Most equity decisions trace back to one question: what kind of equity do you actually have? The four common types can look similar on a statement, but they work differently, and each is taxed differently. It's also completely normal not to know yet. Many people only look closely once a real decision is in front of them.
Stock options give you the right, but not the obligation, to buy company shares at a fixed price, called the strike or exercise price. Buying the shares is called exercising. Options are worth something when the stock's value is above your strike price, and that difference is called the spread.
Available only to employees. If you meet two holding periods, more than two years from the grant date and more than one year from the date you exercise, your eventual gain can be taxed at long-term capital gains rates instead of ordinary income rates. The tradeoff: exercising ISOs and holding the shares can trigger the alternative minimum tax.
The same basic mechanics, but available to employees, contractors, and advisors. When you exercise, the spread is taxed as ordinary income, with no special holding-period benefit for that portion.
An RSU is a promise to deliver actual shares once vesting conditions are met. You don't buy anything. When RSUs vest, their full value is taxed as ordinary income, much like a cash bonus, and any growth after that is taxed as a capital gain when you sell.
Many private companies use double-trigger vesting: RSUs vest only when two conditions are met, your time-based schedule and a liquidity event such as an IPO. That's why RSUs granted years ago may not vest, or become taxable, until the liquidity event itself. When it happens, a large amount can vest at once, creating a large ordinary income tax bill in a single year. More on that in why RSU withholding can fall short.
Actual shares granted at the start but subject to forfeiture until they vest. RSAs are more common very early in a company's life than at later stages.
| Stock options | RSUs | |
|---|---|---|
| Do you pay for shares? | Yes, the exercise price | No |
| When you get shares | When you choose to exercise, after vesting and before the options expire | Automatically, at vesting |
| When tax usually applies | NSOs: at exercise, as ordinary income. ISOs: generally at sale, but AMT may apply at exercise | At vesting, as ordinary income |
| What drives the value | The stock price above your strike price | The full stock price |