Equity Compensation: Stock Options vs. RSUs for Startups 

A younger me wanted to start a new business. I had identified a great niche, I had a supplier in mind, and I felt confident I could be successful, just not by myself. I needed help and I wasn't in a position to spend time or money on hiring. I decided I'd look for a partner. I spoke with several people, and we got close to an agreement multiple times. However, my desire to protect my interest in the company often clashed with potential partner's desire for solid returns. Back then I didn't know about the options that would have given us all what we wanted, and I didn't ask for help on that problem. Consequently, the business was done before it started.

What Are Stock Options?

Stock options give employees the right to buy company shares at a set price (known as the strike price) after a specific vesting period. They don’t receive shares upfront, but if the company’s value rises, they can exercise those options and potentially benefit from that growth. Stock options carry risk. If your startup’s value dips below the strike price, the options lose some appeal.

• Advantages:

  • Motivates employees to work toward increasing company value.

  • Often requires less immediate cost to you as the employer.

• Drawbacks:

  • Employees may feel disappointed if the share price never goes above the strike price.

  • Some folks find the exercise process confusing.

What About RSUs?

Restricted stock units (RSUs) give employees shares or the value of shares once they hit vesting milestones. Instead of buying these shares, employees receive them outright at no purchase cost. RSUs might feel simpler to your team because there’s no need to pay a strike price. Yet taxes can become an issue, as RSUs are taxed as soon as they vest.

• Advantages:

  • Employees get a direct stake without needing to pay anything upfront.

  • RSUs have less downside risk compared to options.

• Drawbacks:

  • There can be higher immediate tax implications when they vest.

  • Employees don’t have the same optionality if the share price drops.

Common Concerns

1. “Will my team appreciate these perks?”
   Equity shows you value your people. If your plan is clear and fair, most staff members see it as an opportunity.

2. “Should I worry about taxes?”
   Taxes differ for options and RSUs. Stock options can let employees defer taxation until they sell, while RSUs create a tax event at vesting. An accountant or attorney can help you structure a plan that works best for your team.

3. “Could I lose control of the company?”
   These equity plans dilute ownership slightly. But if you set sensible vesting schedules and clarity around how many shares you offer, you can maintain control while rewarding those who help grow your startup.

How to Decide

Choosing between stock options and RSUs depends on your goals, the stage of your startup, and how your team feels about risk. If you want to inspire employees to push for a higher valuation, stock options might spark motivation. If you prefer something more straightforward, RSUs might fit better.

Practical Steps

• Review Your Budget: Think about how each plan affects cash flow, taxes, and future fundraising.

• Seek Legal Guidance: Different jurisdictions have varied rules for issuing options or RSUs. A lawyer can pinpoint the right path.

• Communicate Clearly: Your team should know exactly what these terms mean. Offer an FAQ or hold a small Q&A session to walk them through details.

Equity compensation can feel like a murky world. Yet with the right approach, you can harness these tools to reward key contributors and strengthen your company’s future. The founder I met eventually chose a balanced approach—offering options to certain employees and RSUs to others. He found that matching each person’s preference kept morale high without triggering confusion. You can craft a similar plan that aligns with your vision, budget, and team culture. And by doing so, you’ll help your employees share in the growth they help create.

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