RSUs vs options
The calculation involved with choosing RSUs vs options is pretty complicated, both in practice as well in taking personal considerations into account. This mental overhead is compounded by the fact that it determines your equity compensation & is generally fixed for the entirety of the stock grant. This tool can hopefully help visualize and explain how options & RSUs compare and contrast and help visually represent the math.
How to use this tool
This is a rather over-simplified comparison of RSUs vs options in the event of an employer having an exchange of RSUs for options. In the default, it is set to 3 options per RSU, for instance. This has an impact on when the "breakeven" point is, in which the share price going over that point makes options a more lucrative option than RSUs.
What it does not account for is the difference in tax treatment between RSUs and options. It is meant purely to visualize the potential value of an RSU or options at a particular price point relative to the grant price.
It is to paint a reminder that options are potentially risky (potential zero value) while also providing benefit during an upswing in share price, based on the ratio of options to RSUs available to you.
The current breakeven price is $71.85, meaning the share price must exceed that amount for options to be worth more than RSUs.
Using a standard 10% rate of return, it would take 4.05 years to reach that point.
| Share price | RSU value | Options value | Difference |
|---|---|---|---|
| $26.34 | $26.34 | $0.00 | $26.34 in favor of RSUs |
| $28.74 | $28.74 | $0.00 | $28.74 in favor of RSUs |
| $31.13 | $31.13 | $0.00 | $31.13 in favor of RSUs |
| $33.52 | $33.52 | $0.00 | $33.52 in favor of RSUs |
| $35.92 | $35.92 | $0.00 | $35.92 in favor of RSUs |
| $38.32 | $38.32 | $0.00 | $38.32 in favor of RSUs |
| $40.71 | $40.71 | $0.00 | $40.71 in favor of RSUs |
| $43.11 | $43.11 | $0.00 | $43.11 in favor of RSUs |
| $45.50 | $45.50 | $0.00 | $45.50 in favor of RSUs |
| $47.90 | $47.90 | $0.00 | $47.90 in favor of RSUs |
| $50.29 | $50.29 | $7.18 | $43.11 in favor of RSUs |
| $52.69 | $52.69 | $14.37 | $38.32 in favor of RSUs |
| $55.08 | $55.08 | $21.55 | $33.53 in favor of RSUs |
| $57.48 | $57.48 | $28.73 | $28.75 in favor of RSUs |
| $59.87 | $59.87 | $35.92 | $23.95 in favor of RSUs |
| $62.27 | $62.27 | $43.11 | $19.16 in favor of RSUs |
| $64.66 | $64.66 | $50.29 | $14.37 in favor of RSUs |
| $67.05 | $67.05 | $57.47 | $9.58 in favor of RSUs |
| $69.45 | $69.45 | $64.66 | $4.79 in favor of RSUs |
Arguments for RSUs
RSUs are guaranteed to be above $0. Regardless of current market conditions, your shares of RSUs will always be worth something. The best way of looking at RSUs is a bonus, in which you won’t know what $ amount you’ll receive every vesting period. This is the lowest risk option for equity compensation as there is little decision making involved with RSUs.
Generally speaking, if you are a conservative investor and believe in the value of diversification, RSUs generally fit better with that insight. You are not reliant upon the company doing well to receive some value. Obviously, we all want our share value to be worth more than less, but options can be truly worthless, whereas RSUs cannot. Some companies offer an exchange of options per RSU to offset the inherent risk (i.e. 3 options per RSU exchanged).
Additionally, RSUs never expire. When the shares are vested, they become yours to do with as you please regardless of employment status or the share price.
Arguments for Options
Options are for those who are bullish on their company outlook. You are accepting the risk that this piece of your compensation is worth $0, while being able to accelerate your gains when your options are above water. Abstractly: the math works out to be valueless at the grant price. After the grant price, each option is now worth the difference (i.e. grant of $75 and exercise of $100 means your option has a net value of $25).
Options are great for people who are willing to wait out downturns and are willing to make big bets with a substantial part of their compensation. A key note is that you should absolutely be careful to live without needing any of the options value as compensation! As you run the risk of them being “below water” and valueless, having it be a necessary part of your income creates huge risk.
Additionally, options can expire, and options must be exercised within trading windows. This means converting an option into a share is only available during the available trading windows, and if you leave the company you are forced to either not execute the options or execute them in the quarter following your departure if you want to convert them to a share and realize any value. On the other hand, if there is an incentive to take options and the intent is to stay a long time at the company, those options have a very high likelihood of being worth more than RSUs if the company has even average returns.
Tax considerations
Another important consideration is taxation. RSUs are taxed immediately upon vesting, regardless of whether you choose to sell or not, whereas options allow for taxes to be deferred until they are exercised. Options are taxed as income for the difference between the exercise price and the strike price. At the time of exercise, the cost basis will be set to the exercise price. From there, capital gains taxes are applied (i.e. short & long term considerations).
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