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How do restricted stocks and stock options differ?

Stock options give you the right to buy shares at a certain price (the strike price) after a vesting period – typically, after your one year anniversary date, with 25% transferred to you each year over a four year period. The key here is that you must purchase the options. Your hope is that by the time you’re eligible to buy the options, the stock has appreciated. However, stock value could have eroded making it worthless, which doesn’t happen with RSUs.

Restricted stock units (RSUs) are a relatively new financial creature. Similar to options, there’s a vesting period where the employee must satisfy certain conditions before the stock or its value is transferred (typically, there’s a period of time and other conditions – e.g., work performance). Unlike stock options, there’s no purchase involved. Instead, a certain number of units are allocated – or granted – to the employee, but there’s no value/funding until after the employee has satisfied the vesting requirements.

After vesting, RSUs are transferrable if the employee accepts the grant. Therefore, these instruments always have a value, in contrast to options that can decline in value by the time of vesting. The value of your RSUs is the closing market value of the stock price on the vesting date. That’s also the point at which your tax liability is triggered, requiring you to pay withholding and income tax on the amount received.

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