How do RSUs Differ from Stock Options?

What are Restricted Stock Units?

A restricted stock unit, also called RSU, is a type of compensation that an employer issues to their employees via company shares. It gets released and allocated through a distribution schedule and vesting plan. This issuing happens when the entitled employee meets and achieves all the required and necessary performance criteria and milestones. A connection with the employer for a particular period can also result in it getting allocated.  

An RSU gives an employee a rudimentary interest in the company stocks. However, the ones they receive have no real significance and value until the vesting process gets completed. Once it gets over, the restricted stock units receive a reasonable market value. In such cases, they get considered the employee’s income, and a specific portion of it gets withheld for the income taxes. The worker receives the remaining shares and can sell or retain them according to their wishes and discretion. 

What is a Stock Option?

A stock option is the right of an investor to purchase or sell a stock at a particular and mutually accepted amount and date. It is not an obligation but an “option” that is open to a company’s employees. A stock option can be of two types. They are the puts and the calls. The former are bets on the fall of stock while the latter is on its rise. 

Stock options allow an employee or trader to bet on the rise or fall of the stock and the specific date by which either will occur. It marks the expiration date and is essential as it helps comprehend the value of the share. 

Stocks acquired through a stock option are obtainable or receivable using two different styles. The American version allows it to get exercised at any instance of time. It must, however, lie between the acquisition and the expiration periods. On the other hand, European options can get implemented only after the termination date. 

Terms Associated with Stock Options and Restricted Stock Units

Stok options and restricted stock units have some terminology associated with them. They get used whenever the two pop up. Thus, it is essential to get to know them before going over their differences. 

The terms consist of the following:

  • Grant Date

The grant date refers to the particular day when a company bestows or grants stock options or restricted stock units to an employee. 

  • Vesting Date

The vesting date refers to the particular day when the employee gains complete ownership and control over the two options. Restricted stock units and stock options generally vest according to a set vesting schedule. It starts from the grant date and continues over a particular period. In a few other cases, the vesting may take place all at once.  

When the vesting period gets over, the employee can exercise their rights and options. They can then purchase a specific number of shares that equals the stock price of the owned stocks. 

  • Strike Price

The strike price of a stock option or a restricted stock unit is the price at which an employee can exercise the options to purchase a particular number of shares. It generally gets set at a higher level than what the market price of the stock dictates. It ensures that the employee exercising the options earns a profit. 

  • Expiration Date

The expiration date of a stock option or a restricted stock unit refers to the particular day on which the two get terminated. It occurs if and when the employee owning them fails to exercise them. 

However, it is best for the employee not to exercise their options in specific cases. Otherwise, they will end up incurring a significant loss. For example, when the market price of the stock remains below the value of the strike price. 

What are the differences between Restricted Stock Units and Stock Options?

Although their names may seem similar, restricted stock units and stock options differ from each other significantly. Their primary points of difference lie in the following:

  • Shareholder Rights

Shareholders of stock options have complete autonomy and entitlement to all the rights that come with the stock. 

It is not the case for restricted stock units. In this instance, the shareholder’s rights get restricted to an extent. 

  • Voting Rights

Employees who own restricted stock units do not have the right to vote and elect a proposal or suggestion of their choice and fancy during the shareholder’s meetings or other instances. 

Employees who own stock options have the right to vote during such meetings. 

  • Dividend Payment

Stock options get dividends paid to their holders. 

On the other hand, restricted stock unit owners do not get any dividend payments.

  • Settlement Regulations after Vesting

After the vesting period gets over and completed, restricted stock options have to follow particular fixed terms. They need to settle the offered shares. The settlement can get postponed for a specific duration and extent for receiving tax benefits. 

For stock options, the owned stocks become public. It is then up to the owner to decide how to deal with and settle them. 

  • Payment Received During Settlement

During settlement, stock options can receive payment as stocks only. No other mode is acceptable. 

Restricted stock options can do so through both stocks and cash. 

  • Tax Treatment and Payment

For the case of stock options, taxes get paid during the sale of the stocks. It gets done for solely a qualifying disposition at the capital gain rate for long terms. Conversely, for the non-qualifying ones, the sale occurs at the income tax rate. 

For restricted stock units, the rate of the taxes depends on the vesting. Suppose, at the time of settlement, the company grants stocks that the employee keeps for more than 12 months. In that case, the capital gains are feasible. 

  • Popularity

Reserved stock units are more popular among well-established and mature companies that have been in the field for a long time. On the other hand, stock options are more famous among new start-ups and small-scale businesses.