What is an RSU?
A restricted stock unit, or RSU, is a promise from your employer to give you shares or cash later, once the units vest. The IRS equity compensation audit guide, Publication 5992, calls RSUs "unsecured, unfunded promises to pay cash or stock in the future." It adds that one RSU typically "represents one share of actual stock."
You don't pay anything for an RSU. If the company's shares are worth $50 on the day a unit vests, that unit is worth $50 to you. The value moves with the share price, but it only falls to zero if the shares become worthless.
The same IRS guide says RSUs "generally are not taxable at grant" and that "a taxable event does not take place until the vesting." So a grant shows up as income in the years it vests, not the year you sign the offer. The exact rules depend on the plan, so read the grant agreement.
What is a stock option?
A stock option is the right to buy company shares at a fixed price, called the exercise price or strike price, for a set period. You gain only if the shares are worth more than that price when you buy them. If the share price never rises above it, the option is worth nothing.
The IRS splits options into two groups on its stock options tax topic. Statutory options are granted under an incentive stock option (ISO) plan or an employee stock purchase plan. Nonstatutory options are "granted neither under an employee stock purchase plan nor an ISO plan." Your offer letter or grant agreement should say which kind you are getting.
An offer can include either one, or both. Ask which one you are being offered, and ask for the plan documents before you sign.
How are RSUs and stock options different in an offer?
The main difference is what you pay and what you risk. With RSUs you pay nothing, and each vested unit is worth the share price. With options you pay the exercise price for each share and gain only the amount by which the share price beats it. The table compares them.
| Question | RSUs | Stock options |
|---|---|---|
| What you receive | A promise of shares or cash when units vest | The right to buy shares at a fixed exercise price |
| What you pay | Nothing | The exercise price for each share you buy |
| Worth something if the share price falls? | Yes, as long as the shares have value | Only if the price stays above the exercise price |
| When US tax usually applies | At vesting, per IRS Publication 5992 | Nonstatutory: at exercise. ISO: generally not at exercise, though AMT may apply, per IRS Topic 427 |
| When Canadian tax usually applies to options | Not covered on the CRA options page | When you acquire the shares, or when you sell them for a Canadian-controlled private corporation |
| What to ask the recruiter | Number of units, vesting schedule, refresh grants | Number of options, exercise price, vesting, how long you can exercise after leaving |
How do the numbers compare in a real offer?
Turn each grant into a yearly figure at today's price, then test it at a lower price. In this example, with numbers made up for this page, Offer A grants 4,000 RSUs vesting over 4 years, and the shares trade at $25. Offer B grants 20,000 options at a $5 exercise price in a private company, also over 4 years.
Offer A is worth 1,000 units a year times $25, or $25,000 a year at today's price. If the price falls to $15, it is still worth $15,000 a year. That is the cushion RSUs give you.
Offer B depends on what the shares are worth when you can sell them. If they reach $10, each option gains $5, so 5,000 options a year are worth $25,000 before tax. If they stay at $5 or fall below it, the options are worth nothing. For a private company, ask when and how you could sell shares, since the plan and the company decide that.
Run the same test on your own offers. The guide to comparing job offers shows how to put equity next to salary and benefits, and the guide to total compensation vs salary shows what else to count.
How are RSUs and stock options taxed in the US?
The timing differs. RSUs are generally taxed when they vest. Nonstatutory options are generally taxed when you exercise them, on the gap between the share value and what you paid. ISOs generally aren't taxed at exercise for regular income tax, though the IRS says you "may be subject to alternative minimum tax in the year you exercise an ISO."
IRS Topic 427 says that for nonstatutory options without a readily determinable value, "there's no taxable event when the option is granted." When you exercise, IRS Publication 525 says the amount to include is "the difference between the amount you pay for the property and its FMV." Selling the shares later is a separate taxable event.
ISOs have a limit. IRS Publication 5992 says there is a $100,000 annual limit on the value of ISOs that can become exercisable for the first time in a calendar year, measured at grant. Any amount above that is treated as a nonstatutory option.
This page explains how the rules work and doesn't give tax advice. Your situation depends on the plan, your state and your other income. Check with a tax professional before you exercise options or sell shares.
How are stock options taxed in Canada?
In Canada, the benefit from an employee stock option is generally taxed in the year you acquire the shares. The Canada Revenue Agency's security options page says the timing differs for a Canadian-controlled private corporation, or CCPC: the benefit is included when the employee "disposed of the shares." For other employers, it is included when the employee "acquired the shares."
The CRA calculates the benefit as the fair market value of the shares when acquired, minus what you paid for the shares and for the option. If eligible, "your employee can claim a deduction of 1/2 from the value of the security options taxable benefit." The CRA page notes a cancelled proposal to change that rate in 2024.
Some large employers face a cap. For options granted on or after July 1, 2021 by non-CCPC employers with revenues over $500 million, the CRA says options are "subject to an annual limit of $200,000" for the deduction. The CRA page on options does not cover RSUs, so ask a Canadian tax professional how a specific RSU plan is treated.
How does a sign-on bonus work?
A sign-on bonus is a one-time cash payment for joining, paid on a date the offer should state. It is taxable income. IRS Publication 525 says bonuses "you receive for outstanding work are included in your income," and IRS Publication 15 lists bonuses as supplemental wages, which an employer may withhold at a flat 22%.
That flat rate is why a bonus can look smaller than expected on the paystub. The withholding is an estimate, and your actual tax is settled when you file. Ask the recruiter for the gross amount and the pay date in writing.
A sign-on bonus may come with repayment terms, often called a clawback. These are contract terms, so the only rules that apply are the ones in your agreement and the law where you work. Read the agreement for four things.
- How long you must stay before you keep the full bonus.
- Whether repayment is the full amount or reduced for the months you stayed.
- Whether you repay the gross amount or the amount you received after withholding.
- Whether repayment applies if the employer ends your job.
What should you ask before you accept equity or a bonus?
Ask for the details in writing before you sign. You need the number of units or options, the vesting schedule, the exercise price, any refresh grants, how long you have to exercise after you leave, and the sign-on bonus repayment terms. A recruiter who expects you to decide without these is asking you to guess.
Here is an example email you can copy and change.
Hi [name], thank you for the offer. Before I decide, could you send the equity details in writing? I'd like to know the number of [RSUs or options], the vesting schedule and any cliff, the exercise price if these are options, and how long I'd have to exercise after leaving. Could you also share the repayment terms for the sign-on bonus? Thanks, [your name]
If the equity is smaller than you hoped, it can be negotiated like salary. The guide on how to negotiate salary has scripts, the counter offer email examples cover signing bonuses, and how to respond to a job offer covers timing. If pay came up earlier in the process, see what are your salary expectations.
If you are still in the interview stage for other roles, the free debrief template helps you write down what each recruiter said about pay and equity after every call.