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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
  • Are you also in the U.S.? – Chris W. Rea Jun 11 '14 at 15:31
  • Are they offering the same number of RSUs as option? If not, what are the numbers? – JoeTaxpayer Jun 11 '14 at 16:26
  • @ChrisW.Rea: No I am an Indian. – Abhijit Jun 12 '14 at 9:07
  • @JoeTaxpayer: No, if I opt for RSU, it would be 1/4th the number of Options I would be offered – Abhijit Jun 12 '14 at 9:08
  • ok, what is the approximate stock value, and what is the option strike price you'd get? Without these details, how can anyone really answer you? – JoeTaxpayer Jun 12 '14 at 9:33
2

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.

  • There's also a little-known way to save quite a bit of money on taxes with RSUs. (I don't know if anything similar exists for options.) It's called a Section 83(b) Election and allows you to pay tax when you're granted the shares rather than when they actually vest. If you have a crystal ball that tells you the stock is going to be worth quite a bit more when it actually vests, this can be quite a lucrative option. Of course, if you leave the company before your vest completes, then you'll lose a lot of money. – dg99 Jun 11 '14 at 21:23
  • @dg99 this is a very well known way, but it is most useful for start-up founders (in fact - it was invented specifically for them). The OP didn't say anything that would led me to believe that sec. 83b would help him in any way. For example, he didn't say he's from the US. – littleadv Jun 12 '14 at 5:24
  • @dg99 The page you linked to specifically states that 83(b) cannot be used on RSUs. – Icydog Jun 12 '14 at 7:01
  • @Icydog that depends on how the grant is actually implemented. While many things are called "RSU", some are actual stocks and others are "we will give you stocks if XYZ hold". For the first case 83(b) election can be made, for the second - cannot. First case is usually used in startups, and is the common way to allocate equity to founders and early on-boarders. The second way is commonly used in established public companies where 83(b) is meaningless anyway. Technically the term rsU applies to the second way I described (restricted stock UNITS, not actual stocks), but it is often misapplied. – littleadv Jun 12 '14 at 7:06
  • @dg99 - great points, but OP is in India. – JoeTaxpayer Jun 12 '14 at 9:35
0

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  

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