RSUs and stock options, decoded
Your equity grant came with a forty-page plan document and a one-page summary — neither of which explains what actually happens. This letter decodes the two main instruments (RSUs and options), the tax events each one triggers, and the decision that is yours alone regardless of what anyone advises: what concentrated risk you're willing to hold.
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RSUs: the straightforward one
Restricted stock units are a promise: shares (or their cash value) delivered on a vesting schedule. The tax event is vesting — the share value at that moment is taxed as ordinary income, usually with an automatic sell-to-cover for withholding. What remains is yours: real shares, real basis, real capital gains treatment from that day forward.
RSUs are a paycheck in a costume. Your employer is handing you compensation in a currency that happens to be their own stock — a currency with no diversification and full exposure to one company's fortunes. Reading it as a paycheck (vest, evaluate, usually sell part) changes every decision that follows.
Stock options: the two flavors and their tax events
| NSOs (non-qualified) | ISOs (incentive) | |
|---|---|---|
| Exercise tax event | Spread taxed as ordinary income at exercise | No regular income tax at exercise — but AMF-adjusted income for the alternative minimum tax calculation |
| Holding for capital gains | Possible — from exercise date | Possible — IF you hold 1+ year past exercise AND 2+ years past grant (qualifying disposition) |
| The classic trap | Exercising and forgetting taxes exist | Exercising in January, then owing AMT in April on paper gains that later evaporated |
Options are the right — not the obligation — to buy shares at a fixed 'strike' price. They compensate you for staying; they're worth exercising only when the market price comfortably exceeds the strike — and only after you've planned the tax event.
The 83(b) election — the early-exercise accelerator
If your company allows early exercise of options (buying unvested shares), the 83(b) election — filed within 30 days of purchase — taxes you on the nearly-worthless value NOW, starting your capital gains clock years early. It's a genuine tool for early employees at startups; it's also irreversible and worthless if the shares never vest or the company never succeeds. The 30-day deadline is absolute — there is no second filing window.
Every equity decision has three dates — grant, vest/exercise, and sale — and the tax character depends on which doors you walk through in which order. Write your three dates on one page before making any move.
The decision that's always yours
How much of your net worth rides on one company's stock — that's not a tax question, an HR question, or a financial-adviser question. It's a concentration question: our next letter covers the frameworks for deciding what to hold and what to diversify, calmly and on a schedule.
Read your equity like compensation, because that's what it is. The difference is that nobody auto-deposits house money into a single stock for you — except your employer.
The Quiet Money Review, letter two
Frequently asked questions
Should I exercise my options the moment they're in the money?
Not automatically. Exercise triggers the tax event — and options have value from remaining TIME, not just from the spread. Exercising early spends that time value for no reason. The honest sequence: know your three dates, model the tax, THEN decide — usually with a professional for anything ISO-related.
What's the sell-to-cover default on RSUs?
Most plans withhold at a flat rate that often UNDER-withholds for high earners — a classic April surprise. If your marginal rate exceeds the default, plan a quarterly estimated payment or extra withholding elsewhere to cover the gap.
I joined a startup — options or RSUs matter more?
Early-stage: options (with the 83(b) possibility) are the standard instrument — more risk, more leverage on success. Public companies: RSUs dominate — they're worth something from day one of vesting. The instrument matches the company's stage; neither is 'better' in the abstract.