RSU vs. stock options

Startups move from issuing employee stock options to restricted stock units (RSU) as a form of equity compensation as they become larger for at least the following reasons:

  • The value of RSUs are easier to understand compared to the upside of stock options
  • The cost to exercising stock options becomes too large of a burden for employees
  • The company wants to limit dilution
  • Clear alignment between company and exit strategy (i.e: there's a plan to IPO soon)

In a tougher economic climate, it may make sense for companies to switch to offering RSUs instead of stock options because, unlike options, RSUs will still be worth something even if the stock price goes down. Option grants become "underwater" if their fair market value (FMV) falls below the strike price). However, if the 409A valuation of the company drops significantly for a temporary time and then rises, it may make options seem like a good deal in comparison to RSUs.

Generally, later stage companies are the ones that look to switch to RSUs. Early on, options make sense for a company because of the relatively low strike price and higher anticipated growth rate.

So if you're a CFO of a mid- to late-stage company, when do you switch? Timing matters. You want to ensure you aren't late (or early) to the game. This RSU vs. stock options guide is here to help make sure you get this important decision right, because it has deep ramifications for your company and employees.

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RSUs vs. stock options: Key differences

RSUs have benefits for both existing and newer employees — and they simplify a lot: less dilution, no cost to exercise, and less risk if the stock price drops. That said, most private RSUs include "double-triggers" (a time-based vest plus a performance event like IPO or acquisition).

Equity Value proposition Pros Cons
RSUs The value of RSUs is easier to measure; worth whatever the company stock is worth at issuance; no purchase required. • Less equity burn to provide similar value to candidates.
• Straightforward perceived value for recipients. 		• Employees have no control over timing of taxable event or rate; may lose accrued RSUs if they leave before both triggers are met.
• Less alignment with upside vs. options; private RSU liquidity is difficult today.
Options More upside potential at high-growth companies; employees can optimize taxes (e.g., ISO/NSO strategies). • Control over timing of tax (exercise/sale).
• Can participate in private liquidity programs (tenders, secondaries). 		• Higher equity burn to match RSU value.
• As companies mature, exercise cost becomes a barrier; preferred/strike gap can shrink and reduce inherent value.

When are companies switching from stock options to RSUs?

Based on limited directional data, we often see:

On average
Switch at ~5.5 years
after incorporation
At valuation
$1.05B (post-money)
on average at switch time

This isn't a rule — your stage, liquidity plans, and equity philosophy drive the timing.

What to consider before switching from options to RSUs

Taxes

Many late-stage private RSUs use performance triggers, so employees aren't taxed until there's a credible path to liquidity. Public-company RSUs are typically taxed at vest. Here's a quick comparison:

Security type When are holders taxed? Tax type Implications
RSUs with performance trigger At vest (upon performance trigger) Ordinary income Higher rates; little control over the taxable event timing.
Options (ISO/NSO) At exercise or sale (varies by ISO/NSO and holding period) Ordinary income + potential capital gains; AMT may apply (ISO) Potentially lower effective rates; employee chooses when to exercise.

Liquidity

RSU performance triggers make private-market liquidity difficult. Removing the trigger requires covering employee tax at vest, which few private companies are ready to do.

Security type Liquidity options Limitations
RSUs with performance condition IPO or acquisition Private tenders are difficult; at IPO/Acq, accrued RSUs are taxed regardless of employees selling.
Options Private tenders/secondaries, IPO, direct listing, acquisition Primarily cadence and board appetite; otherwise flexible and proven.

Other considerations:

Plan for accounting impacts around an IPO: double-trigger RSU expense is recognized at vest (potentially a large non-cash expense post-listing), which can depress reported GAAP profitability. RSUs also increase the education burden for employees and add complexity for finance/HR/stock admin.

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What happens if you switch too soon

We regularly see companies switch early and get boxed in:

  • Existing RSU grants can't be converted back to options
  • Private liquidity becomes difficult to run
  • Large employee tax bill at vest if heading public
  • Reduced upside for employees if significant growth remains

If you do switch and later decide RSUs aren't a fit, you can issue new options going forward — but outstanding RSUs stay RSUs.

Get help with this big decision

Speak with Falcon on structure, international nuances, and liquidity planning. If you're working with Falcon Wealth Planning, your advisor can help you pressure-test scenarios. This is a high-impact decision — model carefully and align stakeholders.

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