RSU vs. Stock Options: How to Actually Choose (or Make Sense of What You Were Given)
RSUs vs. stock options, explained: how each is taxed, the 22% withholding trap, and how to decide which fits your equity comp situation.
Written by
Dustin Kim, CFP®
You're sitting with an offer letter. Or an equity grant doc. Or an email from HR letting you know your company is switching from one form of equity to another, and the FAQ they sent didn't really answer your questions.
Equity compensation is one of those topics where the stakes feel high and the explanations feel either too basic or too dense. By the end of this guide, you'll know what RSUs and stock options actually are, how each one is taxed, and how to think about which one fits your situation. We'll walk through real numbers and flag the moments where it's worth a second set of eyes on your equity strategy.
A stock option gives you the right (not the obligation) to buy a set number of company shares at a fixed price, called the strike price. The strike is locked in when your options are granted, usually based on the company's fair market value at that time.
Your options vest over time, often four years with a one-year cliff (nothing vests for the first year, then 25% vests at year one, then the rest vests monthly or quarterly). Once vested, you can choose to exercise them, which means buying the shares at the strike price. After you exercise, you own the shares outright and can hold or sell.
Two main types of options exist, and the difference matters for taxes:
A quick example. You're granted 1,000 options with a $5 strike, vesting over four years. Three years in, your company stock is trading at $20. If you exercise all 750 vested options, you pay $3,750 to buy them and now own shares worth $15,000. Your "spread" is $11,250. Whether and when that spread gets taxed depends on the option type and what you do next.
A Restricted Stock Unit is a promise from your employer to give you actual shares once certain conditions are met. The most common condition is time, also known as a vesting schedule. Unlike options, you don't pay anything to receive RSUs. When they vest, the shares show up in your brokerage account.
That simplicity is part of why RSUs have become the standard at most public companies and many late-stage private ones. No decision to make about exercising, no strike price to track, no cash outlay. The shares just arrive.
One wrinkle catches people at private companies. Single-trigger RSUs vest based purely on time. Double-trigger RSUs require two conditions: the time-based vesting and a liquidity event (usually an IPO or acquisition). Many private companies use double-trigger RSUs to avoid hitting employees with a tax bill on shares they can't actually sell yet. If you're at a pre-IPO company with double-trigger RSUs, you may have shares that have technically vested on paper but won't actually be yours (and won't be taxed) until the company goes public.
A quick example to mirror the options one. You're granted 250 RSUs vesting over four years, roughly 62 shares per year. On a vest date when the stock is at $20, you receive 62 shares worth $1,240. Your employer reports that as ordinary income, withholds taxes (more on that in a minute), and you own the remaining shares.
| RSUs | Stock Options | |
|---|---|---|
| What you get | Actual shares at vest | The right to buy shares at a set price |
| When you act | Nothing required at vest (shares arrive) | You choose if and when to exercise |
| Vesting | Typically 4 years, sometimes with a cliff | Typically 4 years with a 1-year cliff |
| Upfront cost | $0 | Strike price × number of shares exercised |
| When you're taxed | At vest, on full share value | At exercise (NSOs) or sale (ISOs, if held long enough) |
| Type of tax | Ordinary income at vest, capital gains on appreciation after | Mix of ordinary income and capital gains depending on type and timing |
| What if the stock drops | You still get shares (just worth less) | Options can become "underwater" and worthless |
| Common at | Public companies, late-stage private | Early-stage startups, pre-IPO companies |
This section is where equity comp gets people in trouble, so we'll spend some time here.
RSUs are taxed as ordinary income at vest. The taxable amount is the number of shares vested multiplied by the share price on the vest date. Any further appreciation or loss after that is treated as a capital gain or loss when you sell.
NSOs are taxed as ordinary income at exercise on the spread between the strike price and the fair market value. Any gain or loss after exercise is capital gain or loss when you sell.
ISOs are more complicated. There's no regular income tax at exercise, but the spread is included in your AMT calculation, which can trigger a separate tax bill. If you hold the shares for at least one year after exercise and two years after grant, the entire gain is taxed at long-term capital gains rates when you sell. Miss those holding periods and the tax treatment looks more like an NSO.
Here's the part most employees don't see coming. RSUs can be taxed at rates up to 44.65%, yet most employees only expect the 22% withholding rate, creating significant tax surprises.
That 22% is the federal flat supplemental wage withholding rate that applies by default to RSU vests. For high earners, it's almost never enough. Add federal marginal rates that can hit 37%, plus Medicare surtaxes, plus state income tax, and the actual tax owed on a vest can be far higher than what was withheld. The shortfall doesn't show up until you file, and by then the cash from the vest may already be working in your portfolio (or your renovation, or your down payment).
The fix isn't complicated, but it does require planning. Options include adjusting your W-4 to withhold extra, making estimated quarterly payments, or selling enough shares at vest to cover the gap.
This is exactly the kind of thing a CFP® professional will catch in an annual tax projection. At Domain Money, we model RSU vests against your full income picture so April isn't a surprise.
If you're at a private company and you have the option to early-exercise NSOs or ISOs before they vest, or if you receive restricted stock (not RSUs), the 83(b) election is worth a hard look. Filing one within 30 days of grant or early exercise lets you pay tax on what the shares are worth then, rather than on what they're worth at each later vesting date. If the company grows significantly before your shares vest, the difference can be substantial.
The catch: if you leave or the company fails before your shares vest, you've paid tax on shares you don't end up keeping, and there's no refund. RSUs aren't eligible for an 83(b) election because they're not actual shares at grant. They're a promise to deliver shares later.
The 30-day window doesn't extend, so the call usually has to be made quickly and with limited information. It's the kind of decision worth talking through with a CFP® professional before you commit either way.
The honest answer is that "RSU vs. stock options" isn't usually a head-to-head choice you get to make. Most of the time, the company decides what to grant based on its stage and compensation philosophy. But when you do have a choice (some offer letters give you one), or when you're comparing two competing offers, here's how to think about it.
Company stage. Early-stage startups grant options because the strike price can be set very low, giving employees meaningful upside if the company succeeds. Closer to or past IPO, share prices are higher, and RSUs make more sense because the upside of options shrinks as the strike price rises.
Your cash position. Options require cash to exercise. RSUs don't, but they generate a tax bill at vest, which is its own form of cash demand.
Your risk tolerance. RSUs hold value as long as the stock has any value (a $50 stock that falls to $20 still leaves you with shares worth $20). Options can become worthless if the stock drops below the strike price.
Your time horizon. ISOs reward holding. If you have the cash and conviction to exercise early and hold for the required period, the long-term capital gains treatment can be meaningful.
Concentration. This one gets overlooked. If a big chunk of your net worth is already in your company (existing equity, salary, your career), adding more concentrated exposure isn't always the right move, regardless of which form it takes.
Let's run a real example. You're given a choice: 12 RSUs or 37 options at a $100 strike, with the current share price at $300.
The 12 RSUs are worth $3,600 today. If the stock stays flat, you keep $3,600 of value (less taxes at vest). If the stock doubles to $600, your RSUs are worth $7,200.
The 37 options have an intrinsic value of $7,400 today (37 × $200 spread), but you'd need $3,700 in cash to exercise. If the stock doubles to $600, your spread becomes $18,500 (37 × $500), substantially more than the RSUs.
But if the stock drops to $90, your options are underwater and worth zero. The RSUs are still worth $1,080.
Options are leveraged exposure to the stock. RSUs are direct exposure. Same company, different bet. Which one fits depends on how confident you are in the upside, how much cash you have to deploy, and how comfortable you are with the asymmetry.
If you weren't given a choice, that's fine too. The bigger question is what to do with what you have.
These come up constantly and rarely get covered well.
Pre-IPO with double-trigger RSUs. You may have hundreds of thousands of dollars in RSUs that have technically vested on paper but won't be taxed (or sellable) until the company goes public. When IPO day arrives, all of those shares vest in a single tax year, often pushing you into the highest marginal bracket. There's usually a lockup period of about six months where you can't sell, then a single moment when you can. Selling some shares at lockup expiration is often the right move, both to cover the tax bill and to start diversifying away from a single-stock concentration. The plan should exist before the lockup ends.
Leaving a company with vested options. When you leave, you typically have 90 days to exercise vested options before they expire. That's a hard deadline, and it forces a real decision: exercise and hold (you spend cash and own the shares), exercise and sell (if you can, depending on the company's policies), or let them expire. The math depends on the spread, your tax situation, and your conviction about the company.
Concentration risk. Once company stock crosses about 10% of your net worth, the case for diversification gets stronger, even if you love the company. Your salary, future grants, and career are already concentrated there. Layering more concentrated equity on top is doubling down on a bet you've already made.
Equity compensation planning is included in every Domain Money membership at the Strategic tier and above (RSUs and ESPP), with full ISO/NSO modeling at the Comprehensive tier. We help you map vests, model tax outcomes, and decide when to sell, without the awkwardness of explaining what an ISO is to your dentist's brother who got his Series 7 last year.
What's the main difference between RSUs and stock options? RSUs are shares you receive when they vest, with no purchase required. Stock options are the right to buy shares at a fixed strike price within a set window. RSUs are taxed at vest. Options are taxed at exercise or sale, depending on the type.
Are RSUs better than stock options? Neither is universally better. RSUs offer guaranteed value as long as the company has a positive share price. Options offer leveraged upside if the stock appreciates above the strike, but can become worthless if it doesn't. The right fit depends on company stage, your cash position, risk tolerance, and existing concentration.
Do I have to pay anything to receive RSUs or stock options? You don't pay to receive RSUs (though you'll owe taxes when they vest). Stock options require you to pay the strike price if you choose to exercise them.
How are RSUs taxed? RSUs are taxed as ordinary income at vest, based on the share value on the vest date. Any appreciation after that is taxed as capital gains when you sell.
How are stock options taxed? NSOs are taxed as ordinary income on the spread at exercise, with capital gains treatment on any appreciation after. ISOs aren't subject to regular income tax at exercise but may trigger AMT, and qualify for long-term capital gains treatment if specific holding periods are met.
What happens to my equity if I leave the company? For RSUs, anything that hasn't vested is typically forfeited. For options, you usually have a 90-day window after leaving to exercise vested options before they expire.
Should I sell my RSUs as soon as they vest? For many people, yes. Selling at vest doesn't create extra tax (you're already taxed on the full value at vest), and it lets you diversify out of a concentrated position. The case for holding is stronger only when you have specific reasons to believe the stock will outperform a diversified portfolio over your time horizon.
Equity compensation isn't a side dish. For many tech employees, it's a meaningful slice of total comp. But it's also one piece of a financial life that includes cash flow, taxes, retirement savings, real estate, and everything else competing for your attention.
Vanguard's research shows professional financial guidance can add approximately 3% in net returns each year through optimized investment decisions, strategic tax planning, and behavioral coaching.
If you want a CFP® professional who actually speaks RSU and won't make you re-explain your vesting schedule every meeting, book a free strategy session to see if personalized financial planning is right for you.
This information is for educational purposes only and should not be considered investment advice or recommendation. Each person's financial situation is unique to them and should be evaluated before making any investment decision.
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