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