RSUs and other Stock options - How Do They Compare?
RSUs and Stock Options - How Do They Compare?
Author: Uk Tax Associate Molly Smith
Many companies offer stock-based incentives and compensation to their employees, in the form of Restricted Stock Units (RSUs). It is a simple way to increase morale, while also incentivizing employees to put maximum effort into their work, and see the stocks they have accrued, appreciate in-value. Simply put, these workers own a small part of the business, thus giving them a vested interest in the business’ success. But what are the pros and cons of this kind of incentive? Not to worry, keep reading and you are sure to find out.
Restricted Stock Units
RSUs are company shares given to employees by their employer as a form of compensation or incentive. RSUs come at no initial cost to yourself, they do, however, need to be left to vest over a certain period. For example, if your company offers you 500 Shares on an RSU basis over 5 years, once that 5-year period is over, you will acquire the shares at no cost.
Problems may arise if you wish to leave the company before the designated 5 year period has ended. If you did decide to do this you could lose your entitlement completely to the RSUs. This is not the only condition placed on the shares fully vesting and you may have to also meet other conditions. They could be locked-behind performance-based targets and any other perceivable parameter that said company decides.
Another common misconception is the wrongful understanding of no Initial cost. While it is correct, you are not paying for these shares, you will not receive all the proceeds from these shares. For example, if your company is giving you 100 shares after 2 years and they are valued at £20, the misconception is that you will receive £2,000. This is incorrect as RSUs, once vested, are subject to income tax and must be declared, so a portion of your shares will have been sold before you have seen the proceeds at all.
Stock Options
Stock Options, much like their counterpart, are also a form of compensation or incentive to employees. A stock option is a window of time that employers will grant to employees, to purchase stocks at a reduced price. The goal being, the company to grow so that the market price is greater than the employee accessible price agreed upon. For example, an employee may have the option to purchase shares at £20 per share for 6 months, in that time, if the market price of these shares rises to £25, the employee can take advantage of this. However, if the price remains the same, or falls below the employee accessible price, the stock option is rendered useless. The employee could also wait too long, letting the stock option expire, leaving them unable to purchase at the given price.
Summary
You have two incentivizing strategies, both with benefits and drawbacks. Both are used to drive productivity and work toward a higher share price. Your choice between the two may be determined by your future plans and your financial position. Either way, both options give an opportunity for returns and should be considered, given that they are offered.
Any Questions
You have two incentivizing strategies, both with benefits and drawbacks. Both are used to drive productivity and work toward a higher share price. Your choice between the two may be determined by your future plans and your financial position. Either way, both options give an opportunity for returns and should be considered, given that they are offered. Contact Us