Difference Between Restricted Stock Units & Stock Options

Do you want stock options, not a raise? This is what it means for you.

Many employers, particularly in the technology sector have adopted the trend of offering stock options in order to retain and attract talent. You don't need to know what this means. This article will explain everything you need to know regarding employee stock options.

Stock options for employees are usually a part your employment agreement. They can also be equity compensation for outstanding performance. You agree to buy a certain number of shares at a specified price. This discount is provided by the agreement. The price at which you purchase the stocks will be lower than the current market rate. You might be asking, "What's the benefit?"

You can then choose to sell the shares when the price is higher. If the company performs better, this happens.oth the employer and employee win.

We now know what an employee stock option is. Let's learn the difference between stock options and restricted stock. A stock option, in simple terms, is a term that covers all types of stock options. It gives stockholders the ability to purchase or sell shares. Restricted stock units can be a type employee stock option that has certain restrictions.

Stock options vs. Restricted stock units

Stock options and restricted stock unit can be used to offer compensation measures that help employees who perform well and keep them. Restricted stock is different from stock options. With restricted stock units (RSU), the shares you purchase are not yours immediately.

This example will help you to understand. Ankita was recently employed by a company offering 2,000 shares and stock options for three year. Shreya, her sister, was hired by a company that offered 2,000 shares of stock options for three years. The vesting schedule is 400 shares per year.

Ankita bought the 2,000 shares of her company. Ankita can sell the shares in part or whole to make a profit over the next three-years.

Shreya will, however, not be able do so immediately. She will have to wait until she has full control of the shares. This is known as vesting. Shreya can now have 400 shares after she has completed one year in her company. She will have the ability to control her shares in part over five years. Shreya's 2,000 shares are taxable.

Stock options and restricted stock have a difference in that stock option holders have the same rights as shareholders, but RSU holders have limited rights. This includes the right of voting at the annual meeting. Stock option holders receive the same dividends as ordinary shareholders. RSU holders are not entitled to the same dividends.

Companies offer refreshers to keep employees loyal if they continue to work for the company after their stock options expire. If your RSU period is ending, your employer can offer a refresher.

Conclusion

Stock options can be a great alternative to salary. These options can be a great way to increase the net worth of an employee if used well.

Although you are free to decide what to do with shares in your company, we recommend that you consider all options to maximize your profit. If you have RSUs, one way to make the most of them is to immediately sell them when they vest and to invest the profits in tax-friendly investment tools.