Maximizing Your Stock Awards: A Guide to RSUs and Stock Options

Table of Contents

• Introduction
• Main Difference Between Stock Options and RSUs
• Financial Risks of Stock Options and RSUs
• Losing Money on Stock Options
• Which is More Beneficial: Stock Options or RSUs?
• What Happens to Stock Options and RSUs When Leaving the Company
• Which is Better for Wealth Building: Stock Options or RSUs?
• Closing Thoughts

Introduction

Madison: Hello, everyone, and welcome to Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora, and I’m here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer, and his law firm is Yardley Estate Planning. Hey, Mike.

Mike: Hey, Maddie. How are you?

Madison: Great, great. All right, so today’s episode, we are going to discuss stock options versus RSUs. So Mike, what is the main difference between stock options and RSUs?

Main Difference Between Stock Options and RSUs

Mike: All right, so there are a couple different things. We’ll start by explaining them. So, stock options, and in this case we’re talking about something that employer provides an employee as part of their overall compensation package, there are other options out there that this conversation is not about them. This is about a lot of companies in this area tend to give employees either restricted stock units or stock options as part of their compensation. And in some cases, employees get to choose whether they should take either or, or some combination of options and RSUs. And so restricted stock unit is an award of stock that’s given to employees, and it is part of their overall compensation. And it vests, it has a vesting schedule. We typically see three-year vesting schedule for the most part. So you don’t have the shares and then they vest in three years and then you have the shares. And so, if you work for a company and they say, okay, here’s an award of 300 shares. A lot of times these companies make these awards available in February or March. So, February, March, three years later, somebody has the shares. And there’s no choice. There’s no timing. It’s just like you’re going to get these shares and they’re going to be what they’re worth when the shares vest. And then when they vest, which means they’re available to you to hold or sell, then you get taxed on the amount of that, it’s income to you. And so either you will have to come up with the money to pay the, the tax withholding or a lot of companies will do a cashless one where if you’re granted 300 shares, you think you’re withholding should be 30%, then what will happen is you’ll get 210 shares and then you have those 210 shares and then you could do whatever you like with them. You could keep it in that same account, you can move them to another account, you can sell them immediately and take the money. And so that’s the quick on restricted stock units. Stock options are a little bit different, a little bit more complicated. So in stock options it’s again, it’s an employer as part of the compensation you would get from your employer. They will also typically have a three-year vesting schedule. And then typically once you exercise, you’ll have seven years. I mean once they vest, you’ll have seven years in which to exercise them. So you know, it’s a form of compensation that could take you 10 years to actually get benefit from and you may not ever get benefit from them. So a big difference between stock options and RSUs is that RSU is you’re going to get this stock and it’s going to be worth whatever it’s worth in three years. With stock options, they’ll say, okay, well our company is trading at a certain amount in the stock market and we’re going to give you an option to buy a certain amount of shares at some specified date in the future. So again, say it’s in March. And so you get these March 2025, they vest in March 2028. And at that point you can exercise those options and get like a, you could feel like a, a discounted price on the stock. And so if the stock is trading for more than the strike price on the option, then like that’s money to you. It’s not free money because you have to pay tax on the difference. But yeah, it could be worthwhile. So hypothetically, say stock is selling for $10 a share when the option is granted and three years later it’s selling. It’s had a great run. Now it’s selling for $15 a share. And so March of 2028, when you have the right to exercise those options, you know, you can earn quickly $5 per share. And so that could be really nice. Now the difference is that the stock could be worth $8 a share and so you would have no reason to, to exercise them or it could be worth a hundred dollars a share. And you could make a lot of money exercising them. So, you know, they’re both.. And for options, when you exercise is when you would get tax consequences. So, the difference between what you can buy it for and what it’s actually selling for is income to you. Like, same way like wage income is income to you. And so you might have to come up with that income. You might have to come up with that money to pay the tax withholding, or they could sell enough shares to meet that obligation. So just like in the RSU thing, maybe they have to sell 30% of the shares, and then what would be is you would have left the shares that are outstanding. So they’re very different. I mean, they’re both reward systems where employers want the employee to stay around because you have to hang around for three years to get the value. And usually it’s a pretty big part of the overall compensation package that we see. It’s not like a rounding error, you know, not a half of a percent or something. It’s generally pretty sizable dollars in the five or even six figures, like per award. And so, they definitely are an incentive. And in both cases, if you leave, just you quit, you will lose any unvested options like that will go away, or you’ll lose any unvested restricted sock units. So they really are done not just because your employer loves you so much, but your employer thinks you’re doing a good job and they want to keep you. And in a competitive job market, like that’s one of their ways that they’ll do it. They want you to be invested in their company for the long term.

Financial Risks of Stock Options and RSUs

Madison: Yeah. What are the financial risks associated with stock options and RSUs?

Mike: Sure. So the first with stock options that the big financial risk is that you might get options that are never worth anything to you. So it could be this award that your employer is like happy to present to you, but then the stock does poorly and you might not ever get anything from it. You know, the RSUs are not quite as risky that way because you know, if somebody’s going to make an RSU award to you, it’s likely that they have some value, right. So you’ll get something in three years. Even if it’s not as much as you might like, there will be something to it. So the stock options definitely have a riskier component for sure.

Losing Money on Stock Options

Madison: Okay. Can I lose money on stock options if the stock price falls?

Mike: So yes, you can lose. So if the price falls, you might not just ever have options that’s worth you doing. So you wouldn’t lose money in that way. But you know, you could lose potential money, right? Because what if the, the price before they vest is up, like way over what you can buy them for and then it comes down. And so that’s not every money that’s in, but it’s like unrealized potential money. And then also if you exercise the stock, you exercise the option, and get the stock, you can definitely lose money. Stocks can definitely go down and do all the time. So yeah, you can definitely lose money.

Which is More Beneficial: Stock Options or RSUs?

Madison: Okay. Which is more beneficial, stock options or RSUs?

Mike: Yeah, I don’t know, it depends. What is best really depends on the individuals circumstances and the risk tolerance and how like the stock performs, right. Like if the stock is not really that volatile and it makes and like doesn’t really go up, then the options won’t really be worth anything. Right? But you’ll get some value from RSUs. And it meanwhile, if the stock goes up a lot, you know, the options would be, could potentially be worth a lot more. You know, one thing that we looked at it is like in both cases we would recommend for most people generally to sell the stock when it’s available to them, either when the RSU’s vest or if they exercise the option because it’s worth money to them, we’d say at the point we own the shares, sell them. And the thing and I know that the company that grants those awards doesn’t want that. But here’s the way to look at it. We’ve had people with options in RSUs worth hundreds of thousands of dollars and what we’d say is, if you had $200,000, would you be using that to buy that one stock in your employer plan? And nobody says yes to that. Right. So look at it that way. Like if your employer is making this part of your compensation because they have incentives to do so, you know, they could just give you $200,000 instead. Right? They could give you a giant bonus or pay raise. I know the listeners salaries and net worths are all over the place on this podcast. So $200,000 is probably a huge amount of money to some people and other people like $200,000, why would I even work give me that small of a RSU? Just throwing these numbers out here for examples. But, you know, look at it that way. But, you know, if all of a sudden your employer gave you that money as a bonus, would you take the bonus and buy company stock with it? We’ve asked 50 people that and none of them had said yes. Right. So looking at it from a different perspective might help. Like one of the things that we often do when clients come in, new clients come in, they’ll have had several grants of RSU’s, they’ll have exercise options, and the company they work for is worth a giant percentage of their net worth. And that is really risky to have your income and your net worth both tied to that same one company. Now, sometimes, like if you worked at Nvidia in the last 10 years or Amazon or Apple or any other big tech companies that have had this huge run these last 15 years, it has made a lot of people rich, that really is an outlier and it’s not the same. You know, a lot of people tell me when they come in and they’ll say like, oh yeah, I exercise, I held this stock and it’s great and I’m so happy with it. But if you look at it and you compare it to the diversified portfolio or a stock index. Yeah. So maybe it has done well, but it hasn’t done nearly as well as the alternatives over that time. So, you know, if you like your employer and you like working there, that’s great. And if you want to have a, some small amount of your employer stock, there’s nothing wrong with that. If you have a couple percent in stock because you really like the mission of the company or you think it’s going to do well financially, you know, those are good reasons to do that. But you know, if you’re an employee and you’re plugging along and you just because you haven’t had a chance to think about it. You know, you still have 30 or 50 or 70% of your net worth tied up with your employer stock. Here’s a general reminder that sometimes companies go out of business. Companies actually go out of business all the time and that employer stock could become worthless and then you can lose your job and have stock that’s not worth anything. Even if you worked at one of those high flying tech companies, once you have enough, you need to diversify. You know, like if all of your goals can be met now but you’re keeping that money in that stock, that’s not really a good idea. It’s just not and we’ve seen too many times where companies that were just seemed amazing one day and they’re out. You know, Arthur Anderson went out of business like in nine months in the Enron scandal. Enron was number seven in the Fortune 500 and they’re out of business. And all those employees lost so much and they didn’t have to. So. Look, I, in a lot of ways I’m a big risk taker. You know, I started a business with no, no clients. You know, I have done the Ironman races when I am not that, yeah, it doesn’t make sense if you looked at me. So I’m a big risk taker and I would say that’s too big of risk for me to take. And you might not realize how big that risk you are, but I’m telling you now that’s a risk.

What Happens to Stock Options and RSUs When Leaving the Company

Madison: All right. What happens to my stock options or RSUs if I leave the company?

Mike: So, if you leave the company just because you decide to quit, your unvested stock options and RSUs will probably go away. If you die or become disabled or retire, there’s probably something in your plan document that addresses those. Like, you’ll often be given some time. Like, if you retire, you’ll probably be given some time to exercise those things, and they might even accelerate the vesting, depending on, like, how long you work there. So, if you leave because you die, retire, become disabled, you need to look at the plan documents and find out, you know, or talk to somebody in HR. Obviously, if you die, you’re not doing those things, but your executor would do those things.

Which is Better for Wealth Building: Stock Options or RSUs?

Madison: Yeah. All right. Which is better for wealth building, stock options or RSUs?

Mike: Yeah, there’s no real answer on that, Maddie. So which one you should choose depends on your personal circumstances. And which one will build better wealth really depends on how the company performs when you have those options. And when I say options in this case, I mean the choice with the RSUs or stock options. Right. So there’s no right answer. You know, if the stock moves different ways, one or the other will do better for you or worse for you. And so you’d have to look at your personal circumstance and figure out what makes the most sense for you and then choose accordingly.

Madison: Okay.

Mike: All right.

Closing Thoughts

Madison: All right. Thank you, mike.

Mike: Thanks, Madison. This has been enjoyable. I really appreciate you getting this together so quickly.

Madison: Yeah, absolutely. All right, so for more information on Yardley Wealth Management or Yardley Estate Planning, you could visit our websites at yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. Don’t forget to smash the like button if you enjoyed this episode, this podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.