RSUs
A promise of shares, not a right to buy them: RSUs, and why later-stage companies use them.
A restricted stock unit is a promise to deliver shares once vesting conditions are met. There is no strike and nothing to buy; the value of the shares is income when they are delivered. At an early company an option's appeal is its low strike; once the common is worth a lot, that appeal shrinks, and RSUs become the usual award.
ISO
- Good at
- No regular tax at grant or exercise
- Capital gain if held two years from grant and one from exercise
- Watch for
- $100,000 a year limit; employees only
- AMT on the spread at exercise
- Holding periods to meet
- Best for
- Employees of an early-stage company
NSO
- Good at
- Anyone can receive one
- No ISO conditions
- Watch for
Spread is ordinary income at exercise
- Best for
- Contractors, directors, advisors — and the excess over the ISO limit
RSU
- Good at
- Nothing to pay
- Worth something even if the price falls
- Watch for
- Taxed when the shares are delivered, cash or not
- No upside from a low strike
- Best for
- Later-stage companies whose common is already valuable
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §83(b)(2) (opens in a new tab)Property transferred for services, and the 83(b) election's 30 daysFree to read
- IRS guidance
- IRS Topic No. 427, Stock options (opens in a new tab)ISOs at grant and exercise, NSOs at exercise, and the AMTFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Restricted stock unitA promise to deliver shares (or their cash value) once vesting conditions are met. Nothing is bought; the shares' value is income when they are delivered. Common at later-stage companies, where an option's low strike no longer exists
- Incentive stock optionA stock option meeting IRC §422: employees only, granted under a stockholder-approved plan, strike at least fair market value, exercisable for no more than ten years. No regular tax at grant or exercise (the spread can trigger AMT); gain is capital if the stock is held two years from grant and one from exercise. Only $100,000 of stock, valued at grant, may first become exercisable in a calendar year
- Nonstatutory stock optionA stock option that is not an ISO — any grant to a contractor or director, and an ISO's excess over the $100,000 limit. With no readily determinable value at grant, the spread is ordinary income at exercise, as wages for an employee