Key Differences at a Glance
| Aspect | RSUs | Stock Options |
|---|---|---|
| What you receive | Actual shares when vested | Right to buy shares at strike price |
| Cost to acquire | $0 (you pay taxes only) | Strike price × number of options |
| Value when stock drops | Still has value (just less) | Can be worthless if below strike |
| Upside potential | Limited to stock growth | Unlimited (no cost basis eaten up) |
| Where they're common | Public companies | Early-stage startups |
| Liquidity | Immediately liquid (public) | Illiquid until IPO or acquisition (private) |
How RSUs Work
RSUs (Restricted Stock Units) are a promise of shares. When they vest, you receive actual shares (or their cash equivalent). You pay ordinary income tax on the value at vesting.
Example: You hold 1,000 RSUs. The stock is at $50 when they vest. You receive 1,000 shares worth $50,000. You owe income tax on $50,000.
How Stock Options Work
Options give you the right to buy shares at a fixed price (the "strike price"). Your profit is the difference between the current stock price and the strike price — but only if the stock is above the strike.
Example: You have 10,000 options with a $2 strike price. Stock is now at $8. You can exercise and pay $20,000 for shares worth $80,000 — a $60,000 profit before taxes. If the stock drops to $1.50 (below your strike), the options are worthless.
Value Comparison at Different Stock Prices
| Scenario (from $50 grant price) | RSUs (1,000 shares) | Options (1,000 shares, $50 strike) |
|---|---|---|
| Stock at $100 (up 100%) | $100,000 | $50,000 |
| Stock at $75 (up 50%) | $75,000 | $25,000 |
| Stock at $50 (flat) | $50,000 | $0 |
| Stock at $25 (down 50%) | $25,000 | $0 |
Private Company Equity: The Illiquidity Discount
When evaluating stock options at a private company (startup), it's common practice to discount the stated value to account for illiquidity and uncertainty — even if the paper value looks attractive.
Why Apply a Discount?
- Illiquidity risk: Private shares can't be sold on a public market. You may wait years before any liquidity event (IPO or acquisition).
- Outcome uncertainty: Most startups don't reach an exit that delivers value to option holders. The median startup equity ends up worthless.
- Long time horizons: Even successful companies may take 7–10 years to reach a liquidity event, eroding present value.
- Secondary market friction: Some companies prohibit or restrict secondary share sales, further limiting exit options.
What Discount to Use?
There is no universally correct discount. Financial planners and investors commonly apply a discount in the 30–70% range to private company equity compared to an equivalent public company offer, depending on:
- Company stage (seed-stage vs. Series D carry very different risk profiles)
- Quality of recent fundraising and valuation trajectory
- Industry and macro environment
- Your personal financial situation and risk tolerance
This is general educational framing, not financial or investment advice. Consult a qualified advisor before making compensation decisions.
Frequently Asked Questions
Which is better, RSUs or stock options?
Neither is universally better. RSUs have guaranteed value (as long as stock > $0) but limited upside. Options have unlimited upside but can be worthless if stock falls below strike price.
Do I have to pay anything to get my RSUs?
No. RSUs are granted to you without cost. You pay taxes when they vest, but you don't need to pay to acquire the shares like with options.
What happens to my stock options if the company goes public?
If the company IPOs, your options become exercisable for publicly traded shares. You can exercise (pay the strike price) and sell shares on the market.
Why do startups use options instead of RSUs?
Options have tax advantages for early-stage companies and employees. ISOs (Incentive Stock Options) can qualify for favorable long-term capital gains treatment if held correctly.
What is an illiquidity discount for private company equity?
Private company shares can't be sold on a public market — they're illiquid. Investors and financial planners commonly discount private equity to reflect this risk and uncertainty. The discount varies widely depending on company stage, perceived exit probability, and time horizon. Common practice is to apply a 30–70% discount to the modeled value, though any specific figure is a judgment call.
Model Your Equity
Use our calculator to see what your RSUs or options could be worth. For private company options, use the illiquidity discount field to adjust the modeled value.
Open RSU Calculator