Over the weekend I was binge-watching the WeCrashed docu-series. In the docu-series, they were mentioning how everyone in the company was going to be millionaires because they were getting “stock options” in the company. I thought that was odd and maybe that was just a tv series mistake. But after googling it I realized a lot of people truly misunderstood what stock options were. But I thought it can’t be that many people right? So, I went out and started to start a discussion with my colleagues and friends. They also had either confusion or no knowledge of the difference between stock options and RSUs.
This is why I wanted to write this article. To dispel rumors and misunderstandings between stock options and RSUs. That way you are not in the same boat as those poor WeWork employees whose lives were crushed when they realized that weren’t going to be millionaires overnight. So, let’s start by defining what Stock options are.
What are Stock Options?
So, what are stock options anyways? Stock Options are what a company provides an investor with the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date. This is a favorite of most fast-rising start-ups. Start-ups use this in order to provide employees with the incentive to work hard and increase the value of those shares. The way stock options typically work, is by allowing employees to buy shares for the lowest amount in a 30-90 day cycle. Most companies typically go on a 90-day cycle. Meaning, that let’s say a current stock price is $80/share but in the previous 90 days the lowest stock price was $35/share. The employees of the company will have the ability to acquire those shares at $35/share.
Most companies don’t typically provide this to new employees. They usually have a time-in-service approach to providing this. You also are only able to buy stock options during certain periods of the year due to some SEC rules. Which I won’t get into in this article. If you are interested in learning more about stock options check out this book. Yes, it is a stock option for dummies books, but let me tell you these books are my best friends for learning finance. So, take advantage of that books.
What are RSUs?
Now that we have defined stock options. Let’s define Restricted Stock Units! This might be a little easier to digest for most people. Restricted Stock Units are a way for a company to compensate you. For instance, when you work for a publicly traded company they can offer you a compensation package of salary, RSUs, and a cash bonus. What makes RSUs different than stock options is that you are paid in company stock like a salary rather than you having the option to purchase the stock. They will also be used to augment your current salary. Meaning, when you are paid RSUs they will be vested at a specific period of time. They will be paid out alongside your basic pay salary. So, in a nutshell, Restricted Stock Units are when a company pays you in stock in the company as a way to compensate you on top of your salary.
Difference Between Stock Options and RSUs?
I think by now you can start to put together the difference between stock options and RSUs. But it’s always good to do a quick review. So, to be clear stock options are provided to the investor with the right, but not obligation, to buy or sell a stock on an agreed-upon date and time. RSUs are ownership of assets that may have debts or other liabilities attached to them. Such as actually receiving shares in a company.
Those are the differences between stock options and RSUs. Hopefully, after this article, you understand the difference a little bit better. The goal of this article was to make sure you understand what you are getting and not get duped by a snazzy billionaire giving your his magical pep talk. But remember to use these articles as starting points. There are a lot of resources out there, seek them out and keep learning!
If you want a more deep dive into equity compensation plans check out that article!