News & INSIGHTS
From Options to Units: Understanding Your Equity Compensation Choices
What They Are:
Employee Stock Options (ESOs): These are options, meaning the company gives employees the “option” to buy a certain number of company shares at a predetermined price (known as the “strike price”) after a specific period. Employees hope the company does well because if the stock’s market value goes above the strike price, they can buy the stock at the lower strike price and make a profit.
Restricted Stock Units (RSUs): These are a promise from the company to give the employee shares of stock after a certain period. This waiting period is usually tied to reaching particular work anniversaries or performance milestones. Unlike ESOs, with RSUs, employees don’t have to pay to acquire the stock.
Value: ESOs can be worth nothing if the company’s stock price doesn’t go above the strike price (what you’d pay for the stock), but they have high reward potential if the company does well. On the other hand, RSUs have value once vested, unless the company’s stock is worth zero (which is less likely).
Taxation: Both ESOs and RSUs have tax consequences, though their specifics vary. There are two types of ESOs—Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs)—each with distinct tax treatments. Generally, you are taxed when you exercise (buy) the options and/or sell the shares. ISOs can have move favorable treatment than NSOs if handled properly. With RSUs, you are generally taxed when the shares are delivered to you, which is typically at vesting. Given the complexities and variations based on individual scenarios, consulting with a tax specialist alongside a financial advisor is advised.
Which is better?
As with most things, it really depends on your individual circumstances, the company’s performance, and what you expect to happen in the future. Some might lean towards RSUs due to their perceived stability and “guaranteed” value at vesting, while others prefer the high-reward potential and potentially better tax treatment of ESOs.
In summary, both ESOs and RSUs are potential ways for employees to benefit from the company’s success. They each have risks and rewards and understanding them can help employees make informed decisions about their benefits. It’s always recommended to consult a financial advisor to understand what is best for one’s situation.
This is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product or services. The content is provided solely for your personal use and shall not be deemed to provide access to any particular transaction or investment opportunity. Amplius Wealth Advisors, LLC does not intend the information to be investment advice, and the information should not be relied upon to make an investment decision. Any third-party information contained herein was prepared by sources deemed to be reliable but is not guaranteed.