RSUs vs Stock Options: What Kestrel Bay Retirement Advisors Tells Candidates Comparing Offers

Which is worth more: 1,000 RSUs or 3,000 options?

It depends on the price, and the table shows where. Each RSU is worth the full share price, while each option is worth only the price minus the strike. With the stock flat at $100, 1,000 RSUs are worth $100,000 and 3,000 options with a $100 strike are worth $0. Notice that the options catch up only in the last row.

The two tie at $150 per share, because 1,000 × $150 = $150,000 and 3,000 × ($150 − $100) = $150,000. Above $150 the options win, by $2,000 for every extra dollar of share price (3,000 − 1,000 = 2,000 more shares of gain). Below $150 the RSUs win. That's why the headline share count misleads: 3,000 sounds three times bigger than 1,000, yet it loses in every row but one.

To find the crossover price for your own offers, use strike × options ÷ (options − RSUs). Here that is $100 × 3,000 ÷ 2,000 = $150. If your honest estimate of where the stock will trade by the time you'd exercise sits below the crossover, take the RSUs. If you expect it well above, the options may pay more. That holds only if you have the cash to exercise and can live with a $0 outcome. Investing involves risk, including loss of principal.

Hypothetical: what the same $150,000 costs Leah in cash and tax

Leah is 38 and unmarried. She works as a senior software engineer at a public cloud company, rents her home and has never sold a vested RSU. She has $180,000 in her 401(k) and is comparing the two packages from the table with the stock at $150. Package A is 1,000 RSUs worth 1,000 × $150 = $150,000. Package B is 3,000 options at a $100 strike, worth 3,000 × ($150 − $100) = $150,000.

Both create $150,000 of ordinary income, one at vest and one at exercise. Assume a 35% combined federal and state rate, for illustration: $150,000 × 0.35 = $52,500 on each. If she sells at once, her net is $97,500 either way. On paper the offers are twins.

The cash is where they split. Holding the options means paying 3,000 × $100 = $300,000 to exercise, plus the $52,500 tax, so $352,500 in cash. The RSUs need none of that. Leah doesn't have $352,500 sitting around, so the money would come from selling her other employer shares or borrowing, and that is a tax decision before it is an investing one. A tax-first review at Kestrel Bay Retirement Advisors starts here. We price each route in this year's tax, then in what it adds to her lifetime tax bill.

How do you compare two offers step by step?

Compare offers by turning each grant into the same few numbers, then checking cash and tax. Five steps cover it, and a spreadsheet is enough. Most candidates skip the last two, and those are the ones that change the answer.

• Step 1: Write each grant as a share count and a strike. RSUs have a strike of $0.
• Step 2: Compute the payout at a low, flat and high price, as in the table above.
• Step 3: Find the crossover price and decide whether you believe the stock gets there.
• Step 4: Add the cash needed to exercise and the tax due at exercise or vest.
• Step 5: Check the vesting schedule and what happens to the grant if you leave.

Pros and cons side by side

Neither grant wins everywhere, so list what each one costs you. RSUs are always worth something while the stock is above $0 and need no cash from you. The price is that they're taxed as income at vest and the upside is smaller. Options give you more leverage if the price climbs well above the strike, and you choose when to exercise, which gives some control over the tax year. The price is that they're worthless at or below the strike, they need exercise cash, and most plans set a deadline after you leave.

For Leah, with about 75% of a $1.6 million net worth in employer stock, leverage adds risk to the very thing she already has too much of. We'd lean toward the RSUs for her, because a flat stock is a far likelier outcome than a 50% jump, and because the extra concentration is the bigger danger. It's a judgment call, though, and someone with a diversified portfolio could reasonably choose the other way.

• RSUs, pros: worth something at any price above $0; no cash to hand over.
• RSUs, cons: taxed as income at vest; smaller upside.
• Options, pros: more leverage above the strike; you pick the exercise date.
• Options, cons: worthless at or below the strike; exercise cash; a deadline after leaving.

Myths about RSUs and options

Most of the bad comparisons we see trace back to three beliefs. The first is that more options always means more money. Each option is worth only the gain over the strike, so 3,000 options can pay less than 1,000 RSUs, and in the flat case they pay $0 against $100,000. Counting options by the headline number of shares is where candidates go wrong most often, and it can cost the whole $100,000.

The second is that options defer all the tax. Nonqualified options are taxed as ordinary income when exercised, on the spread between the price and the strike. You can defer the timing, but you can't skip the bill. The third is that RSUs are lower risk. They lose value one-for-one if the stock falls, so a 50% drop takes $100,000 down to $50,000. What they can't do is go to zero from a strike price, which is a real but narrower advantage.

How does the answer change with age or account size?

Younger earners can afford to gamble on options more than people close to retirement. At 38, with 25 or more years of earning ahead, Leah can absorb options that expire worthless far better than someone at 55 who plans to retire at 60 and has no time to rebuild.

Account size matters just as much. If your portfolio is $400,000, a $300,000 exercise bill is not realistic, because paying it would put almost everything into one stock. With a larger portfolio it becomes possible, but only with a plan for the concentration it creates, including how and when you'd sell shares and what tax each sale triggers.

One more rule of thumb: the larger the slice of your wealth already tied to one company, the less either grant should be treated as an add-on. Once a single employer accounts for over 20% of your net worth, a new grant of either kind makes diversifying harder. We usually work on reducing that position first, starting with the sales that cost the least tax. Our concentrated stock positions work covers that side in detail.

What should you do this week if you're comparing two offers?

Start with paperwork, then a spreadsheet. Ask each recruiter for the strike price, vesting schedule and post-departure exercise window in writing. Verbal answers like "it's pretty standard" won't help you when the window is 90 days and you've left on short notice.

Then build the three-price table for both offers and find the crossover. Finally, write down what share of your wealth sits in your employer's stock today, because the new grant will add to it. This comparison is simplified. It uses nonqualified options and ignores vesting schedules, company risk and ISO rules, which change the math. A private company's options may also be impossible to sell for years, so the table overstates what you can spend.

What should you ask an advisor before choosing?

Bring these questions to any advisor, including us. A good answer will have numbers in it. If you'd like help with equity compensation planning, Kestrel Bay Retirement Advisors works through them with clients on video or by phone, and you can use the request form to ask for a conversation. Meetings cover your own grants and tax picture, and this article is general education, not individual advice.

• What price do the options need to reach for the tax after exercise to beat the RSUs?
• How much of my current net worth is in this one stock, and does the new grant raise it?
• Where would the cash to exercise come from, and what would it cost in tax to raise?
• Are these ISOs or NSOs, and does the alternative minimum tax matter?