With the recent tech boom, many companies have started offering Stock Options and Restricted Stock Units as part of the compensation packages of their employees. The goal of each is to attract, retain, and motivate employees by tying their financial success to the success of the organization. In this post, we’ll cover the difference between those instruments and some important concepts for each.
A stock option grant is an option to purchase a certain amount of shares of a company at a certain price, the strike price. These are typically granted before a company is public and have a few fairly standard terms such as the vesting period. Options from a grant vest on a defined period. A typical vesting period is 4 years with a 1 year cliff, and 1/48th vesting monthly for the remaining 3 years.
Restricted Stock Units.
RSUs are shares of common stock that are subject to vesting. These are typically granted once a company is public. The value of RSUs are received on a vesting schedule typically 4 years with a 1 year cliff and 1/48th vesting monthly for the remaining 3 years. The value received at the time of vest and exercise is the full market value of the share of common stock.
Similarities between Options and RSUs.
- Both have vesting periods that are typically 4 years with a 1 year cliff and evenly dispersed vesting for the remainder of the vesting period.
- Organizations outsource the management of these grants to financial services companies such as Fidelity.
- Both are subject to taxes, either short term or long term capital gains depending on the length of time share is held.
Differences between Options and RSUs.
- Option doesn’t have to be exercised at time of vesting, RSUs are exercised at the time of vest.
- Options are granted at a strike price, RSUs are granted at stock market price at time of vesting.
- At time of option exercise, grantee pays the strike price to purchase the the share. At time of RSU vest, grantee receives full market value of share.
- Options can be exercised before the organization is public, and held to be sold at a later date.
Example Vesting Schedule
1200 Stock options in ACME corp granted on 1/1/2018 with a strike price of $1 vesting over a 4 year period with a 1 year cliff:
|Period||Shares Vested in Period||Cumulative Shares Vested||Shares Yet to be Vested|