RSUs vs Stock Options - Everything You Need to Know
While salary comprises one of the most important forms of compensation when you join a company, there are other benefits that you are likely to get, such as paid vacation days and some form of equity. Equity or stock compensation comes in two forms — restricted stock units (RSUs) and stock options. While both may appear the same, they differ in several aspects.
What are RSUs?
RSUs are a form of equity compensation firms provide to employees in the form of company shares. They are restricted as they have a vesting schedule. It means you must stay with the company for a certain period to get your hands on them.
Let us understand RSUs with an example. Suppose, your company says it will give you 1000 RSUs and they have a four-year vesting schedule with a one-year cliff, which means you will receive a portion of them after the first year.
Assuming 25% of the RSUs vest after the first year, you will receive 250 RSUs. After another one year, you will receive another 250 RSUs and subsequently at the end of four years, you will get all the 1000 RSUs.
What are stock options?
Stock options give you the right to buy a certain number of shares of the company at a specific price. This is called the strike price or the exercise price. Like RSUs, stock options also have a vesting period, which means you must stay with the company for a certain number of years before exercising your right.
Let’s understand stock options with an example. Suppose your company offers you 1000 stock options at a strike price of ₹50 per share. Once vested, you can buy them at ₹50 each, even if the market price is higher. If your company does well and the price shoots up to ₹100 per share, you can still buy them at ₹50.
Stock options vs Restricted stock units: The differences
The table captures key differences between RSUs and stock options on various parameters:
| Parameter | RSUs | Stock options |
|---|---|---|
Risk involved | Lower risk as you get value even if stock prices fall slightly | Carries higher risk if the price falls below the strike price. However, if it goes above the strike price, you can make profits. |
Ownership | You become an owner only after the vesting period | You become an owner only after you exercise your right to buy the shares at the end of the vesting period. |
Initial cost | You don’t incur any cost when vested | You need to pay the strike price to buy the shares |
Suitable for | Employees preferring lower risk | Employees with a high-risk tolerance |
RSU or Stock Option: Your Pick
There is no definite answer about whether you should opt for RSUs or stock options. It depends mainly on your risk tolerance, financial situation and the company's future outlook. RSUs may be more suitable for you if you prefer certainty and want some guaranteed value. On the other hand, stock options are ideal if you have a high-risk tolerance and believe the company's stock price will appreciate in the future.
Wrapping it Up
Whether offered RSUs or stock options, both are a valuable addition to your compensation package. While the former offers more certainty and is easy to understand, the latter can offer more gains if the price of your company's stock appreciates. Irrespective of whatever you receive, value it as a part of your broad financial strategy.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
