Stock Option vs RSU

Difference Between Stock Option vs RSU

Stock option vs RSU is both well known in equity compensation. These two form a major portion of the net worth. So before finalizing one, one needs to do a thorough understanding of tax treatment and the effect on the financial statements. Here the stock options are not (call and put) but the employee stock option. Stock option vs RSU of these employee benefits options can make a profit at a later stage depending upon the type of stock options.

Head to Head Comparison Between Stock Option vs RSU (Infographics)

Below are the top 7 differences between Stock option vs RSU:

Key Differences Between Stock Option vs RSU

Some of the major key differences are mentioned below:

1. Stock options are simply stocks that are bought and sold by one entity to the other entity with no compulsion of the time to execute just before the expiration dates. When stock options are attached to the employee benefits plans that means the company has a contract to purchase a fixed amount of shares at a fixed time with a fixed stipulated price. This is like additional incentives for the employees so that the company can attract the best employees and increase productivity. This your of employee benefits serve a dual purpose as benefiting the employees as well as the company. Unlike in Stock options where the power to execute i.e buy and sell of stocks is given to the employees, in
2. RSU, the execution of the option is restricted. As the RSUs are issued in units that do not stock format having a value attached to a specified no of shares. That means after the vesting period the employer gets the equivalent shares. These limits which work as restrictions are attached to the vesting period. The vesting period is that period where the employees are not allowed to execute the options e.g If your plan states 30 percent vested after 3 years. It means after a service of 3 years an employee can execute 30 percent of the allocated stocks in the plan.
3. After the vesting period is over in stock options, the employees have an option to buy or sell the stocks. After the end of the vesting period, stock options behave as common stocks. In Restricted stock units, the employees can ask the employer to stretch the vesting period for a little longer so that he has some income tax benefits. This is done under the tax laws mentioned.
4. The no of shares that gets available for stock option holders over a series of time frames. So the stock options only can have the payment by stocks. In the case of RSU, the company doesn’t purchase but gives grants. So the payment in RSU can be both in terms of cash or stocks.
5. In RSU the taxes are applied only as of the income taxes. This simply means that the capital gain taxes are not applicable here. Stock options can be of either of the two: Nonqualified stock options and incentive stock options. For the non-qualified stock options, the taxes are calculated on the spreads. Spreads can be defined as the difference between the market price and the grant price. This difference is treated as an income and charged accordingly. For the incentive stock option, the taxes are calculated as preferred items and treated as alternative minimum tax.
6. To decide whether the stock option would be valuable or restricted stock options. One needs to analyze and model the future aspect of the company. If the analysis shows that the company will be doing great in the future, then stock options are more valuable because in the future the market price of the stock will be higher because of the performance of the company and the grant price at the initiation would be smaller. So, it would be more valuable to get stock options. If In the future the company doesn’t perform well then you would be paying more than the actual market price available for the stocks.
7. In RSU one doesn’t pay anything to purchase it so these options are always beneficial e.g: If suppose a company XYZ hires a CEO and offers 1000 stock options at the joining time. He can purchase the stock option say at a flat price of RS 5/ stock. The condition is he can execute it only after 4 years of employment. So the main intention of the CEO would be to increase the market price of the stock so that he can purchase at a flat price which would below and earn a profit later. After 4 years suppose the stock trades at RS 20/ stock. Then he can earn a profit of Rs15/ stock.
8. So in this way even the company earns a profit by the good performance of the employees and employer as well earns by selling the stock later at a higher price.
9. In stock options, full shareholders’ rights are given to the employees. In restricted stock option units, employees have very limited rights. As in the stock option, it behaves like common shareholders after the vesting period is over. The employee can purchase at a fixed price and purchase time. In restricted stock units is only offered if certain conditions of the employees are fulfilled. Voting rights are given to the stock option holders whereas in RSU employees don’t receive any rights for voting as well as dividends.

Stock Option vs RSU Comparison Table

Let’s discuss the top comparison between Stock Option vs RSU

Basis of Comparison	Stock option	RSU
Definition	Rights to the employee to purchase the fixed amount of shares at a fixed price after a fixed period.	A company assures to pay the amount of stock or cash after the questing period is completed.
After the vesting period	The employee receives stock.	The employee can even extend the period to earn tax benefits.
Mode of payment	Stock	Stock or cash
Taxes	Depending upon non-qualified stock and incentive stock options.	On regular income
Valuable	The market price of the stock is greater than the grant price.	Gain as you do not pay for them.
Shareholders right	Full rights.	Restricted rights.
Voting rights and dividends	Given	Not given

Conclusion

Deciding whether to go with RSU or stock options, one has to do a detailed difference between the advantages and disadvantages of both of them. Generally, the RSU is considered to be less risky because here the purchase doesn’t happen as one does not have to spend on the purchase of stocks.

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