Definition
Restricted Stock vs Stock Options
Restricted stock units are shares granted that vest over time at no cost to receive, while stock options give the right to buy shares at a fixed price; their value and risk profiles differ.
RSUs give you actual shares once they vest, costing you nothing to receive (you are taxed on their value at vesting), so they retain value as long as the stock is worth anything. Stock options (ESOPs) give the right to buy shares at a preset exercise price, valuable only if the market price exceeds that strike.
Options offer higher upside leverage but can become worthless if the share price stays below the exercise price ('underwater'), whereas RSUs almost always have some value. Both are taxed as a perquisite first and as capital gains on sale.
When evaluating equity compensation, understand whether you are getting RSUs or options, the vesting schedule, and the tax at each stage, as these materially affect the real value.
Related terms
- ESOP TaxationEmployee Stock Options are taxed in India at two stages: as a perquisite on exercise based on the share value, and as capital gains when the shares are eventually sold.
- RSU Vesting & TaxRestricted Stock Units are company shares granted to employees that vest over time; in India the value at vesting is taxed as a perquisite, and later sale gains as capital gains.
- ESPPAn Employee Stock Purchase Plan lets employees buy company shares, often at a discount, usually through payroll deductions; the discount is taxed as a perquisite in India.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.