RSUs vs Stock Options: Equity Compensation Explained

RSUs (restricted stock units) and stock options are the two most common forms of equity compensation, and the difference between them comes down to what’s actually granted. An RSU is a promise of actual shares, delivered once they vest. A stock option is the right to buy shares later at a price fixed today, whether or not the stock has gone up since. That distinction changes how each behaves as the underlying stock price moves.

How RSUs work

A restricted stock unit is a grant of company shares that converts to actual stock once a vesting schedule is satisfied — commonly over several years, often with a portion vesting after an initial period and the rest vesting gradually afterward. Until a unit vests, it isn’t real stock; it’s a commitment that becomes stock automatically once the vesting condition is met, with no purchase required. When units vest, they’re typically treated as ordinary income based on the stock’s value at that moment, and a portion is often withheld or sold automatically to cover that tax obligation.

The defining feature of an RSU is that it has value as long as the stock price is above zero. If the stock is worth less than it was at grant, the employee has still received something of value — just less than originally expected.

How stock options work

A stock option grants the right, not the obligation, to buy a set number of shares at a fixed price — the strike price (or exercise price) — usually set at the stock’s value when the option is granted. Options vest on a schedule just like RSUs, but vesting only unlocks the right to buy; the employee still has to exercise the option by paying the strike price to actually own the shares, and options typically carry an expiration date by which they must be exercised or they’re forfeited.

The value of an option comes from the spread between the strike price and the current market price. If the stock has risen well above the strike price, exercising and immediately selling captures that difference. If the stock is trading below the strike price — commonly described as being “underwater” — the option is worth nothing on paper, since there’s no reason to pay more for shares than they’re currently worth on the open market.

RSUs vs stock options

	RSUs	Stock options
What’s granted	Actual shares, on vesting	The right to buy shares at a fixed price
Cost to receive shares	None	Must pay the strike price
Value if stock falls	Still worth something (share price × units)	Can be worth nothing if underwater
Upside if stock rises	Grows with share price	Leveraged — gains are the spread above strike
Expiration	None once vested	Yes, must exercise before expiring
Typical use	Common at larger, later-stage companies	Common at earlier-stage startups

Why the choice tends to track company stage

Earlier-stage companies, where the stock has more room to grow from a low starting valuation and cash is scarcer, tend to lean on stock options — the leverage of a low strike price is exactly what makes equity compensation attractive when salaries can’t compete with more established employers. This connects directly to how startup funding rounds work: each round tends to raise the company’s valuation, and the strike price on new option grants generally rises with it, so joining earlier usually means a lower — and more favorable — strike price on the options granted then.

Larger, later-stage, or public companies more often grant RSUs instead. With a higher, more stable market cap and less room for the kind of explosive percentage growth options are built to leverage, a straightforward grant of shares is simpler for both the company and the employee to reason about — there’s no strike price to track, no expiration to worry about, and no risk of the grant becoming worthless as long as the company has any value at all.

Risk and reward

Options are a leveraged bet: a modest rise in stock price can produce an outsized percentage gain relative to the (often small) strike price paid, but a decline below the strike price wipes out the paper value entirely. RSUs are a steadier form of compensation — the value moves proportionally with the stock, with no strike price threshold that has to be cleared first. Employees choosing between offers with different equity mixes are effectively choosing between two different risk profiles, not just two different amounts of “equity.”

The takeaway

RSUs deliver actual shares once they vest and hold value as long as the stock is worth anything at all. Stock options grant the right to buy shares at a fixed strike price, offering more leverage on the upside but the risk of being worthless if the stock falls below that price. Which one a company grants often tracks its stage — options for earlier, higher-growth-potential startups, RSUs for larger and more stable companies — and understanding the difference matters for judging what an equity-heavy offer is actually worth.