tax advisor before you exercise, not after.
- If you’re considering leaving your job, check your exercise window first. Most plans give 90 days after your last day to exercise vested options. For ISOs, exercising after that window converts them to NSOs, eliminating the favorable tax treatment entirely.
- Don’t compare offers using share count alone. 1,000 options and 1,000 RSUs are not remotely equivalent in value or risk; compare the actual expected value instead.
💡 VALORIA PERSPECTIVE
I regularly meet women who assume their options work exactly like RSUs, until an exercise decision or a tax bill proves otherwise. Knowing which one you hold, and how it actually behaves, changes how you plan around it entirely.
Common Questions
What does “strike price” mean?
It’s the fixed price at which you can purchase shares through a stock option, regardless of the current market price.
Can stock options expire worthless?
Yes. If the stock price never rises above your strike price before the options expire (often 10 years from grant, or a shorter window after leaving the company), they expire with no value.
Do RSUs ever expire?
Once RSUs vest, you own the shares outright, they don’t expire the way options can. Unvested RSUs, however, are typically forfeited if you leave the company before they vest.
What is the AMT and why does it matter for ISOs?
The alternative minimum tax is a parallel tax calculation that can create a tax liability from exercising ISOs, even if you haven’t sold the shares or realized cash from them.
What happens to my options if I leave my job?
Most plans give you a limited window, commonly 90 days, to exercise any vested options after you leave. Miss that window and unexercised options are typically forfeited. For ISOs, exercising after 90 days also converts them to NSOs, losing the more favorable tax treatment.
Which one is better, RSUs or stock options?
Neither is universally better. RSUs offer more predictable value with lower risk; options offer more upside potential with more risk, including the possibility of no value at all.
If I have both RSUs and options from the same employer, how do I plan around both?
Each requires a different strategy, RSUs mainly around tax withholding and diversification, options around exercise timing and the AMT. A combined equity plan usually works better than treating them separately.
For a fuller breakdown of how equity compensation fits into your financial picture, visit my About page or explore the full Equity Compensation guide.
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