Equity is presented in offer letters as a single headline figure, which conceals the fact that the two common instruments behave almost nothing alike. One is deferred pay. The other is a call option on your employer with a tax schedule attached. The distinction determines what you should do the moment each one vests.
The structural difference
| RSUs | Stock options | |
|---|---|---|
| What you receive | Shares, once vested | The right to buy shares at a fixed price |
| Value if price falls | Still worth the market price | Can be worth nothing ("underwater") |
| Cash needed | None to acquire | You must pay the strike price |
| Usual tax point | At vesting, as income | At exercise, and again at sale |
| Leverage | None — moves 1:1 | High — small price moves swing value sharply |
| Main risk | Concentration | Worthlessness, plus tax on paper gains |
Read the bottom two rows together. Options are the instrument with real upside and real chance of zero; RSUs are the instrument that behaves like a bonus paid in a single stock. Those call for different decisions.
The test that settles itAsk what the grant is worth if the share price is flat in four years. RSUs are worth their full market value — real compensation. Options are worth exactly nothing. If a large part of your offer fails that test, you are being paid in lottery tickets, and you should price them accordingly when comparing offers.
RSUs: the withholding trap
When RSUs vest they are ordinary income. Most employers withhold by selling a portion of the vesting shares at a flat statutory supplemental rate. If your marginal rate is higher than that flat rate — common for anyone with a substantial vest — the shortfall is yours to settle at filing.
- Check the withholding rate on your vest statement. Compare it against your actual marginal rate, including state and local tax.
- Reserve the difference at each vest, in cash, not in more company stock.
- Decide a selling policy in advance. Holding vested RSUs is an active decision to buy your employer's stock with money you already earned.
- Consider a scheduled sale plan so the decision is not made emotionally in a volatile quarter.
Options: strike, spread and the tax trap
An option's economics are simple: market price minus strike price, times shares. The complication is entirely in the timing of tax.
Non-qualified options are taxed as ordinary income on the spread at exercise. Incentive options avoid ordinary income at exercise but the spread counts toward alternative minimum tax — meaning you can owe real cash on a gain you have not realised, in a company whose shares you may be contractually unable to sell.
The classic disasterAn employee exercises incentive options in a private company at a high valuation, triggers an AMT liability, and cannot sell shares to pay it because there is no market. The valuation then falls. The tax bill does not fall with it. Never exercise into an illiquid position without modelling the tax first and confirming you can pay it from other assets.
Vesting mechanics that change the maths
- The cliff.Typically one year. Leaving a day before it means the entire first tranche is forfeited — the single most expensive date in most equity packages.
- The post-termination exercise window.Often 90 days. For options in a private company this is brutal: you must find the cash to exercise, and pay the tax, within three months of leaving.
- Refresh grants.Initial grants front-load. Whether refreshers exist determines your real compensation from year three onward — ask explicitly.
- Acceleration on acquisition.Single-trigger vests on the deal; double-trigger requires the deal plus your termination. This clause decides what a takeover is worth to you.
Limits, errors and borders of the standard advice
Critical reviewEquity advice is dominated by two groups with opposite incentives: recruiters who present grants at their most flattering, and financial commentators who treat all concentration as recklessness. Both are partly wrong, and here is precisely where.
"Always sell RSUs immediately on vest."
The claimVested RSUs are cash; holding them is an unnecessary concentrated bet, so sell at once and diversify.
Where it breaksThe logic is sound and it is the right default — but stated absolutely it ignores three real constraints. Trading windows and blackout periods may make "immediately" illegal for insiders. Some grants sit inside plans where a holding period changes the tax treatment materially. And where the position is small relative to net worth, the diversification benefit of selling is negligible while the transaction and tax friction is not.
The borderSell-on-vest as a written default, with two documented exceptions: a compliance restriction, or a modelled tax reason. "I feel good about the company" is not one of them — that is the bias the rule exists to defeat.
"Options are better because the upside is unlimited."
The claimOptions give leveraged exposure to growth, so ambitious employees should prefer them.
Where it breaksIt quietly omits the probability distribution. Most startup equity returns nothing; a minority returns modestly; a small tail returns enormously. Presenting the tail as the expected case is survivorship bias in its purest form. The claim also ignores that the employee bears the leverage and the illiquidity and the exercise cost, while the employer bears none of the three.
The borderOptions are rational when you can afford the exercise cost, can afford the outcome being zero, and are compensated for that risk with materially more upside than an RSU grant of equal stated value. Outside those conditions the "unlimited upside" is a story about someone else's outcome.
"Early-exercise to start the capital gains clock."
The claimExercise as soon as possible at a low strike and low valuation to minimise tax and maximise long-term treatment.
Where it breaksThis is genuinely powerful advice — for people who can lose the money. It converts a free option into a purchased illiquid asset. You pay cash now, possibly tax now, for shares you cannot sell, in a company that statistically may not exist in five years. The advice circulates most in communities where the outcomes were good, which is exactly where the sampling is worst.
The borderOnly exercise early with money you can write off entirely without changing your life, and only after modelling the tax on the current valuation. If the exercise cost is a meaningful share of your savings, the correct answer is usually to hold the option and accept the less favourable treatment later.
"Your equity is worth the number in the offer letter."
The claimThe stated grant value is a fair estimate of what you will receive.
Where it breaksFor a public company with RSUs, the figure is roughly honest, subject to price movement. For a private company it is arithmetic performed on a valuation that is itself an estimate, ignoring dilution from future rounds, liquidation preferences that pay investors first, and the possibility of no liquidity event at all. Preference stacks can consume the entire common-share value in a modest exit.
The borderAsk for the number of shares, total shares outstanding, the strike, the last preferred price and the total preference. Without those five, the grant value is unverifiable — and an employer unwilling to provide them has told you something useful.
"Never hold more than 10% of net worth in employer stock."
The claimA fixed percentage cap protects against concentration risk.
Where it breaksThe principle is right; the fixed number is arbitrary and it measures the wrong thing. It ignores that your human capital is already fully concentrated in the same employer — if the company fails you lose the salary and the shares together, which is a correlation no percentage cap addresses. Conversely, someone with a large diversified portfolio and a modest grant may be well within a sensible risk budget at 20%.
The borderSize the position against the loss you could absorb if the share price and your job disappeared in the same month, because in a real failure they do. That framing produces a personal number, which is the only kind worth having.
This article treats concentration as the primary risk and diversification as the default, which is a defensible but not neutral stance — it systematically undervalues the case of employees who understood their company well and were correct. Some genuinely life-changing outcomes came from ignoring exactly the advice given here. We take this position because the median outcome of concentration is poor and the downside is unrecoverable, not because the upside is imaginary. Tax treatment also varies sharply by country and changes frequently; every mechanism described here needs checking against your own jurisdiction and current year.
Frequently asked questions
Should I take more RSUs or more options?
If the grants are of equal stated value, RSUs are the lower-risk choice and options are the higher-variance one. Prefer options only when the quantity offered is large enough to compensate for a meaningful probability of zero, and when you can fund the exercise.
What happens to unvested equity if I am laid off?
Unvested grants are normally forfeited, and the exercise window on vested options starts immediately. Both are negotiable at exit — see severance negotiation.
How does equity affect my retirement contributions?
Vesting income can push you into a higher bracket, which changes the value of pre-tax versus Roth contributions that year. The stacking order is in 401(k) vs IRA vs HSA.
Is a large vest a good time to diversify?
Usually yes, because the tax has already been triggered by vesting — selling immediately adds little further tax while removing concentration. On allocating the proceeds, see asset allocation by age.
The bottom line
Value RSUs as deferred salary and manage them as a concentrated holding you did not choose. Value options as a leveraged bet, check the strike, the preference stack and the exercise window before assuming any worth, and never exercise into an illiquid position without first proving you can pay the tax from something else.
Revision log. Aug 2026: added the critical review, the instrument comparison table and the AMT illiquidity warning. Reviewed twice yearly.