Employee Stock Options And RSUs



StockA share of stock means ownership in the company.
Share PriceThis price is readily available and sold in share markets.
Public vs Private companyPrivate company shares don't trade in the market.

Private company hires an independent evaluation firm to evaluate the price of the company shares (normally each year).


Options are the right, but not the obligation, to buy a share of stock at a specified price (exercise price) for a specified period of time.

This means you would be using your own money to buy stock at a certain price.

Generally the expiration is about 10 years from the time you were offered the options.

Exercise PriceFair Market Value of a share at grant date.
SpreadShare price - exercise price. We want higher spread.

The exercise price never changes. You always have the option to buy at that price no matter how high or how low it changes.

There are generally two types that functionally work the same way:

  1. Incentive Stock Options (ISOs): they may have more favourable tax treatment.
  2. Non-qualified Stock Options (NQSOs and NSOs).


RSUs (Restricted Stock Units) are a Company's commitment to give you shares of stock in future (1 for 1).

Key Dates for Stock Options and RSUs

Grant date:

  • Options: how many, exercise price, vesting schedule, expiration.
  • RSUs: how many, vesting schedule.
  • Vesting: Time (graded, cliff or combination), Performance or Milestone.

Vesting means something has to happen before you can control the stock. Generally that is time. It can also be based on performance or milestone.

Vesting date:

  • Options: own and can exercise.
  • RSUs: receive shares.

Exercise date:

  • Options: pay exercise price per share to buy shares.

Sale of stock date:

  • Sell shares. Typically only after a liquidity event for a private company. Normally that would be when a company was purchased or goes public.

Expiration date:

  • Unexercised options no longer valid.

Examples of Stock Options and RSUs

Nancy and her options


  • Nancy hired at company.
  • 5000 options (ISOs) granted.
  • $5 exercise price.
  • 4-year graded vesting with a 1-year cliff.
  • 1/4 vest at end of one year.
  • Remaining vest montly over next 3 years.
  • 10-year expiration.

Remember that the $5 exercise price NEVER changes.

If the company stock is valued at $5, then the current spread is 5 - 5 = $0, however over time that spread can become larger and larger.

We go one year ahead

  • 1/4 of the options have now vested.
  • 1250 options now onwed.
  • 3750 unvested.

If the stocks is now up to $7, then spread becomes $2.

Nancy's options for a decision:

  1. Exercise any of her 1250 options.
  2. Nothing, options have a value of $2 each.

3 years into her career

  • 3/4 have now vested.
  • 2500 additional options now owned.
  • 1250 unvested.
  • Total 3750 options owned (if decided not to sell).

If the share price is now $11 share, then the spread becomes $6.

Nancy's options for a decision:

  1. Exercise any of her 3750 options.
  2. Nothing, options have a value of $6 each.

4 years into the career

  • All options have now vested.
  • 0 unvested (from the initial 5000). She could have more awarded from a promotion, etc.

If the share price is now $13, then the spread becomes $8.

Nancy's options for a decision:

  1. Exercise any of her 5000 options.
  2. Nothing, options have a value of $8 each.

Nancy decides to exercise all the options.

  • Nancy pays $25,000 and recieves 5000 shares.
  • Nancy now has 5000 shares valued at $13 each = $65,000.

Note: there is a tax issue when exercising.

Dave and his RSUs


  • 3000 RSUs granted.
  • 3-year cliff vesting. This means he won't own or control RSUs for 3 years.

Digital stock valued at $7 per share (not relevant).

3 years later

  • Dave is "over the cliff", vested in all RSUs.
  • He has 3000 RSUs valued at $13 each = $39,000.
  • 0 RSUs remaining.

Note: there is a tax issue at the vesting of RSUs.



  • Company has initial public offering.
  • Underwrites now value company, price at $15.
  • Shares begin trading, close at $18.
  • Lockup period starts: typically 180 days. Investors, management, employees cannot sell.

Now that it is the lockup period, Nancy and Dave cannot sell their shares.

  • Nancy now has 5000 shares values at $18 = $90,000.
  • Dave now has 3000 shares valued at $18 = $54,000.

The company needs to submit a Form S-1 to the SEC in order to IPO. This can still means months before IPO.

Another half year later

  • Lockup period ends.
  • Stock trading at $20.

Decisions can now be made.

  • Dave holds on to all 3000 shares work $60,000. Dave has 3,000 shares and 0 RSUs. $60,000 - $39,000 = $21,000 unrealized (pre-tax) profit.
  • Nancy sells all 5,000 shares for $100,000. There are tax implications for this now. Nancy now has 0 shares and 0 options. $100,000 - $25,000 = $75,000 realized (pre-tax) profit.

Estimating the potential value of your shares

Most IPOs price between $10 and $20 per share.

# of shares x $15 = a good estimation.


This section was more specific to the US, but note that tax will apply in Australia.

For the US, note that the capitals gains tax is different from the income tax. Depending on how long you hold the asset, it will be consider short-term and taxed at ordinary income rates or long-term (with a capital gains rate).

Here is the tax flow in the US that might apply to AUS:

  1. Grant: no tax.
  2. Vesting: no tax for options. RSUs full value taxed as Ordinary Income.
  3. Exercise: tax for options. Can be different for ISOs (Alternative Minimum Tax AMT calculation) and NQSOs (Ordinary income).
  4. Sale of stock: options tax for ISOs is taxed based on qualifying or disqualifying disposition. NQSOs are taxed at long-term or short-term gain. RSUs long-term or short-term gain.

Important provisions

In company's plan document or your grant agreement.

What if you leave?

  1. Before options are vested? Normally forfeit.
  2. After you have vested options? Typically 90 days to exercise.
  3. When you own shares? Company may have right to buy back.

What if the company is bought instead of going public?

  1. Vested options typically remain intact (contractual obligations).
  2. Unvested options can be assumed by acquirer, cancelled and new options issues or accelerated and fully vest upon acquisition (single trigger) or upon acquisition and you not having a position (double trigger).

You need to look at the company's stock plan agreement.

The three big considerations

  1. Spending your own $$$.

The risks:

  • Cease operations.
  • Never have a liquidity event.
  • Have an IPO and shares substantially decrease in value.
  1. Likelihood of a liquidity event.

Indicators that they may go public:

  • Lower earlier, higher later.
  • Form S-1.
  1. Taxes.
  • Lower earlier, higher later.
  • Taxes paid are not refunded.

Options and stock are part of your investment plan:

  • How "in order" is your financial life?
  • What % of your total investments are your options/stock?
  • What about your Contingency Fund and Retirement Fund?