Stock Options vs RSUs: Engineer's Perspective

Here's what you need to know about stock options and RSUs as a software engineer:

• Stock options: Right to buy company shares at a set price. High risk, high reward.
• RSUs: Promise of actual shares after vesting. Lower risk, guaranteed value.

Key differences:

Feature	Stock Options	RSUs
Risk	Higher	Lower
Potential reward	Unlimited	Capped at stock price
Cost to you	Must buy shares	Free shares
Taxes	At exercise & sale	At vesting
Company stage	Startups	Established firms

Engineers say:

• FAANG companies often use RSUs to boost total comp
• Startup options can be a rollercoaster - some hit jackpots, others get burned

Choose based on:

1. Company growth potential
2. Your risk tolerance
3. Ability to buy shares
4. Tax implications
5. Vesting schedule

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What Are Stock Options and RSUs?

Stock options and Restricted Stock Units (RSUs) are two common types of equity compensation in tech. They're different beasts, so let's break them down:

Stock Options: The High-Risk, High-Reward Game

Stock options are like a coupon for company shares. They give you the right to buy stock at a set price (the strike price) within a certain time frame. If the stock price shoots up, you can cash in big time.

Here's how it works:

You get options to buy 1,000 shares at $10 each. The stock price jumps to $50. You buy at $10, sell at $50, and boom – you've made $40,000 (before taxes).

But there's a catch: if the stock price doesn't go above your strike price, your options are worthless. It's a gamble, which is why startups love them.

RSUs: The Safer Bet

RSUs are simpler. They're a promise of actual company stock. Once they vest, you own the shares – no need to buy anything.

Let's say you get 1,000 RSUs vesting over four years. Each year, you get 250 shares. If the stock's worth $50 when they vest, that's $12,500 in value per year.

RSUs are less risky. As long as the company's stock isn't worthless, your RSUs have value. That's why bigger, more stable tech companies often use them.

Options vs. RSUs: The Showdown

Here's how they stack up:

Feature	Stock Options	RSUs
Risk	Higher	Lower
Upside	Sky's the limit	Capped at stock value
Cost to You	Gotta buy shares	Free shares
Expiration	Yes	No
If Stock Tanks	Can be worthless	Still worth something
Who Uses Them	Startups, young companies	Big, established firms
Taxes	Complicated	Simpler, taxed at vesting

Dan Sachs from the University of Chicago's Polsky Center puts it well:

"Stock options provide an opportunity for employees to benefit from the company's growth, while RSUs offer a more predictable form of equity compensation."

Vesting Rules and Timing

Vesting is how you earn ownership of your equity compensation over time. It's a big deal for engineers with stock options or RSUs. Let's break it down.

Standard Vesting Schedules

Most tech companies use a 4-year vesting schedule:

• You get nothing for the first year. This is the "cliff".
• After that, you get a chunk of shares each month or quarter.

Here's an example:

You join Adobe. They give you 4,000 RSUs with a 4-year vest and 1-year cliff. Here's how it works:

• Year 1: On your first work anniversary, you get 1,000 shares.
• Years 2-4: You get 250 shares every 3 months.

Some companies do it differently. Google, for instance, uses GSUs that can change based on how well you perform.

Leaving Early? Here's What Happens

Quitting before your equity fully vests can cost you. Here's the deal:

1. Unvested equity

You lose it. Simple as that. Leave Adobe after 18 months? Say goodbye to 2,500 RSUs.

2. Vested stock options

You usually have 90 days to buy these after you leave. But what if you can't afford to? Or the company isn't public yet? Tough luck.

3. Vested RSUs

These are yours. You already got the actual shares when they vested.

"Your equity compensation is most likely tied to a vesting schedule, which outlines the timeline that transfer occurs." - Charles Schwab

Pro tip: Always read your equity award agreement. It tells you how vesting works and what happens if you leave.

Working in Europe? Vesting rules can be different there. Each country has its own rules. If you're job hunting in Europe, check out Next Level Jobs EU (https://nextleveljobs.eu) for high-paying software engineering gigs with sweet equity packages.

Taxes and Stock Compensation

Let's break down the tax implications of stock options and RSUs. It's not the most exciting topic, but it's crucial for engineers to understand.

When to Pay Taxes

Stock options and RSUs have different tax timelines:

RSUs: You pay taxes when they vest. The entire value of the vested shares counts as ordinary income.

For example: 1,000 RSUs vest when the stock price is $50 You owe taxes on $50,000 of income

Stock Options: You typically don't owe taxes until you exercise them. The tax treatment depends on whether you have ISOs or NSOs.

Here's a real-world example:

Eddy Engineer gets 4,000 RSU shares from Adobe in April 2021. In April 2022, 1,000 shares vest at $50 per share. Eddy now owes taxes on $50,000 of RSU income for 2022. If he's in the 35% tax bracket, his tax bill is $17,500.

Managing Your Taxes

1. Plan for withholding

Most companies use a 22% flat rate for supplemental wage income tax withholding on RSUs. This might not cover your full tax bill, especially if you're in a higher bracket.

2. Consider "sell to cover"

Many companies offer this option. They automatically sell enough shares to cover your tax bill.

3. Max out tax-deferred accounts

Use RSU sale proceeds to max out your 401(k) or IRA. This can help offset your tax bill.

4. Implement deduction bunching

Pull deductions into one tax year to minimize taxes when a large chunk of RSUs vests.

5. Watch out for AMT

If you have ISOs, exercising them might trigger the Alternative Minimum Tax. Plan carefully and talk to a tax pro.

6. Think about long-term capital gains

Hold RSU shares for over a year after vesting, and any extra gains get taxed at the lower long-term capital gains rate.

Here's a quick look at the 2023 long-term capital gains tax rates:

Income (Married, filing jointly)	Income (Single Filers)	Tax Rate
< $89,250	< $44,625	0%
$89,251 to $553,850	$44,626 to $492,300	15%
> $553,850	> $492,300	20%

Keep in mind, tax laws can vary a lot by country. If you're in Europe, each country has its own rules for taxing equity compensation. The European Commission is looking at ways to coordinate between Member States to avoid double taxation, which could change how your stock compensation is taxed in the future.

"With a Section 83(b) election, employees are taxed on shares they have not received yet, and the election is irrevocable." - Bloomberg Tax

This quote highlights a key point about restricted stock awards (RSAs). But heads up: this election isn't available for RSUs.

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What Engineers Say

Let's dive into real stories from software engineers about equity compensation. Their experiences shed light on how stock options and RSUs play out in the real world.

FAANG Engineer Stories

Engineers at big tech companies like Facebook, Amazon, Apple, Netflix, and Google (FAANG) usually get RSUs as part of their pay. Here's what they're saying:

"I've been at a FAANG for 10 years. My company sets a target total comp for me. I get a cash salary every two weeks, but it's not enough to hit that target. So they give me RSUs that vest a couple times a year to make up the difference."

This shows how companies use RSUs to boost total compensation beyond base salary.

Another FAANG engineer talked about junior-level pay:

"For an L3 (junior level), your stock grant is usually about the same or a bit more than your base salary, vesting over 4 years."

But watch out - RSUs can get complicated with taxes. A UK-based engineer pointed out:

"In the UK, when you get RSUs, you might have to pay the employer's part of National Insurance. This can push your tax rate over 50%. Some companies cover this extra tax, but not all do."

Startup Engineer Stories

Startup engineers often deal with stock options instead of RSUs. Their stories show both the ups and downs:

One engineer learned a tough lesson about timing:

"I got burned by the lockup period. Our company went public during the dot com boom, less than 6 months before 9/11. By the time we could finally sell our shares after the 1-year lockup, 9/11 happened and the market crashed. Our shares lost about 90% of their peak value."

Another saw their startup get acquired, but it didn't pay off:

"My first 'successful' startup was bought for $2M in stock from the buyer. That stock ended up worthless, except to the IRS. When we were acquired, the company was about a year old with some IP and market traction but no revenue."

But it's not all bad news. Some engineers hit the jackpot. Early employees at Beyond Meat saw their stock options explode in value when the company went public. The shares started at $25 at IPO but were trading between $160-$200 just three months later.

These stories show how startup equity can be a rollercoaster. Some engineers strike it rich, while others end up empty-handed.

In the end, whether you're dealing with RSUs at a big tech company or stock options at a startup, it's crucial to understand your equity compensation. Know your vesting schedule, tax situation, and the potential risks and rewards. As one engineer put it:

"Equity compensation can be an incredible benefit that aligns your success with that of the company."

Just make sure you go in with your eyes open to both the opportunities and the pitfalls.

How to Choose Between Options and RSUs

Picking between stock options and RSUs isn't easy. Let's break it down based on your situation and goals.

Company Size and Growth Stage

The company's stage often determines what you'll get:

Stock options are common in early-stage startups. They're risky, but can pay off big time.

RSUs are more typical in later-stage startups and public companies. They're safer, but might not have as much upside.

Take Facebook, for example. Early employees got stock options for just 15 cents per share. When Facebook went public in 2012, those shares hit $38 each. That's a huge win.

But times are changing. Even pre-IPO companies are moving towards RSUs. On average, companies switch to RSUs 5.5 years after starting, usually when they're worth about $1.05 billion.

Risks and Benefits

Here's what to think about:

1. How much risk can you handle?

Options are high risk, high reward. RSUs are safer, but might not pay off as much.

2. Can you afford to buy shares?

With options, you need to buy the shares. RSUs are given to you for free.

3. What about taxes?

Options give you more control over when you're taxed. RSUs are taxed when they vest.

4. Where's the company headed?

If you think the company will grow a lot, options might be better.

Here's a quick comparison:

Factor	Stock Options	RSUs
Risk	Higher	Lower
Potential Reward	Sky's the limit	Capped at stock price
Cost to Buy	Yes	No
Tax Control	More	Less

There's no perfect answer for everyone. As Meg Bartelt, a Financial Planner, says:

"If you want certainty over the chance of making more if the stock price goes up, go for RSUs."

When looking at job offers, think about asking for a mix of cash and equity. Some engineers even try to get cash instead of options, especially with brand new startups.

Don't forget about vesting schedules. Most companies use a 4-year vesting period with a 1-year cliff. This means you need to stick around for at least a year to get any benefit from your equity.

Stock Compensation in Europe

European tech companies are playing catch-up with their US counterparts on equity compensation. Here's the scoop on stock options and RSUs in Europe's tech world.

European Company Practices

In Europe, equity compensation isn't as widespread or generous as in the US. Only about 30% of European companies offer equity to all employees. Compare that to over 70% in the Bay Area. Why? Historically, European companies kept equity for founders and top brass.

But things are changing. In the last five years, stock options for European scaleup employees jumped from 12% to 16%. It's progress, but still behind the US, where employee stock ownership inched up from 20% to 22%.

Hannah Seal from Index puts it this way:

"We've seen in the US the impact of ownership on the entire tech ecosystem, and how positive that has been. So the fact that we are closing the gap and moving towards the more US star model of employee ownership is a positive thing."

Country-Specific Rules

Taxes on stock options and RSUs? It's a mixed bag across Europe. Let's break it down:

France is making moves with its BSPCE scheme. It's a hit with startups, working like stock options. The tax deal is sweet, especially if you stick around:

• Less than 3 years at the company? 47.2% tax on gains.
• 3+ years? Just 30% flat tax.

Germany? Not so hot. Their Virtual Share Option Plans (VSOPs) hit employees with taxes twice - when they exercise options and when they sell shares.

UK has a better setup with their Enterprise Management Incentive (EMI) scheme. It's got tax perks similar to France's BSPCE.

Who's leading the pack? The Baltic states - Estonia, Latvia, and Lithuania. They've got the most stock option-friendly rules in Europe. Bringing up the rear? Belgium and Spain, with policies that'll make your head spin.

Next Level Jobs EU

Want to navigate this maze? Check out Next Level Jobs EU. It's a job board that zeros in on high-paying software engineering gigs across Europe, including roles with juicy equity packages.

What's cool about Next Level Jobs EU:

• It's all about €100k+ salary jobs
• You can filter by location and tech stack
• They keep adding fresh job listings

If you're serious about maxing out your comp (equity included), they've got subscription plans:

1. 1 Month Plan: €9.50

Unlock all jobs and get your applications in early.

2. 3 Months Plan: €16.50

New jobs added weekly, plus you get alerts.

3. 1 Year Plan: €30

Early access to jobs and options for feedback.

As European tech firms push for better equity policies, Next Level Jobs EU can help you snag those roles with competitive stock compensation packages.

Summary

Software engineers face a big choice with equity compensation: stock options or RSUs. Let's break it down:

Stock Options vs RSUs: The Basics

Stock options? Buy company shares at a set price. RSUs? Get actual shares after a vesting period. The company's stage often dictates the choice:

• Startups usually go for stock options
• Big companies tend to prefer RSUs

Risk and Reward

Stock options are a gamble. They could make you rich if the company takes off, or be worthless if the stock price doesn't budge. RSUs? They'll always be worth something, as long as the company's stock isn't in the gutter.

Tax Stuff

Taxes hit differently:

• Stock options: Taxed when you exercise (and maybe again when you sell)
• RSUs: Taxed as regular income when they vest

Real-World Examples

FAANG engineers often get RSUs. Here's what one said:

"I've been at a FAANG for 10 years. My company sets a target total comp for me. I get a cash salary every two weeks, but it's not enough to hit that target. So they give me RSUs that vest a couple times a year to make up the difference."

But for startups? It's a different story. Early Beyond Meat employees hit the jackpot when the company went public. Shares started at $25 at IPO and shot up to $160-$200 just three months later.

Making Your Choice

Think about:

1. How old is the company? How much can it grow?
2. How much risk can you handle?
3. Can you afford to exercise options?
4. What about taxes?
5. How long until you can actually get the shares?

There's no perfect answer. Meg Bartelt, a Financial Planner, puts it this way:

"If you want certainty over the chance of making more if the stock price goes up, go for RSUs."