Stock options and restricted stock units (RSUs) are both common forms of equity compensation, but they work fundamentally differently. One requires you to buy shares, the other simply delivers them once conditions are met. Earlier-stage private companies tend to grant options, since their share price is typically low enough that buying is affordable; later-stage and public companies increasingly grant RSUs instead. This post covers the mechanical and tax differences, and a structural quirk specific to private-company RSUs that trips a lot of people up.
What is a stock option?
A stock option is the right to buy a set number of shares at a fixed strike price; once vested, it’s not stock itself, but a right to purchase stock later. That right only has value if the company’s fair market value rises above your strike price; if it falls below, the option is “underwater” and worth nothing unless the value recovers. Exercising requires paying your strike price in cash (or occasionally through other structures), and the tax treatment depends on whether it’s an ISO or NSO.
What is an RSU?
A restricted stock unit (RSU) is a company’s promise to give you actual shares once specific conditions are met, with no purchase price required. You don’t pay anything to receive the shares. Because there’s no strike price involved, RSUs always have some value as long as the company’s stock is worth anything above zero, unlike options, which can go underwater entirely.
How is the tax treatment different?
Options create a taxable event only when you exercise (and again when you eventually sell), and the amount taxed is the spread between your strike price and fair market value, meaning you control some of the timing by choosing when to exercise. RSUs create a taxable event automatically once they vest (and, at private companies, once any additional conditions are met, more below), with the full fair market value of the delivered shares taxed as ordinary income, and no ability to defer that by choice the way you can with an unexercised option. Companies typically withhold on RSU income the same way they withhold on a paycheck, commonly at a flat 22% federal supplemental-wage rate for amounts under $1 million (37% above that threshold), plus Social Security and Medicare. Often by automatically selling a portion of the vesting shares to cover the tax bill, a mechanic usually called “sell-to-cover.”
What is double-trigger vesting for RSUs, and how is it different from double-trigger acceleration for options?
These are two different concepts that happen to share the same name, and it’s a common point of confusion. Double-trigger RSU vesting means your RSUs don’t actually deliver shares (or create a tax bill) until both your normal time-based vesting is complete and a liquidity event, an IPO or acquisition, has occurred; it’s a structural feature built into most private-company RSU grants specifically to avoid taxing you on shares you can’t yet sell. Double-trigger acceleration for stock options, by contrast, is a provision that speeds up vesting if a company is acquired and you’re then let go without cause within a set window. An entirely different mechanism, tied to job loss rather than a liquidity event, and only relevant to options, not RSUs.
Why do private companies use options while public companies favor RSUs?
Early-stage private companies typically have low 409A valuations, which keeps strike prices affordable; an employee can plausibly come up with a few thousand dollars to exercise. As a company matures and its valuation rises, that math breaks down: exercising options at a high strike price becomes expensive, and options carry downside risk if the price ever falls. RSUs sidestep both problems, since there’s no purchase price and the shares retain value regardless of price movement (short of the company being worth nothing), which is why later-stage private companies and public companies lean toward RSUs, especially for new hires.
Worked example
Say a private, later-stage company grants a new hire either 1,000 options with a $20 strike price, or an equivalent-value RSU grant, when the 409A valuation is also $20 a share.
With options: if the company’s value never rises above $20, the options are worthless. There’s no benefit to exercising at or above the current price. If the value later rises to $35, exercising costs $20,000 up front, with a $15,000 taxable spread.
With RSUs: the employee owes nothing to receive the shares. Once vested (and, if it’s a double-trigger private-company RSU, once a liquidity event also occurs), the full value of the shares at that time is taxed as ordinary income. There’s no strike price cushioning the downside, but also no purchase cost and no risk of the grant being worth literally zero unless the company itself is worthless.
FAQ
Do private companies grant RSUs, or is that only for public companies? Private companies, especially later-stage ones, do grant RSUs, usually with a double-trigger structure that delays delivery and taxation until a liquidity event occurs.
Do I have to pay anything to receive RSU shares? No. Unlike options, RSUs don’t require a purchase. You simply owe income tax on the value of the shares once they’re delivered.
Is double-trigger RSU vesting the same as double-trigger acceleration for options? No, despite the similar name. RSU double-trigger vesting ties delivery to a liquidity event; option double-trigger acceleration ties speeded-up vesting to being let go after an acquisition. They’re separate mechanisms.
Which is worth more, an option or an RSU? Neither is universally worth more. It depends entirely on where the company’s value ends up relative to your option’s strike price. An RSU guarantees some value as long as the company has any value at all; an option can be worth more per share if the company’s value rises substantially, or worth nothing if it falls below the strike price.
Can I have both options and RSUs at the same company? Yes, it’s common for companies to shift from granting options to granting RSUs as they mature, meaning longer-tenured employees may hold options from earlier grants and RSUs from more recent ones.
What to do next
Whether you hold options, RSUs, or both is set by your specific grant agreements, not by company stage alone. Check your own equity documentation. You can model your own numbers for either type at movewealth.io.
MoveWealth is not a broker-dealer, investment adviser, or lender. This is educational content, not financial, tax, or legal advice. Consult a qualified professional about your specific situation.