RSUs vs stock options: what employees actually need to know
Two of the most common equity instruments, two completely different risk profiles. Here's the plain-English explainer with tax mechanics, real numbers, and…
- Options = right to buy at a fixed price. RSUs = right to receive shares for free.
- Options work pre-IPO when the strike price is low. RSUs work post-IPO when there's a tradable market.
- Tax timing differs sharply — and so does what the employee actually owes.
- What you grant is a culture signal: bet-the-future (options) vs cash-equivalent (RSUs).
Most employees can't tell you what their equity is worth or what it'll cost them. That's HR's failure, not theirs. Here's the briefing you should be giving every grant recipient.
The basics
| Stock options (ISO/NSO) | RSUs | |
|---|---|---|
| What you get | Right to buy at the strike price | Shares delivered at vest |
| You pay | Strike price + tax on spread | No purchase; tax at vest |
| Vest pattern | Usually 4 years, 1-year cliff | Usually 4 years, no cliff or quarterly |
| Risk | Can go to zero (underwater) | Worth FMV at vest |
| Best for | Pre-IPO, low strike | Post-IPO, public market |
Tax mechanics
- NSO: tax at exercise on the spread (FMV − strike). Ordinary income.
- ISO: no tax at exercise (AMT may apply); long-term capital gains if held 2 years from grant + 1 year from exercise.
- RSU: tax at vest on the FMV. Ordinary income. Often net-share-settled so employee gets fewer shares but no cash bill.
- Always: country and state rules vary materially. Provide tax-resource links, not advice.
Stage-appropriate grants
- 1Pre-seed → Series AISO/NSO options. Strike is low; upside is real. Refresh annually.
- 2Series B → COptions still standard; consider double-trigger RSUs for senior hires.
- 3Late-stage (pre-IPO)Mix: options for early employees, double-trigger RSUs for new hires (avoids the AMT trap).
- 4PublicRSUs. Options become rare. PSUs for executives.
How to explain it to employees
What you're being granted, vest schedule, what tax event happens when, what the company would have to be worth for this to be meaningful, and a link to two reputable tax-explainer resources. No legalese. Equity confusion at offer is the #1 source of regret 12 months later.
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