RSUs and stock options are bets with opposite shapes.

Two bets with opposite shapes

It is tempting to treat RSUs and options as two flavours of the same thing, priced differently. They are not. They are bets with opposite shapes, and reading an offer as though they were interchangeable is how people end up disappointed by both.

An option is a claim on the increase in value above a fixed strike. It is leveraged: a small movement in the share price is a large movement in the option, in both directions, and below the strike it is worth precisely nothing. An RSU is a claim on the whole value of the share, unleveraged. It moves one-for-one with the share price and only reaches zero when the company does.

That is the entire comparison in two sentences. Everything below — the cash cost, the tax timing, the behaviour in a downturn, which stage of company grants which — falls out of the presence or absence of a strike price.

The comparison in full

What happens when the price moves

The arithmetic below holds the share count equal at 1,000 under each award, with a grant-date fair market value of $10 and an option strike of $10. Holding the count equal is not how grants are actually sized — it is how the shape of the payoff becomes visible.

Read the two columns against each other. At $40 the option holder committed $10,000 of their own cash and finished $30,000 ahead — a fourfold return on the money they put at risk. The RSU holder committed nothing and finished with $40,000, a better absolute number on a worse return on capital. At $4 the option holder simply walks away, having lost nothing but the years they spent hoping, while the RSU holder still receives $4,000 of stock and still owes ordinary income tax on it.

Timing: the thing options give you and RSUs do not

With an NSO the taxable moment is the exercise, and the holder chooses when that is. Exercising early, while the spread between the strike and the current valuation is small, keeps the ordinary income small and starts the capital gains clock sooner. Exercising late converts a larger spread into ordinary income at whatever the valuation has become. Nothing forces the decision except the expiry date and the post-termination window.

With an ISO the same choice exists with a different tax profile. There is no regular income tax on exercise at all under section 421(a), and if the shares are then held for more than two years from grant and more than one year from exercise, the entire gain is long-term capital gain under section 422(a)(1). The cost of that treatment is the alternative minimum tax adjustment on the spread in the year of exercise under section 56(b)(3), which is genuinely fact-specific: whether it produces an actual AMT liability depends on the rest of the return, and no page can tell an individual reader whether it will.

An RSU offers none of this. The holder does not choose the settlement date, the whole delivered value is ordinary income rather than just a spread, and the only capital gain available is on movement after settlement. In exchange the holder gets certainty: the award is worth what the share is worth, there is no cheque to write, and there is no decision to get wrong. Options trade certainty for control. RSUs trade control for certainty.

What happens when the company is worth less

This is the section most readers arrive for, because it is the case the recruiting conversation skipped.

Options go underwater and can stay there for years. The strike was set at the fair market value on the grant date and does not move; if the valuation falls below it, exercising means paying more than the shares are worth. The holder does nothing, loses nothing in cash terms, and waits. Their downside is bounded at zero — but so, often, is the value of the package they were recruited on. Some companies respond with a repricing or an exchange programme; that is a board decision, not an entitlement.

RSUs behave differently and worse. A fall in value does not switch them off. They become worth less, they still settle on schedule, they still produce ordinary income measured on the value delivered, and that income still has to be funded. There is no underwater state to sit in and nothing to decline.

Why the stage of the company picks the instrument

Early-stage companies grant options because the structural logic favours them. A low 409A fair market value (/equity/strike-price) means a low strike, which makes the exercise cheque affordable and makes the leverage meaningful: if the share price multiplies, almost all of that increase sits above the strike and belongs to the holder. Granting RSUs at that stage would hand out the whole value of a share that is currently worth very little, which is a poor use of the pool and produces income at settlement on stock nobody can sell.

Later-stage private companies and public companies shift toward RSUs for the mirror reason. Once the share price is high, an option strike set at that price is a large personal cheque, and the leverage is less compelling because the appreciation ahead is a smaller multiple of what has already happened. An RSU asks for no cheque and is worth something even if the share price goes sideways for three years, which is a more credible retention instrument at that point.

This is the structural logic, not a claim about how many companies do which. Plenty of late-stage companies still grant options and plenty of early-stage companies grant restricted stock instead. The point is that the reason a company grants what it grants is usually the relationship between its current valuation and the size of the cheque it would be asking employees to write.

Dilution: a pool goes further in options

Both instruments come out of the same place — the option pool or the share reserve under an equity incentive plan — and both dilute existing holders (/equity/dilution). They do not consume the reserve at the same rate. An RSU delivers a whole share, so it consumes a share of the reserve for a share of value. An option consumes a share of the reserve but only delivers value equal to the appreciation above the strike, and it consumes nothing on the cap table at all until somebody exercises. For the same dollar of expected value to employees, a given pool therefore supports meaningfully more options than RSUs. That arithmetic is why the switch from options to RSUs usually arrives alongside a much larger authorised reserve.

One correction worth making explicitly, because it is repeated constantly: there is no section 83(b) election on an RSU. The election applies to property that has actually been transferred — restricted stock, and shares acquired on an early exercise of an option — and must be filed no later than 30 days after that transfer under section 83(b)(2). An RSU is a promise, so there is nothing to elect on. The full mechanics are at /equity/83b-election.

What to compare when you are actually deciding

A share count on its own is not information. If someone is holding both instruments, or weighing two offers against each other, these are the things that determine what the grant is worth — asked as questions, because the answers are specific to the company and nobody should take a general answer to them.

• How many shares, against the fully diluted share count — not against the authorised count, and not as a percentage quoted without a denominator.
• The strike price, and the 409A fair market value it was set against, and how recent that valuation is.
• The current 409A valuation, and the price of the most recent preferred round, which are different numbers measuring different things.
• The vesting schedule, the cliff, and — for RSUs — whether settlement is single or double trigger and what the outside date is.
• The post-termination exercise period on options, which is what decides whether vested options survive leaving or have to be bought within a few months.
• Whether the plan permits early exercise, since that is what makes an 83(b) election possible on an option at all.