Your employer offers you a choice: you can choose between receiving RSUs or Stock Options for your next equity grant package. Which should you choose?

RSUs have the benefit of retaining value when the stock price falls. If you accept an RSU grant, you can have confidence that even if the stock price falls during the vesting period, your shares will have value. If the stock price increases during the period, you will participate in the stock’s appreciation (awesome!). 

Example:

• You receive an RSU grant of 300 shares on 01/01/2020
• The trading price is $10 per share on the grant date of 01/01/2020.
  
• Vesting period is 3 years with annual vesting
• You will receive 100 shares each year on the following dates: 01/01/2021, 01/01/2022, 01/01/2023 

If the stock price rises during the vesting period…great! You can sell the RSUs for a higher price upon vesting (when you receive them). If the stock price rises by the first vesting date of 01/01/2021 to $15, you can sell your 100 vested shares for $1500 (100 shares x $15 per share).    

If the stock price falls during the vesting period, that’s okay. You can still sell the RSUs upon vesting for a positive value (although less than what you had hoped). If the stock price falls to $5 per share on the first vesting date of 01/01/2021. You can still sell your 100 shares for $500 (100 shares x $5 per share). 

Now, let’s look at stock options. If the stock price rises above the exercise price during the vesting period, the options have positive value. However, if the stock price falls below the exercise price, the options have zero value. This situation is known as the option being “underwater.” (Options can never have a negative value). 

Example:

• You receive a stock option grant of 900 shares on 01/01/2020
• Vesting period is 3 years with annual vesting
• The stock’s trading price on the grant date is $10 per share
• The exercise price of each option is $10 per share
• You will receive 300 options each year on the vesting dates: 01/01/2021, 01/01/2022, 01/01/2023.

If the stock price rises during the vesting period, your options have positive value. 

If the stock price increases to $15 per share on the first vesting date of 01/01/2021, you can exercise and sell your 300 options for a value of $1500 = 300 options x ($15 trading price – $10 exercise price).

If the stock price falls to $8 per share on the first vesting date of 01/01/2021, the 300 options you receive are worth zero. The trading price of $8 has fallen below the exercise price of $10. 

If the stock price does not change during the vesting period, your options are also worth zero. Options do not have a positive value unless the stock price rises above the exercise price.  

Now let’s look at a scenario where the stock price skyrockets. This is where things get interesting. 

If the stock price increases to $45 per share by the first vesting date of 01/01/2021, you can exercise and sell your 300 options for a value of $10,500 = 300 options x ($45 trading price – $10 exercise price). 

If you had opted for 100 RSUs instead of 300 options, your 100 RSU shares would be worth $4500 = 100 shares x $45 trading price. 

Options have an appealing return profile when the stock price rises quickly. If you work for a young, rapidly-growing company, you may be tempted to take the option package instead of the RSU package. However, you should understand the mechanics. RSUs will retain value if the stock price falls or remains unchanged. On the other hand, options will have a higher ROI if the stock price rises significantly.   

RSUs are the safer bet — they retain positive value even if the stock price drops or does not change.

Stock options are a bet on stock growth — they have a more favorable return profile when prices rise.

Deciding which equity package to choose depends on many factors (ughh.. why is the answer always “it depends?”) These factors include: 

• Your willingness to accept risk (risk tolerance)
• Your ability to accept risk (what does your overall balance sheet look like?)
• Your financial goals
• Your liquidity (cash) needs 
• The growth prospects of your company 
• How long you plan on staying at the company 
• The structure of your elective grant