What is the difference between restricted stock
and stock options? I'm breaking it all down in
this video. I've been talking lately about startup
job offers and compensation and all of that fun
stuff. And I know that a lot of you are going to
be trying to understand your equity. And one of
the key things that you're going to do is
understand the difference between a restricted
stock and stock options. If that sounds good to
you tap the like button and let's jump straight
into it. Let's start off with just an overview of
what restricted stock versus stock options are.
These are the two most common vehicles of stock
based compensation. That's equity my friends,
let's start out with stock options. What is an
option so a stock option is essentially something
that is going to give you the option to buy a
stock at a fixed price. stock options allow you to
purchase stock according to a vesting schedule at
a strike price. In plain English, they're setting
a price for you to buy future stock at you will
get a set number of stock options that will vest
over time and you will have the option to acquire
now hopefully over time, the stock price actually
goes up and you end up making money on the
difference. And we're going to come back to that
one in just a few options typically do have an
expiration, there's generally going to be a window
of time, in which case you can exercise that which
is you can purchase them. In most cases, you have
a long amount of time, what I typically see is 10
years now restricted stock, there are actually two
different types of restricted stock that are at
play. There's the restricted stock award, the RSA,
and there's the restricted stock unit, the RSU.
RSUs are much more common. So I will focus on that
in this video, because it's going to be what most
of you are really looking for just like a stock
option, they are going to be granted on a vesting
schedule. However, there is no need to pay because
essentially, when the RSU vests, it's yours, no
decision making no money exchanged, that stock is
now in your name. So for example, if you have 1000
rs use that vast and the stock is valued at $5.
That is essentially $5,000. The key difference
here is that when in RSU vests, you're not making
any purchasing decisions, there is no strike price
involved. Because when that RSU vests, it's yours
that happens automatically. Let's talk about some
of the differences between our RSUs and our stock
options. Now, the first key difference might seem
pretty obvious to you already. And that is in
value, my stock options com value is in RSU at
about three to four times that of a stock option.
Remember that options have no intrinsic value,
because you actually have to buy them. For
example, in the real world, your strike price is
going to be $5. And when that stock fast is going
to be $10. And you make $5 on each option. But if
the stock is at the same price, then it's not
worth anything. And if it's lower, you would pay
to lose money if you exercise that option at that
time, because in most cases, you have an extended
period of time to exercise the option. If the
price was equal or below, ideally, you can hold it
and eventually it's going to be worth more at
which time you would exercise the option.
Essentially, the value of a stock option is in the
delta between the strike price and the current
value of the stock or the future costs or the
future value of the stock. RSU is on the other
hand, because you're just being awarded the stock
do have some intrinsic value automatically. Well,
it's nice when the value of the stock is higher
because the RSU is automatically granted. The
price can be low, it can be high, it can be in
between no matter what you are making something
off of it, because your actual investment in it
was zero, essentially, you know, other than your
time and your labor and your effort and your
intellect and all of that stuff, which is what
you're being compensated for.
So based on this fact alone, you might be thinking
RSUs are superior, it's obvious, right? Well, not
necessarily because we need to consider the next
major difference between a restricted stock unit
and a stock option and that my friend is taxes.
Let's start by talking about taxes when it comes
to our SEOs because RSUs are going to be granted
to you as a vast they are income it will be based
on the market price when that RSU vests. It just
occurred to me that I'm wearing a vest. Anyways,
for the sake of example, let's say that you have
100 RSUs that vest, so they're granted to you
they're now yours. And when they vest they are
worth $5 each. That means that you have an
additional $500 in income. Let's say that you
decide not to sell them RSU when it vests, with a
market value of $5. You hold on to it for a little
bit - and good news! The value goes up, and now
it's worth $10. So you decide to sell. Now you're
going to pay capital gains on the difference
between the RSU price when it vests and the price
at the time of sale, so that would be $5 in
between. On the other hand, as I mentioned with a
stock option, just because it has vested, it
doesn't mean that you need to exercise it. This
also means that they have no taxable overhead at
the time of vesting, because you don't own them
yet. And they have no value to you yet, but when
you do exercise them, you are going to pay tax,
most companies give non qualified stock options,
NQSO for short, when a non qualified stock op
ion is exercised, you are going to be taxed on th
difference between the strike price and the sa
e price. And this is going to be under your no
mal payroll tax. The real advantage here is th
t you can be strategic in terms of when you're ac
ually exercising your options, especially if yo
're trying to be strategic in terms of what st
ck market you are actually sitting in. This is ac
ually something that can help you make the pe
son who determinants what this actually looks li
e based on the market values of the time, of co
rse, is going to be something that helps you ha
e more control over your taxable income. That sa
d, some of you might have incentive stock op
ions. And these of course, to make a co
plicated need to go and beat different in
entive stock options, or ISOs are not subject to
payroll tax, however, they're going to be su
ject to capital gains tax. If you currently ha
e stock options, and you're not sure where you ar
, you can ask someone at your company or if yo
're deciding on an offer, you can ask what type of
stock option there is, if it's not clearly ou
lined in the contract, you want to make sure th
t you know what you're getting. The next di
ference that we need to talk about when we're ta
king about RSUs and stock options is what happ
ns to them when you leave. Now when you leave RSUs
are yours, they're not going to continue to vest
when you're no longer with the company or in an e
it situation with some companies depending on the
tructure, but the RSU was yours. So when you leav
if you have RSU is you don't need to decide if y
u're going to invest in them or anything like that
They're just yours. On the other hand, if you
ave stock options, you are going to be faced with
a choice. You need to decide whether you're goin
to exercise your options or not. And this quit
honestly can be a really hard choice. And this
is actually a conversation that I've had a few
imes over the past few months in terms of that
decision making. Should you buy your options, shou
dn't you buy your options? I don't have a clea
answer for you. But I am thinking about maki
g a video in terms of what I would consider if y
u're interested in that. Let me know in the comm
nts down below. No matter what you decide, you
ypically are going to have a window of time, ofte
90 days in order to make that decision. And this
leads me to the ultimate question that you're prob
bly thinking, which one is better? The RSU? Or t
e stock option? Will the answer for you, my frie
d is actually totally personal because it is goin
to depend on if it's a private or a public comp
ny, your financial circumstance, your tax situ
tion, all sorts of things. Now, many comp
nies tend toward stock options, because beca
se they're having less money. Remember a stoc
has value to them. So that is them handing you
oney when they're handing you stock. Now pers
nally, I think it's more in the interest of empl
yees to have RSUs, they're just easier, less d
cision making. There is no Should I or should
't I exercise kind of thing going on them? Again,
this has tax implications that might not be benefi
ial based on your scenario. So this My friend
is really up to you. And this leads to the ultima
e question that this always leads to whethe
you have stock options or RSUs, the question
you probably have is can I negotiate my equity?
nd the answer, of course, in most cases is yes.
specially if you're negotiating a startup job offe
if you are at a stage where you're watching
this because you do have a startup job offer or
an offer for a big tech company. I need to get r
ady for salary negotiations. I want you to go an
check out this video right now we're going to
walk you through the steps that you need to take
o slay your negotiations. If this video was help
ul, give it a thumbs up consider subscrib
ng for more great content like this. And as alway
my friends thank you so much for watching
I will see you in the next video. Bye for now.