Comparing strike prices to free share promises
The right to buy shares at a fixed strike price after vesting is granted by this instrument. That instrument is a stock option, and if the strike price is set at today's value and the company grows, the holder profits from the difference. An RSU is a promise to hand over shares for free once a vesting schedule or performance condition is met, so the holder receives value as long as the shares are worth anything at all, a difference that shapes the tax outcome described in equity tax by country.
- Options need an exercise decision and payment, RSUs settle automatically at vesting
- RSUs always have some value once vested, options have none if the share price is below the strike price
- Options are more common at early stage startups because the strike price is low
- RSUs are more common at later stage or listed companies where share value is established and cash rich holders are less of a concern
Tax liabilities at vesting versus later exercise
| Feature | Stock options | RSUs |
|---|---|---|
| Payment required | Yes, strike price at exercise | No |
| Tax point | Usually at exercise | Usually at vesting or delivery |
| Tax base | Value at exercise minus strike price | Full market value at vesting |
| Risk if company falls in value | Can be worthless below strike price | Still has value unless shares are worthless |
For example, if a company grants an option with a 2 euro strike price and the shares are worth 5 euros at exercise, tax is calculated on the 3 euro gain per share. An RSU covering the same number of shares has no strike price, so tax is calculated on the full 5 euros per share at vesting, which usually produces a larger tax bill at that point, one of the trade-offs covered under RSUs.
Deciding between options and restricted units
- Early stage startups favour options because the low strike price keeps the tax bill small at exercise
- Companies preparing for or past a liquidity event favour RSUs because employees can sell shares immediately to cover tax
- RSUs remove the risk of options expiring worthless if the company's value falls
- Options preserve more upside per share for the recipient if the company grows significantly, since gains are measured above the strike price rather than from zero
Options versus RSUs: recurring questions
- Are RSUs common at seed stage European startups?
- They are less common at seed stage because they create an immediate tax liability at vesting with no cash to cover it, which is harder for early employees to manage.
- Do RSUs dilute the cap table before delivery?
- RSUs are usually only reflected in the fully diluted cap table once granted, similar to an option pool, but they convert to actual shares at vesting rather than requiring a separate exercise step.
- Can a company switch from options to RSUs later?
- Some companies move to RSUs as they mature and share value rises, since a high strike price makes new options less attractive. Existing option grants are not usually converted retroactively.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.