My wife's company (Fortune 100) offers LTIs in the form of options and RSU's. I have a good understanding of how each function but I'm wondering if there are advantages to taking a mix. She can go 100% in one or the other, 50/50, or 25/75 either way. RSUs and options vest fully over three years and she'd have 10 years from the grant date to exercise options once vested. I haven't been able to find out what the window to exercise vested options after leaving the company is but I haven't looked hard yet.


she has to choose the allocation before knowing the anticipated value of the award and the equivalency rate between options and RSUs.

Any thoughts on this?

Does she need cash to exercise the options in the future?

RSUs have a clear basis once vested, taxes paid and you move on. Are the options taxed at strike price or is some value put on them upon vesting for tax purposes, and then gain taxes upon exercise?

mosdefn14 said:

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Does she need cash to exercise the options in the future?

RSUs have a clear basis once vested, taxes paid and you move on. Are the options taxed at strike price or is some value put on them upon vesting for tax purposes, and then gain taxes upon exercise?

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Yes I'd think we'd need the cash to exercise, but I don't see that being a problem.

Options would be taxed at exercise on the delta between strike and exercise price. Strike price is share value on the day options are granted (not vested).

Are the options qualified (ISO) or non-qualified (NSO)? There are tax consequences to consider. I'd suspect non-qualified since they're offering an RSU, but you should confirm.

RSU will probably be taxed when they vest, and the stock option (NSO) I 'think' (double check this) won't be taxed unless you exercise, and qualified options (ISO) won't be taxed at all if you meet the holding requirements. ISOs might subject you to AMT taxes though if they are worth a lot. If you don't meet the holding requirements the IRS will treat the option as an NSO and tax you accordingly and it will be painful.

You'll have to cough up money to exercise the options but I'd expect the company to have a way to exercise without any out of pocket expense, they basically exercise and sell some of the options to cover the exercise cost, so you don't have to pay anything but end up with less options. If you can afford it you can pay the exercise price and keep all of the options.

Also, you'll want to get familiar with the 83b tax election if you expect the company stock price to increase. It lets you pay tax on the present value when the stock is granted rather than when the stock vests. Obviously the risk is if the stock value goes down, you paid extra tax.

DO NOT IGNORE 83b! It could save you tons in taxes.

If you get options, also ask if you they will allow you to early exercise them before they vest. You can then early exercise the option, and at this time file an 83b election. The 83b applies only to stocks, so it applies to the RSUs, but the option converts to stock when you exercise so you'd need to file 83b when you exercise the options. It's a bit convoluted so get a tax professional to advise you.

If you early exercise the options you'll definitely want the 83b or you'll be totally screwed on taxes. I can't emphasize this enough, to make a good decision here you need to understand how ISOs, NSOs and RSUs are taxed and how you think the company stock valuation will change as they vest.

If they allow early exercise and the strike price is equal to the share price NSO might make more sense than an ISO since the profit (and tax) at exercise will be zero. This applies more to non-public companies which are valued less frequently than a publicly traded company and you can exercise early before the valuation deviates from the strike.

Thanks, this is really helpful advice. I don't think early exercise is an option but I'll definitely check out 83b.

gggmann said:

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Unfortunately, I've had the experience of options expiring worthless. At least w/ RSU's you'll get guaranteed shares even if the stock price drops by 50%, and you can wait as long as you want to let the price recover.

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That is certainly a risk. This is a very large and very stable company, so I'd hope that considering a 10 year time that wouldn't be the case, but you never know. That's also why I want to know if vested options can be exercised if/when she no longer works for the company. Definitely a higher risk of expiring worthless if options are forfeited after an employee leaves.

SweaterVest said:

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gggmann said:

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Unfortunately, I've had the experience of options expiring worthless. At least w/ RSU's you'll get guaranteed shares even if the stock price drops by 50%, and you can wait as long as you want to let the price recover.

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That is certainly a risk. This is a very large and very stable company, so I'd hope that considering a 10 year time that wouldn't be the case, but you never know. That's also why I want to know if vested options can be exercised if/when she no longer works for the company. Definitely a higher risk of expiring worthless if options are forfeited after an employee leaves.

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I'm not 100% certain, but from my understanding, once options vest then they're yours to keep even if you leave the company.

I'm with the above poster, I would rather have RSU's since thats guaranteed versus options.

SweaterVest said:

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gggmann said:

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Unfortunately, I've had the experience of options expiring worthless. At least w/ RSU's you'll get guaranteed shares even if the stock price drops by 50%, and you can wait as long as you want to let the price recover.

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That is certainly a risk. This is a very large and very stable company, so I'd hope that considering a 10 year time that wouldn't be the case, but you never know. That's also why I want to know if vested options can be exercised if/when she no longer works for the company. Definitely a higher risk of expiring worthless if options are forfeited after an employee leaves.

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Ask someone in banking what their options look like now relative to this summer (or March, or a year ago). You never know where you are in the ten year period.

She's likely to get more options than RSUs so don't underestimate how much of a game changer that can be if the companies stock goes up. RSUs are more or less guaranteed money so it really depends on your situation. I was fortunate enough to do really well by sitting on options for 8 of the 10 years I had to exercise them when I was younger. Now I get RSUs and the stable extra income is nice.

I had options early in my career and then the model switched to RSUs. Prefer the RSUs way over the options. I buried too many worthless options when they expired. Even have a small options graveyard in the corner of my backyard. I've always earned something with RSUs and many times they exceeded target 2x or more due to performance and/or market price improvements.

The ability to get more options than RSUs is where it gets interesting. I get a similar LTI structure but we get SSARs instead of regular options and we can't take 100%, only 80/20, 50%, or 20/80. I've made huge gains on some years but have other years that are worthless right now. Good problem to have but agree with the general guidance of taking mostly RSUs since the share will be worth something at vesting but you might not on the options.

I work for a large "stable" company too but a big stock rise and subsequent fall during Covid really screwed our LTI because we got two years of grants at much higher value than it really should have been now everything that vests is far below grant or worthless options. Lost lots of money on paper because of that.