Companies move from issuing employee stock options to restricted stock units (RSU) as they become larger for at least the following reasons: The value of RSUs are easier to understand compared to the upside of options. Clear alignment between company and equity strategy (i.e: there’s a plan to IPO soon)

What is the difference between RSU and non-qualified stock options?

Bottom Line. Stock options are when a company gives an employee the ability to purchase stock at a predetermined price at a given time. Conversely, RSUs are grants of stock that a company gives to an employee without any purchase. Employees get these either as shares or a cash equivalent.

Do startups give options or RSU?

Startups and VCs are starting to recognize that stock options are losing their effectiveness in recruitment and retention of the best talent. RSUs, used at large companies, doesn’t work at most startups since they can’t use their cash to buy back RSUs.

Can a non qualified stock option be granted to an employee?

Qualified stock options, also known as incentive stock options, can only be granted to employees. Non-qualified stock options can be granted to employees, directors, contractors and others.

What’s the difference between stock options and restricted shares?

Stock options are the right to buy a certain number of shares at a certain price in the future, with the employee benefiting only if the stock price then exceeds the stock option price. Restricted shares are, as noted, an outright award of equity ownership in a company.

When does a stock option not qualify as an incentive stock option?

When a stock option does not qualify as an incentive stock option, it is called a non-qualified stock option (NQO). NQOs do not offer the beneficial tax treatment that is available with incentive stock options.

What are restricted stock units for startup employees?

One possibility is to replace early employee (first ~10 employees) stock options with the same Restricted Stock Agreements (RSAs) as the founders. For later employees, offer what are called restricted stock units (RSUs). Restricted Stock Units are a company’s promise to give you shares of the company’s stock.