Difference between rsus and stock options

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• Stock Options vs RSU - The Ultimate Guide.

Search for:. Toggle navigation. Stock Options vs RSUs.

This difference translates to potentially superior tax treatment for stock options The merits of Stock Options vs RSUs depends on whose perspective you have, the employee or the employer company issuing the equity , and the stage of the company. A stock option can be turned into a share that can be sold while the company is still private. This usually requires permission but it can be done whereas an RSU cannot be transferred at all. A stock option can be exercised at almost any time to qualify for reduced taxes via Long Term Capital Gains or no taxes through Qualified Small Business Stock.

Stock option grants often have an early exercise privilege where an 83 b election can be filed to lock in taxes at lower FMV. Even after the IPO, a stock option can be retained while still appreciating in value and deferring taxes. The exercise price and associated taxes act as a retention mechanism to discourage employees from leaving the company. Even when exercised early to obtain tax benefits, the effect of having skin in the game better aligns the interests of the employee and company.

Rapidly rising FMVs are bad for employee taxes. As such, it is fortunate that companies are motivated to slow down the growth of the a FMV while issuing options. If an employee exercises, the company actually gets cash. If the employee pays taxes on options, the company gets a tax deduction. Especially if they are concerned about having to leave and pay the high exercise price in order to retain the shares. Exercising can trigger a lot of tax. NSOs are always subject to immediate withholding tax upon exercising. Options typically expire within 90 days of leaving a company.

This guide is here to help make sure you get this important decision right, because it has deep ramifications for your company and employees. But RSUs often have a certain type of vesting condition, called triggers , which can be performance or time-based. Time-based triggers are like your standard vesting schedules. But performance-based triggers are tied to company milestones, like going public or undergoing a change in company ownership. This might seem too soon or too late for your company.

If you want to know when is the right time for your company to switch, download our free option and RSU grant calculator.

This calculator lets you look at a specific grant and compare how it may change the total payout for the employee based on if they were granted options or RSUs it does not account for taxes. If you want to dive deeper, here are some aspects to consider before making the decision to move from options to RSUs:.

Most public companies already have RSU programs, and their stock is already liquid to some degree, so employees are taxed upon vesting. Because most private companies have that RSU performance trigger sale or IPO of the company , the ability to have private market liquidity is difficult. While companies can remove the performance-trigger, they need to be ready to cover tax obligations of time-vested RSUs. Currently, there is no easy platform that enables companies to do this.

Thus, private liquidity with RSUs is a real challenge. If you plan to stay private for the majority of the lifetime of the awards you are issuing, think twice about switching.

Moving to RSUs too early can be costly and can trap companies, like what occurred with Airbnb. Since switching, Airbnb has likely not run any tender offers for employees that have RSUs. Employees have reportedly been unhappy with this and in addition, Airbnb is coming up against the IRS limit of how long an RSU can be in place before vesting. This makes it tough to get the transaction volume needed to price the initial offering. If you stick with options you will have more choices offering private liquidity and increasing transaction volume on the private side and better price discovery as a result.

While option expense is spread out over the life of the award, double trigger RSUs are expensed at vest. This means finance teams should plan for a potential large expense number following their listing. This type of expense is non-cash and is simply an accounting entry that impacts your reported GAAP numbers, which can make the company look less profitable or having lower net income. RSUs also require more employee equity education , as they are different from stock options.

RSUs add a new layer of complexity for finance, HR, and stock administration teams. At Carta, we hear about lots of companies who are considering switching to RSUs. While there is a point where it may make sense, more often than not, we see companies switch too soon. This is why you need to think critically about this moment and what it means for your business. Talk to your outside counsel about each of these items regardless of your company structure.

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Moving to RSUs is a huge decision for any company and it needs to be done carefully. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.

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Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.

This post contains links to articles or other information that may be contained on third-party websites. The inclusion of any hyperlink is not and does not imply any endorsement, approval, investigation, or verification by Carta, and Carta does not endorse or accept responsibility for the content, or the use, of such third-party websites. Carta assumes no liability for any inaccuracies, errors or omissions in or from any data or other information provided on such third-party websites. ASC expense accounting: Welcome to the future. Stock options vs. Why Equity Education is Essential.