What is the difference between rsu and stock options

Among the compensation schemes involving stock is restricted stock, which generally comes in one of two forms, restricted stock awards and restricted stock units. Stock Options Stock options provide the possibility of a big payoff if the stock price soars. Visit performance for information about the performance numbers displayed rsj. Cantrell Forbes: Ten Tax Tips For Stock Options Photo Credits Executive man and woman on a downtown roof image by Scott Griessel from yliya-86.ru. In the case of RSUs, the amount of units that are earned by the employee vests similar to the common provisions of restricted stock. What Happens to Shares in a Bull Call Spread?

See how Wealthfront can help you reach your financial goals One of the biggest changes in the structure of Silicon Valley private company compensation over the past five years has been the increasing use of Restricted Stock Units RSUs. To understand why RSUs emerged as a popular form of compensation, we need to look at how RSUs and stock options differ. His intention was to build a system that was attractive for Venture Capitalists and provided employees a significant incentive to grow the value of their companies.

Issuing stock options with exercise prices below the fair market value of the Common Stock would result in the recipient having to pay a tax on the amount by which the market value exceeds the cost to exercise. Appraisals are pursued approximately every six months to avoid employers running the risk of incurring this tax.

This system continues to provide an attractive incentive to employees in all but one case — when a company raises money at a valuation well in excess of what most people would consider fair. Let me explain why. At the time Microsoft was falling desperately behind Google in the race for search engine advertising. It wanted the ability to bundle its search ads with Facebook ads to give it a competitive advantage vs. Microsoft then did a very savvy thing to win the Facebook deal. The extremely high valuation created a recruiting nightmare for Facebook.

RSUs or Restricted Stock Units are shares of Common Stock subject to vesting and, often, other restrictions. Prior to Facebook, RSUs were almost exclusively used for public company employees. Let me provide a private company example to illustrate. The final major difference between RSUs and stock options is the way they are taxed. The bottom line is RSUs are taxed as soon as they become vested and liquid.

In most cases your employer will withhold some of your RSUs as payment for taxes owed at the time of vesting. Ronald raygun forex some cases you may be given the option to pay the taxes due with cash on hand so you retain all vested RSUs. As we explained in the aforementioned blog post, holding on what is the difference between rsu and stock options your RSUs is equivalent to making the decision to buy more of your company stock at the current price.

If you exercise your options after they increase in value, but before you are liquid, then you are likely to owe an Alternative Minimum Tax. We highly recommend you consult with a tax advisor before making this decision. Most people do not exercise their options until their employer has gone public. At that point it is possible to exercise and sell at least enough shares to cover the ordinary income tax owed on the appreciation of the options. The good news is, unlike RSUs, you can defer the exercise of your options to a point in time when your tax rate is relatively low.

For example you might wait until you buy a house and are able to deduct most of your mortgage payment and real estate taxes. RSUs and stock options were designed for very different purposes. We strongly believe that with a better understanding of how their use has evolved you will be able to make better decisions on what constitutes a fair offer and when to sell. We are also very aware of how complex and specific your own decision-making can be so please feel free to follow up with questions in our comment section —they are likely to prove helpful to others as well.

Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This blog is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome.

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