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What’s better: stock options or RSUs?

It depends on your circumstances; there are pros and cons for each type of instrument.

Stock options give you the right to buy shares at a certain price after a vesting period. This typically occurs 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. The idea and hope is that by the time you’re eligible to buy the options, the stock has appreciated. However, stock value could erode making it worthless, which doesn’t happen with restricted stock units (RSUs).

RSUs are similar to options in that there’s a vesting period where the employee must satisfy certain conditions before the stock or its value is transferred. Such conditions are usually tied to a period of time or based on work performance. Unlike stock options, there’s no purchase involved. Instead, a certain number of units are granted to the employee, but there’s no value until after the employee has met the vesting requirements.

After vesting, the employee may transfer the RSUs. Thus, RSUs always retain a value, in contrast to options that can decline in value by the time of vesting. The value of 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.

As always, please understand this answer is not offered as advice, but only to provide general information. There is no substitute for getting sound advice from a professional. Since there are many considerations involved with the complexities of these transactions, you really need to have personalized advice specific to your circumstances. Please check out LawTrades in order to connect with an experienced startup attorney for additional guidance about evaluating RSUs and stock options.

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