Everything You Need to Know About Stock Options and RSUs - Deepstash
Everything You Need to Know About Stock Options and RSUs

Everything You Need to Know About Stock Options and RSUs

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Stock Options: Turning Employees Into Co-owners

Free food, Beer taps and ping pong games in the break room do not help employees feel connected with the company's vision, mission or direction.

Employees prefer equity/stock compensation, the non-cash payout they get by being allocated restricted stock options. 

Employees then become partial owners of the company, vested into how it performs, increasing their motivation to be more productive and effective.

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Restricted Stock Units(RSUs)

RSUs work like stock options, with one difference: The employee does not have to buy them. 

As the company goes public or reaches a solid valuation, it offers RSUs to employees at a rate that will not dip during the ‘gestation period’ of a few years.

Employees can cash in the RSUs after the stipulated time at the price decided earlier, so there is no surprise or disappointment.

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Taking Advantage Of Stock Benefits

While switching jobs or even considering a new job offer, one has to understand what the different kinds of equity compensation are.

Stock options allow an employee to purchase shares in the company and go through a lock-in period of a certain number of years before the shares are buyable to them.

  • Stock options don’t need any upfront money from the employees, and if the company performs well over the years, they gain substantially.
  • If the company stock dips, the stock options become worthless.

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Negotiating Equity Compensation

  • Similar to salary negotiation, employees can negotiate equity compensation while switching their job.
  • Employers prefer giving stock over salary, as stock compensation is subjective to the performance of the company.
  • Some senior-level positions also see a percentage of salary provided in RSUs every month.

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Evaluating Equity Compensation

  • One has to evaluate while agreeing to take equity compensation, as having too much in one basket is risky.
  • Keep the balance between cash savings and stocks/bonds using a ratio according to your risk appetite, diversifying your investment every year.
  • During the time of vesting your stocks, ensure that they are not more than 10 percent of your total investment portfolio.

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Other Considerations For Employees

  • Consider the tax efficiency of buying and selling stocks options provided by the employer, by consulting your accountant.
  • Sell the company stock using the Employee Stock Purchase Plan(ESPP) which usually entitles you to the discounted price.

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"Yeah, I'm a thrill seeker, but crikey, education's the most important thing. " ~ Steve Irwin

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