If you get ISOs (not NQSOs) and you early-exercise them such that the spread is $0 (or at least negligible/low) and you correctly file an 83b and the IPO or exit is more than two years from date-of-grant and one year from date-of-exercise, then you can get the more favorable long term capital gains tax treatment on the generated income from the exit event.
That’s a lot of conditions, so IMO they don’t make all that much sense and I much prefer RSUs (maybe I’d think differently as a founder). Plus there are sharp edges like AMT. I’ve been an early employee multiple times at companies that had successful exits and never successfully had all conditions satisfied, and have ended up paying regular income tax rates but had more complicated taxes to file.
If joining a company as a non-founder I’d just take straight RSUs.
Generally, stock options are granted before the company is liquid (aka pre-IPO) and you pay $X with the hope that they're worth more and liquid someday. As you hit vesting dates, you can purchase more of them up to your total grant. (There's also stuff around early exercise, don't worry about that.)
RSUs are just shares you don't own yet. When you hit your vesting dates, you don't have to DO anything, they just become yours. You don't have to pay anything to execute and often the company will sell some for you to pay the taxes on them.
I wouldn't say one is definitively better.. there are tradeoffs:
RSUs can be better because you don't have to spend money to get them and they're liquid immediately (or at least soon).
Stock options can be better because your pre-IPO price may be better than the public price but you have no guarantee they'll ever be liquid.
- RSUs are taxable at vest, and if the shares aren't liquid, offloading enough of them to pay taxes is a huge headache (sometimes the company will help buy some back, but it's also a headache for a startup to do this, so they often don't)
- Stock options are "cheaper" for a startup to give out than RSUs, so you get more shares, ie your equity is higher-leverage. So if things go well, you end up with much much more money than had you gotten RSUs (and yes obviously if things go terribly, you get nothing).
> Stock options are "cheaper" for a startup to give out than RSUs, so you get more shares, ie your equity is higher-leverage. So if things go well, you end up with much much more money than had you gotten RSUs (and yes obviously if things go terribly, you get nothing).
Is this generally true? I’m not sure it applies for the typical engineer joining a larger company (a Databricks or Stripe, say) where you’re not really affecting the cap table all that much. Do companies really give out more options than RSUs?
My one personal piece of anecdata here is when considering an offer from a startup (that I didn’t take), they offered during negotiations to change the mix of RSU+options into just all RSUs (same total number).
RSUs are better but you can't get them before a company goes public. RSUs will have non-zero value. Options might never be exercisable but they're the normal way you get a stake of ownership at a startup (you don't get stock). So if you want to own part of a company before it goes public and you're not an investor, options are usually the only way on offer.
You can certainly get RSUs in a company before it goes public. You won't (generally) be able to sell them very easily, but being a publicly traded is not a requirement for issuing stock to employees.
