By David Hughes, Financial Advisor at Resurgent Financial Advisors
Equity compensation has become one of the most powerful – and sometimes puzzling – tools in modern career packages. For many professionals, especially those working in tech, biotech, or startups, the promise of stock-based pay isn’t just a line on a contract; it’s a potential turning point in long-term wealth building. But when the offer letter arrives and you see terms like “stock options” or “restricted stock units (RSUs),” the natural question follows: Which one is better?
The truth is, neither plan is universally “better.” Each has strengths and trade-offs that depend on the company, your career stage, your risk tolerance, and even your personal financial goals. By unpacking the key differences, we can help you understand how each form of equity works and what role it might play in your financial story.
Stock Options: The Upside – and the Catch
Stock options give you the right (but not the obligation) to purchase company stock at a set “strike price.” If the company grows, your options can become incredibly valuable.
The appeal of stock options comes from leverage. If your strike price is $10 and the stock climbs to $50, you stand to gain $40 per share when you exercise and sell. That kind of upside can be life-changing.
But the story isn’t always rosy. Options can expire worthless if the stock never rises above the strike price. They also require you to pay the strike price plus any associated taxes when you exercise. That can mean putting cash at risk before you see any actual reward.
There are also different types of options – Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) – each with its own tax rules. ISOs can receive favorable tax treatment under certain conditions, while NSOs are generally taxed as ordinary income upon exercise. Taxation is complex, and this is one area where professional guidance can be especially important.
RSUs: Simpler, But Not Always Easier
Restricted Stock Units (RSUs) remove much of the guesswork. When RSUs vest, you receive shares of company stock – no strike price, no upfront cost. If the stock is worth $50 at vesting, you receive $50 of value per share.
That simplicity makes RSUs appealing. Unlike options, they hold value even if the stock price falls after the grant date. However, RSUs also have drawbacks: they’re taxed as ordinary income at vesting, which means you could face a hefty tax bill without having sold the shares. Some companies offer automatic withholding, but the amount may not always cover your full tax obligation.
Another factor is long-term upside. RSUs don’t offer the same leverage as stock options. If your company stock doubles, you benefit- but not in the same magnified way options can deliver.
Comparing the Two: What Matters Most
So how do you weigh stock options versus RSUs? A few themes stand out:
- Risk vs. Certainty: Options offer potentially higher rewards but carry the risk of expiring worthless. RSUs provide guaranteed value once vested but with less explosive potential.
- Tax Timing: Options may allow more flexibility in timing when you incur taxes (exercise vs. sale). RSUs trigger taxable income automatically at vesting.
- Cash Flow Considerations: Exercising options may require significant upfront cash. RSUs don’t require a purchase, but they may generate a tax bill without any cash inflow unless you sell.
- Career Stage: Early-career professionals at startups might embrace the risk of options, while those seeking predictability may prefer RSUs.
Human Side of the Equation
These are technical details, but financial decisions rarely live in spreadsheets alone. Imagine two professionals:
- Chris, a startup engineer, views options as a lottery ticket worth the gamble. The thrill of being part of something big outweighs the risk.
- Dana, a mid-career professional with family responsibilities, prefers the steady value of RSUs, knowing they will provide tangible benefits at vesting.
Neither is wrong. Each is aligning compensation choices with personal circumstances and values.
Equity compensation is both exciting and intimidating. It can be a springboard for long-term wealth, but it comes with fine print that can trip up even the savviest professionals. The best choice between stock options and RSUs depends on your unique financial situation, your goals, and your appetite for uncertainty.
This article is for informational purposes only and should not be construed as individualized investment or tax advice. Equity compensation involves complex tax implications, and readers are encouraged to consult a qualified professional for guidance specific to their situation.
