What is a stock option?

Stock option: Right to buy company stock at a set price (strike price). Example: Strike price $10, current price $50 = option worth $40 per share. You must "exercise" (pay strike price) to own stock. If company goes public at $200, your $10 option is very valuable.

RSU (Restricted Stock Unit): A promise to give you actual company stock after vesting. Example: 100 RSUs vest over 4 years = You get 1 stock per month. No strike price. When vests, you own stock worth market price. Simpler than options for most employees.

Which has better tax treatment?

ISOs (qualified stock options): Taxed favorably if hold 2+ years. NSOs (non-qualified options): Taxed as ordinary income. RSUs: Taxed as ordinary income when they vest. Options have potential tax advantage; RSUs are straightforward.

What is a vesting cliff?

Vesting cliff: You get zero stock until year 1, then year 2 vesting begins. Example: 4-year vest with 1-year cliff = Nothing for 12 months, then quarterly vesting after. Common in tech. If you leave before cliff ends, you get nothing.

Do I lose RSUs if I leave before vesting?

Yes. Unvested RSUs are forfeited. Vested RSUs you keep. Example: 100 RSUs, 50% vested, you leave = You get 50 RSUs worth current price, lose 50. This is critical to understand for job changes.

Which is better: options or RSUs?

Depends: Options = Higher upside if company explodes, but require capital to exercise, tax complex. RSUs = Guaranteed value, tax simple, easier to understand. For most people: RSUs are safer, options offer more upside.

What is exercise price for stock options?

Exercise price (strike price): Price you pay to convert option to stock. Example: Strike $50, market price $100 = You pay $50, get stock worth $100. Profit = $50 per share. Lower strike = bigger profit potential.

May 3, 2026·8 min read·✓ Updated May 2026(quarterly reviews)·By WorkContractReview.com · AI-assisted analysis, human-edited

Stock Options vs RSUs: Understanding Equity Compensation in Tech

Stock options and restricted stock units (RSUs) are the two main forms of equity compensation in tech companies. They have different tax treatment, vesting schedules, and risk profiles. Understanding the differences is critical for evaluating offers and managing your compensation.

Key Points in This Guide

1Stock options explained
2RSUs explained
3Tax differences (ISOs vs NSOs)
4Exercise price vs market price
5Vesting cliff impact
6Upside potential differences
7Risk comparison

stock options and restricted stock units (RSUs) are the two main forms of equity compensation in tech companies. They have different tax treatment, vesting schedules, and risk profiles. Understanding the differences is critical for evaluating offers and managing your compensation.

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About this guide: This article is written and maintained by the WorkContractReview.com editorial team. Where statutes are cited (e.g. Cal. Bus. & Prof. Code §16600, C.R.S. §8-2-113), we link directly to the official legislative source. AI analysis on this site is powered by Claude claude-opus-4-6 by Anthropic. Content is for informational purposes only and does not constitute legal advice. See all cited sources →

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