Stock Options vs. RSUs

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A restricted stock unit RSU is compensation offered by an employer to an employee via company stock. The employee does not receive the stock right away. The employee receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time.

Upon vesting, RSUs are considered income, and a portion of the shares are withheld to pay income taxes. Are rsu a type of stock options or employee receives the remaining shares and can sell them at any time.

With stock options, you can buy company stock on a future date at the price that was current when you received the stock option. The expectation is are rsu a type of stock options or the stock price will increase above the strike price so that you can earn the difference between the prices.

If the current price of the stock does not go above the strike price then there is no financial gain to the employee. This can create problems for employees because they may not have the cash available to pay the taxes. The holder of an option whether an NSO — non qualified stock option or ISO does not pay any tax as the option vests, and are rsu a type of stock options or optionee that never exercises their options will never pay tax.

NSOs get taxed on the date of exercise. ISOs are even better; with an ISO, there is no tax obligation until the underlying security stock is sold. Although there are no taxes due upon exercise of an ISO for regular tax purposes, the gain upon exercise will be counted towards the Alternative Minimum Tax AMT calculation. You should seek the guidance of a qualified tax professional whenever exercising options.

The 10, options will turn into 10, shares. If Joe holds the stocks for more than days, he will also be eligible for the long term capital gains rate. Most employees exercise their options right away a same-day sale. So, in one day, they both exercise their options for shares and sell those shares.

This disqualifies them from receiving long-term capital gains tax treatment. They are instead taxed at the short-term capital gains rate, which is equivalent to their ordinary income tax rate. This means that they will have some value as long as the common stock has value. An RSU with equivalent vesting will be more valuable to employees than an option as you are almost are rsu a type of stock options or expected to have some financial gain.

So, the main difference between an RSU and an ISO is that the former may result in a direct cash outlay, whereas, in the latter case you get shares. Of course, if you have an ISO you can choose to turn the stock into cash when you receive the option. If you have an RSU, the company may restrict you to receiving cash only. The choice between receiving money or stocks may belong only to your company. Since you are restricted from selling the RSU stock for a certain period, you may wish for the stock option which requires no income tax until you sell.

RSU is basically a deferred cash bonus calculated and paid in shares. RSU is taxed to the employee as a cash are rsu a type of stock options or when they are vested. Any gains after vesting can be taxed as a long-term capital gain if you hold it more than a year.

Of course, you can get the same result by simply buying the stock on the open market and holding it for more than a year. Thus, there is no tax advantage of holding RSUs after they vest, since you already paid tax throughout the vesting period. Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.

Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may are rsu a type of stock options or may not have positions in Financial Instruments discussed in this newsletter.

Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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Restricted stock , also known as letter stock or restricted securities , is stock of a company that is not fully transferable from the stock-issuing company to the person receiving the stock award until certain conditions restrictions have been met. Upon satisfaction of those conditions, the stock is no longer restricted, and becomes transferable to the person holding the award.

Restricted stock is often used as a form of employee compensation, in which case it typically becomes transferrable " vests " upon the satisfaction of certain conditions, such as continued employment for a period of time or the achievement of particular product-development milestones, earnings per share goals or other financial targets.

Restricted stock is a popular alternative to stock options , particularly for executives , due to favorable accounting rules and income tax treatment. Restricted stock units RSUs have more recently become popular among venture companies as a hybrid of stock options and restricted stock. RSUs involve a promise by the employer to grant restricted stock at a specified point in the future, with the general intention of delaying the recognition of income to the employee while maintaining the advantageous accounting treatment of restricted stock.

Typical vesting conditions for restricted stock awards in venture capital —backed startups may include the following: Executive compensation practices came under increased congressional scrutiny in the United States when abuses at corporations such as Enron became public.

Prior to , stock options were a popular form of employee compensation because it was possible to record the cost of compensation as zero so long as the exercise price was equal to the fair market value of the stock at the time of granting.

Under the same accounting standards, awards of restricted stock would result in recognizing compensation cost equal to the fair market value of the restricted stock. However, changes to generally accepted accounting principles GAAP which became effective in led to restricted stock becoming a more popular form of compensation.

Under Section 83 of the Internal Revenue Code , the value of property transferred in connection with the performance of services is included in gross income, and is recognized as such on the date on which the property is no longer subject to a substantial risk of forfeiture, or the date on which the property becomes transferable, whichever is earlier.

In the case of restricted stock, the former date is generally known as the "vesting date" and is the date when the employee recognizes income for tax purposes assuming that the restricted stock is not transferable at an earlier date, which is how employers generally structure their restricted stock awards.

Employees pay income tax on the value of the restricted stock in the year in which it vests, and then pay capital gains tax on any subsequent appreciation or depreciation in the value of the restricted stock in the year in which it is sold. A grantee of restricted stock may make an "83 b election" to recognize the income from the restricted stock grant based on the fair market value of the restricted stock at the time of the grant, rather than at the time of vesting.

Revenue authorities in the United Kingdom and the Republic of Ireland have issued guidelines on the taxation of restricted stock and RSU awards. Restricted stock is generally incorporated into the equity valuation of a company by counting the restricted stock awards as shares that are issued and outstanding.

This approach does not reflect the fact that restricted stock has a lower value than unrestricted stock due to the vesting conditions attached to it, and therefore the market capitalization of a company with restricted stock outstanding may be overstated.

However, restricted stock has less of an impact than stock options in this regard, as the number of shares awarded tends to be lower and the discount for illiquidity tends to be smaller. From Wikipedia, the free encyclopedia. Restricted Stock and RSUs". Retrieved 19 August Archived from the original PDF on 30 June What employees and employers should know".

Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock.

Authorised capital Issued shares Shares outstanding Treasury stock. Electronic communication network List of stock exchanges Trading hours Multilateral trading facility Over-the-counter. Alpha Arbitrage pricing theory Beta Bid—ask spread Book value Capital asset pricing model Capital market line Dividend discount model Dividend yield Earnings per share Earnings yield Net asset value Security characteristic line Security market line T-model.

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