How Are Employee Stock Options and RSUs Different?

Two of the most common employee stock plans, employee stock options (ESOs) and restricted stock units (RSUs), both give you the chance to eventually become a shareholder in your company.

While these benefits may sound very similar, there are significant differences between them. An employee stock option is the promise that at a future date, an employee has the option to buy company stocks at a certain price. A restricted stock option is the promise that at a future date (or upon the accomplishment of another milestone or benchmark), an employee will receive company stocks.

An employee stock plan may be offered to everyone as a companywide benefit. Other times, it’s a custom plan that’s baked into an executive job offer as either a recruitment and retention incentive, a way to cover the lack of cash flow in a startup, or both.

Sometimes, employees get a choice between ESOs and RSUs. Understanding how each stock plan works, how they differ, and exactly what the risks are with each can help you make a decision that best aligns with your financial goals.

This guide outlines the key features of ESOs and RSUs, and breaks down the differences between them, so you can better decide what’s right for you.

Employee Stock Plans: Key Terms and Phrases

Having a grasp of stock market vocabulary can help you decipher quickly what your employer is offering, the terms and restrictions, and whether it’s a good deal for you.

The Grant/Strike/Exercise Price

These are three different words with the same meaning: grant, strike, and exercise price all refer to the price at which your plan says you can purchase company stock. It’s most often based on the stock’s current market value.

If your strike price is 1,000 shares at $1 per share, for example, that’s what you’ll pay for those shares if you decide to exercise your stock options, regardless of their current market price.

Being ”In the Money” and “Out of the Money”

When the stock is currently trading above the strike price, it’s called being “in the money” and may mean big profits.

Conversely, if the stock’s market price falls below the strike price, your options are considered “underwater” or “out of the money” and don’t hold any value. In that situation, it may be cheaper to buy your company’s stock on the open market.

What Are Employee Stock Options (ESOs)?

An ESO is an option to buy shares in your employer company in the future for a price set today. The “option” part means you can buy the stock later if it suits you, but you aren’t obligated.

Unlike an outright stock purchase, an option doesn’t give you actual shares until you decide to buy them, which is called exercising. Another difference from a traditional stock purchase is that options become null and void if you don’t exercise your stock options before the expiration date.

How do ESOs Work?

Generally, ESOs operate in four stages—starting with the grant date (aka strike date or exercise date) and ending with the exercise, or actually buying the stock.

1. The grant date. This is the official start date of an ESO contract. You receive official information on how many shares you’ll be issued, the strike price (aka grant price or exercise price) for those shares, the vesting schedule, and any requirements that must be met along the way.

2. The cliff. If a compensation package includes ESOs, it doesn’t necessarily mean that they’re available on day one.

Contracts often contain a number of requirements that must be met first, such as working full time for at least a year. Those 12 months when you are not yet eligible for employee stock options is called the cliff. If you remain an employee past the cliff date, you get to level up to the vest.

3. The vest. When you pass your cliff date, your vesting period begins, which means you start to take ownership of your options and the right to exercise them. Vesting can either happen all at once or take place gradually over several years, depending on your company’s plan.

One common vesting schedule is a one-year cliff followed by a four-year vest. On this timeline, you’re 0% vested the first year (meaning you aren’t eligible for any options), 25% vested at the two-year mark (you can exercise up to 25% of the total options granted), and so on until you own 100% of your options. At that point, you’re considered fully vested.

4.The exercise. This is when you pull the financial trigger and actually purchase some or all of your vested shares.

One common timeline is 10 years from grant date to expiration date, but specific terms will be in a contract.

Pros and Cons of Employee Stock Options (ESOs)

If you land a job with the right company and stay until you’re fully vested, exercising your employee stock options could lead to instant, huge gains.

For example, if your strike price is $30 per share, and at the time of vesting the stock is trading at $100 or more per share, you’re getting a great deal on shares.

On the other hand, if your strike price is $30 per share and the company is trading at $10 per share, you might be better off not exercising your employee stock options.

Tax Implications of Employee Stock Options

Generally speaking, employers offer two types of stock options: nonqualified stock options (NSOs) and incentive stock options (ISOs). NSOs are the most common and often the type offered to the general workforce.

NSOs are subject to income tax on the difference between the exercise price and the market price at the time you purchase the stock. (ISOs are “qualified”, meaning you don’t pay any taxes when you exercise the options—only when and if you sell them at a profit later on.)

Any money you make above and beyond that if you sell your shares later can also be subject to the capital gains tax. If you hold your shares less than a year, the short-term capital gains tax rate equals your ordinary income tax rate, which could be up to 37% for the highest tax bracket.

For assets held longer than a year, the long-term rate can be 0%, 15%, or 20%, depending on your taxable income and filing status.

What Are Restricted Stock Units (RSUs)?

Restricted stock units, or RSUs, fall somewhere in between stocks and options—they are a promise of stock at a later date. When employees are granted RSUs, the company holds onto them until they’re fully vested.

The company determines the vesting criteria—it can be a time period of several years, a key revenue milestone, or even personal performance goals. Like ESOs, RSUs can vest gradually or all at once.

How Do Restricted Stock Units (RSUs) Work?

RSUs are priced based on the fair market value of the stock on the day they vest, or the settlement date. This means that you don’t have to worry about falling out of the money—the company stocks you receive from your company will be worth just as much as they would be if you purchased them on your own that same day.

As long as the company’s common stock holds value, so do your RSUs. Upon vesting, you can either keep your RSUs in the form of actual shares, or sell them immediately to take the cash equivalent. Either way, they will be taxed as income.

Pros and Cons of Restricted Stock Units (RSUs)

One good thing about RSUs is the incentive they can provide to stay with the company for a longer period of time. If your company grows during your vesting period, you could be very far in the money when your settlement date rolls around.

But even if the stock falls to a penny per share, they’re still awarded to you on your settlement date, and they’re still worth more than the $0 you paid for them.

In fact, you may only lose out on money with RSUs if you leave the company and have to forfeit any units that aren’t already vested, or if the company goes out of business.

Tax Implications of RSUs

When your RSU shares or cash equivalent are automatically delivered to you on your settlement date(s), they’re considered ordinary income and are taxed accordingly. In fact, your RSU distributions are actually added to your W2.

For some people, the additional RSU income may bump them up a tax bracket (or two.) In those cases, if you’ve been withholding at a lower tax bracket before your vesting period, you could owe the IRS even more.

As with ESOs, if you sell your shares at a later date and make a profit, you’ll be subject to capital gains taxes.

Feature ESOs RSUs
The benefit An employee can buy company stock at a set price at a later date. An employee receives stock at a later date.
The stock price The “strike price” is determined when ESOs are offered to an employee—even if they can’t purchase shares for a year or more (until they’re vested). The share price is based on the fair market value of the stock on the day they vest.
Tax implications The difference between the strike price and the stock’s value when you exercise your options is considered earned income and added to your W-2, where it’s taxed just like your salary. If you sell your shares later at a profit, you may also be subject to the capital gains tax. RSU shares (or cash equivalent) are considered ordinary income as soon as they are vested, and are taxed accordingly.

The Takeaway

Knowing how ESOs and RSUs work—and understanding the differences between them in terms of terms, pricing, and tax implications—can help you make an informed decision if and when you are offered one or both of these workplace perks.

Having the option to own stock in your employer company has the potential to provide attractive financial benefits, especially if you believe in the company and its future. However, one key investing strategy that many investors follow is portfolio diversification—making sure your investments are spread out across companies, industries, and assets.

Here’s why: Because if all your investments are in company stock and the business folds or takes a downturn, you risk losing both your salary and your stock.

With SoFi Invest®, members can Trade stocks, ETFs, crypto, and may be able to participate in upcoming IPOs—diversifying in a way that best suits individual risk tolerance, preferences, goals, and more.

Find out how to get started with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
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How Do Employee Stock Options Work?

Perhaps you’ve been offered a job package with a combination of salary, benefits, and employee stock options. In order to make an informed decision, it helps to know how employee stock options (ESOs) work. Knowing the basics can be especially important if you’re considering taking a lower salary offer in exchange for ESOs.

Or maybe your current employer has already given you employee stock options, but you’re still not clear on how to exercise them. This is an incentive that could be valuable—so you probably don’t want to ignore it.

Employee stock options have the potential to make an employee some extra money, depending on the market, which may be a nice perk. Stock options can also give employees a sense of ownership (and, to a degree, actual ownership) in the company they work for.

Here is everything you need to know about ESOs—from how they work to the different types, and all the details in between.

What Are Employee Stock Options?

Employee stock options give an employee the chance to purchase a set number of shares in the company at a set price—often called the exercise price—over a set amount of time. Typically, the exercise price is a way to lock in a lower price for the stock.

This gives an employee the chance to exercise their ESOs at a point when the exercise price is lower than the market price—with the potential to make a profit on the shares.

Sometimes, an employer may offer both ESOs and restricted stock units (RSUs)—RSUs are different in that they are basically a promise of stock at a later date.

Employee Stock Option Basics

When talking about stock options, there are some essential terms to know in order to understand how options work. For investors who know their way around options trading, some of these terms may be familiar.

•  Exercise price/grant price/strike price: This is the given set price at which employees can purchase the stock options.
•  Market price: This is the current price of the stock on the market (which may be lower or higher than the exercise price). Typically an employee would only choose to exercise and purchase the options if the market price is higher than the grant price.
•  Issue date: This is the date on which you’re given the options.
•  Vesting date: This is the date after which you can exercise your options per the original terms
•  Exercise date: This is the date you actually choose to exercise your options.
•  Expiration date: This is the date on which your ability to exercise your options expires.

How Do Employee Stock Options Work?

When you’re given employee stock options, that means you have the option, or right, to buy stock in the company at the established grant price. You don’t have to exercise options, but you can if it makes sense to you.

Exercising your ESOs means choosing to actually purchase the stock at the given grant price, after a predetermined waiting period. If you don’t purchase the stock, then the option will eventually expire.

ESO Vesting Periods

Typically, employee stock options come with a vesting period, which is basically a waiting period after which you can exercise them. This means you must stay at the company a certain amount of time before you can cash out.

The stock options you’re offered may be fully vested on a certain date or just partially vested over multiple years, meaning some of the options can be exercised at one date and some more at a later date.

ESO Example

For example, imagine you were issued employee stock options on Jan. 1 of this year with the option of buying 100 shares of the company at $10/share. You can exercise this option starting on Jan. 1, 2021 (the vesting date) for 10 years, until Jan. 1, 2031 (the expiration date).

If you choose not to exercise these options by Jan. 1, 2031, they would expire and you would no longer have the option to buy stock at $10/share.

Now, let’s say the market price of shares in the company goes up to $20 at some point after they’ve vested on Jan. 1, 2021, and you decide to exercise your options.

This means you decide to buy 100 shares at $10/share for $1,000 total—while the market value of those shares is actually $2,000.

Exercising Employee Stock Options

You don’t have to exercise your options unless it makes sense for you. That may depend on your financial situation, the forecasted value of the company, and what you expect to do with the shares after you purchase them.

If you do plan to exercise your ESOs, there are a few different ways to do so. It’s worth noting that some companies have specifications about when the shares can be sold, because they don’t want you to just exercise your options and then sell off all your stock in the company immediately.

Buy and Hold

Once you own shares in the company, you can choose to hold onto them. To continue the example above, you could just buy the 100 shares with $1,000 cash and you would then own that amount of stock in the company—until you decide to sell your shares (if you do).

Cashless Exercise

Another way to exercise your ESOs is with a cashless exercise, which means you sell off enough of the shares at the market price to pay for the total purchase.

For example, you would sell off 50 of your purchased shares at $20/share to cover the $1,000 that exercising the options cost you. You would be left with 50 shares.) Most brokerages will do this buying and selling simultaneously.

Stock Swap

A third way to exercise options works if you already own shares. A stock swap allows you to swap in existing shares of the company at the market price of those shares and trade for shares at the exercise price.

For example, you might trade in 50 shares that you already own, worth $1,000 at the market price, and then purchase 100 shares at $10/share.

When the market price is higher than the exercise price—often referred to as options being “in the money”—you may be able to gain value for those shares because they’re worth more than you pay for them.

Why Do Companies Offer Stock Options?

The idea is simple: If employees are financially invested in the success of the company, then they’re more likely to be emotionally invested in its success as well and it can increase employee productivity.

From an employee’s point of view, stock options offer a way to share in the financial benefit of their own hard work. In theory, if the company is successful, then the market stock price will rise and your stock options will be worth more.

A stock is simply a fractional share of ownership in a company, which can be bought or sold or traded on a market.

The financial prospects of the company influence whether people want to buy or sell shares in that company, but there are a number of factors that can determine stock price, including investor behavior, company news, world events, and primary and secondary markets.

Tax Implications of Employee Stock Options

There are two main kinds of employee stock options: qualified and non-qualified, each of which has different tax implications. These are also known as incentive stock options (ISOs) and non-qualified stock options (NSOs or NQSOs).

Incentive Stock Options (ISO)

When you buy shares in a company below the market price, you could be taxed on the difference between what you pay and what the market price is. ISOs are “qualified” for preferential tax treatment, meaning no taxes are due at the time you exercise your options—unless you’re subject to an alternative minimum tax.

Instead, taxes are due at the time you sell the stock and make a profit. If you sell the stock more than one year after you exercise the option and two years after they were granted, then you will likely only be subject to capital gains tax.

If you sell the shares prior to meeting that holding period, you will likely pay additional taxes on the difference between the price you paid and the market price as if your company had just given you that amount outright. For this reason, it is often financially beneficial to hold onto ESO shares for at least one year after exercising and two years after your exercise date.

Non-qualified Stock Options (NSOs or NQSOs)

NSOs do not qualify for preferential tax treatment. That means that exercising stock options subjects them to ordinary income tax on the difference between the exercise price and the market price at the time you purchase the stock. Unlike ISOs, NSOs will always be taxed as ordinary income.

Taxes may be specific to your individual circumstances and vary based on how the company has set up its employee stock option program, so it’s always a good idea to consult a tax advisor for specifics.

Should You Exercise Employee Stock Options?

While it’s impossible to know if the market price of the shares will go up or down in the future, there are a number of things to consider when deciding if you should exercise options:

•  the type of option—ISO or NSO—and related tax implications
•  the financial prospects of the company
•  your own portfolio and how these company shares would fit into your goals

You also might want to consider how many shares are being made available, to whom, and on what timeline—especially when weighing what stock options are worth to you as part of a job offer. For example, if you’re offered shares worth 1% of the company, but then the next year more shares are made available, you could find your ownership diluted and the stock would then be worth less.

The Takeaway

Employee stock options may be an enticing incentive that companies can offer their employees: the chance to invest in the company directly, and possibly profit from doing so. There are certain rules around ESOs, including timing of exercising the options, as well as different tax implications depending on the type of ESO a company offers its employees.

For some investors, owning shares in their employer company may be just one aspect of a diversified portfolio. With SoFi Invest®, members can participate in upcoming IPOs, trade stocks, ETFs, and crypto—or start automated investing—as a way to diversify their portfolios based on their personal goals, risk tolerance, and other preferences.

Find out how to get started with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Source: sofi.com

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