Employee stock options vs. restricted stock

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The company determines the term of the stock option in such a way that the CEO would be able to exercise his rights on the stock options after 3 years from his joining date. His purpose would be to increase the stock price as higher as he can do in the next 3 years.

Equity Compensation: When Startups Should Grant Restricted Stock, ISOs, NSOs, or RSUs

That is a huge profit. Often stock options are offered to employees who perform exceedingly well. And also, stock options are given at a discount rate less than the price of the stock at that time so that the stock option can be considered as a reward. On the other hand, the restricted stock unit is offered to keep exceptional employees in the organization.

But the way RSUs are constructed is different.

Stock Options & Restricted Stock

For example, Jay is a great employee, and his organization wants to keep him. To entice him to say the company decides that they would pay Jay RSUs but as per the vesting schedule of shares each year for the next 5 years. If Jay stays in the organization for the next 2 years, he would only get shares. When RSUs are offered, it also creates capital gain taxes and income taxes.

The employees who are offered RSUs need to pay the taxes. As you can understand by now, restricted stock unit and stock options are offered so that the companies can hold on to extra-ordinary employees. But both of these options are quite different, and the scope of each of them is diverse too.

This article has been a guide to Stock Options vs. Here we discuss the top difference between stock options and RSU restricted stock units along with infographics and comparative table. You may also have a look at the following articles —. Free Investment Banking Course.

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This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. The value of a stock option is the current price of the stock minus the option strike price. Restricted shares are shares of the company stock that vest, or become available, to an employee over time; they are restricted in the sense that an employee cannot sell them until the shares vest.

What Are RSUs?

Stock options provide the possibility of a big payoff if the stock price soars. Stock options granted to employees are termed statutory by the IRS, meaning they're granted special privileges under tax law. This means employees only owe taxes when they sell the stock received after the options are exercised. Receiving or exercising statutory options does not create a taxable event, only the subsequent stock sale triggers a liability.

If an employee owned the options for at least two years or held the shares for at least 12 months following the option exercise, the profit is subject to favorable long-term capital gains treatment.

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Shorter holding periods will result in ordinary income, taxed at the normal marginal rate. Stock options are risky — if the underlying stock never pierces the strike price, the options remain worthless. Restricted shares have, when vested, the same value as normal shares trading on the stock market.

Restricted stock is sometimes also called letter stock.

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Restricted shares cost employees nothing, and receiving them is not a taxable event. Employees are taxed as the shares vest. When a share is vested, the employee must note the share value on the vesting date and pay taxes on that amount as ordinary income. When the stock is sold, the employee pays either long- or short-term capital gains tax on any further appreciation as normal.

Within 30 days of receiving restricted shares, an employee can elect what's called Section 83b tax treatment.


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Under this scenario, employees pay ordinary taxes on the shares when they are granted , calculated using the share price on the grant date. There are two benefits: Employees do not owe any taxes when the shares vest, and employees receive long-term capital gains treatment when they eventually sell vested shares if held for at least 12 months following vesting.


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