Deciding between Employee Stock Option and Restricted Stock

Question

The Company I am currently working with, as part of a reward program awarded me 500 stock options and given me an option to choose them either as

1. Employee Stock Option
2. Restricted Stock
3. Or as a mixture of both

My Manager educated me that there are differences in both the above and I need to decide what I should opt for. What I understood was

Employee Stock Option: I would be given the entire stock option and can start exercising my option from second year onward. Each year I earn the right to purchase those shares over 4 years, in 25% annual increments.

Restricted Stock: I would only be given 1/4 of the stock option i.e. 125. I would earn the right to the shares based on a 25% annual vesting schedule.

Or as a mixture of both: I can also choose a fraction of the Stock as ESOP and a fraction as Restricted Stock, i.e. if I choose to equally split my stock, I would have 250 as ESOP and 62.5 as Restricted Stock.

What is the Optimal Strategy I can adopt to decide that will maximize my chance of gain.

Note

• I have the historical market data of the Company
• The Company is US based

Few more details (that I realized are important and required to make a subjective answer)

• I am not a US Resident/Citizen (I am Indian)
• The Company is not a start-up, but a well known established U.S. based multinational computer technology corporation

Answer 1

There's no best strategy.

Options are just pieces of paper, and if the stock price goes below the strike price - they're worthless. Stocks are actual ownership share, whatever the price is - that's what they're worth.

So unless you expect the company stock prices to sky-rocket soon, RSU will probably provide better value.

You need to do some math and decide whether in your opinion the stock growth in the next few years justifies betting on ESOP.

You didn't say what country you're from, but keep in mind that stock options and RSUs are taxed differently and that can affect your end result as well.

Answer 2

As @littleadv wrote, it depends on your prediction of the direction the stock price will go. This answer is to provide a concrete illustration.

I'll use different numbers to simplify the math. Anyone can adapt this to their actual numbers. I'm also going to only consider a single vesting date. You can consider each portion of the grant that has a separate vesting date as a separate grant. I'm also going to use dollars.

Assume the following:
1. You have the choice between 100 RSUs or 400 options.
2. In either case, the grant vests in 1 year.
3. The current stock price is $100.
4. The options are granted with a strike price that is the current price.

After 1 year, when the grant vests, the value of each choice depends on the current stock price at that time:

Price    Value of RSUs   Value of options  
 $90         $9,000              $0
$100        $10,000              $0  
$110        $11,000          $4,000  
$120        $12,000          $8,000  
$130        $13,000         $12,000  
$140        $14,000         $16,000  
$150        $15,000         $20,000  
$160        $16,000         $24,000  

Answer 3

There's no best procedure.

Alternatives are simply bits of paper, and if the stock cost goes beneath the strike cost - they're useless. Stocks are genuine proprietorship share, whatever the cost is - that is what they're worth.

So except if you expect the organization stock costs to soar soon, RSU will likely give better worth.

You have to do some math and choose whether as you would like to think the stock development in the following hardly any years legitimizes wagering on ESOP.

You didn't state what nation you're from, yet remember that investment opportunities and RSUs are burdened diversely and that can influence your final product also.

Answer 4

Whether RSUs or stock options are better will depend entirely on the future performance of the stock. With stock options and RSUs being offered at a 4:1 ratio, the options will be worth more than RSUs if the stock price goes up by more than one third.

Suppose your choice is between 4 options struck at $90, or 1 RSU worth $90. If the stock price goes up by 1/3 to $120, the options have a total value of $120, as does the RSU. If the price goes up by more than 1/3, perhaps to $130, the stock options are worth more ($160 vs. $130). If the price goes up by less than 1/3, perhaps to $110, the RSU is worth more ($80 vs. $110).

This is simply an analysis of which choice is worth more when you sell. There may be tax implications to consider, like the fact that RSUs are generally taxed upon vesting, while options generally don't get taxed until you sell them.

There is also the element of your personal tolerance for risk - stock options have a bigger potential upside, but it's also possible they will be worth nothing at all. The RSUs are a safer bet, in that you won't earn as much if the stock does very well, but they will always be worth something even if the stock does poorly. The OP mentions they want to "maximize their chance of gain", which suggests RSUs might be the better fit - the chance of gain is 100%, although the expected value of the gain may not be as high as with the stock options. RSUs are basically a surefire bonus check, while options are less certain.