RSUs and options create different rights, costs and decisions

A restricted stock unit generally promises a share, cash equivalent or another benefit after specified conditions are met.  

An employee option generally gives you a right to acquire shares at a set exercise price before an expiry date, subject to the plan conditions.

The practical difference is important:

  • an RSU can still have value when the share price is low, provided it vests and delivers value;
  • an option may have little or no economic value if the share price does not rise above the exercise price;
  • an option usually requires an exercise decision and may require cash;
  • both can create Australian employee share scheme tax questions before you receive cash from a sale.

Neither instrument is universally better. Value depends on the number granted, company value, dilution, exercise price, vesting, liquidity, tax treatment and what happens when employment ends.

Side-by-side comparison

Feature RSUs Options
Basic right Usually a conditional right to receive a share, cash equivalent or benefit A right to acquire a share at a specified exercise price
Upfront cash to acquire shares Often none at settlement, although plan terms differ Exercise price usually must be paid unless a cashless process is available
Value if share price falls Can retain value above zero if the award vests and delivers a share Can be “underwater” if the share price is below the exercise price
Main dates Grant, vest, settlement, availability and sale Grant, vest, exercise, expiry, availability and sale
Decision pressure Often arises at vesting or when shares become available Can arise before expiry, on leaving employment or when funding exercise
Liquidity Depends on whether shares are listed and tradable Depends on ability to exercise and then sell the resulting shares
Australian tax Depends on the legal interest and applicable ESS treatment Depends on the legal right, ESS treatment, exercise and other plan events
Leaving employment Unvested units may be forfeited or treated under leaver rules Vested options may have a shortened exercise window; unvested options may be forfeited

This table describes common commercial features. Your plan can operate differently. Read the award agreement and full plan rules.

How RSUs usually create value

Suppose an RSU award promises one share for each unit that vests. If 1,000 units vest and settle in 1,000 shares, the gross market value is based on the share price at that time.

There may be no exercise price, but that does not make the shares tax free. Depending on the Australian ESS rules and the plan, a discount may be included in assessable income at an upfront or deferred taxing point.

RSUs can create a liquidity mismatch. You may have assessable ESS income even if:

  • shares are withheld or sold under the plan;
  • a blackout period limits further sale;
  • the shares are in a foreign market or currency;
  • you decide to retain the shares;
  • the share price later falls.

Confirm the reporting and cash needed with an accountant or registered tax agent.

How options usually create value

An option has an exercise price, sometimes called a strike price. Its economic value depends partly on the difference between the share price and that exercise price, along with time, conditions and the prospects of liquidity.

If the exercise price is $10 and a share can be sold for $18, the gross difference appears positive before tax, costs and restrictions. If the share price is $8, paying $10 to acquire it would not ordinarily make economic sense at that moment. The option may still have time until expiry, or it may lapse without value.

For an unlisted company, a quoted valuation does not guarantee that the resulting shares can be sold. Exercising can require cash and create a concentrated, illiquid holding.

Questions include:

  • How much cash is required to exercise?
  • Is a cashless exercise or sell-to-cover process available?
  • What is the expiry date?
  • Does leaving employment shorten the exercise window?
  • Can the resulting shares be sold?
  • What shareholder rights and restrictions apply?
  • What Australian and foreign tax events arise?

Australian tax depends on more than the label

The ATO's ESS rules apply to shares and rights acquired in relation to employment. Broadly, a scheme may be taxed upfront, qualify for deferred treatment or meet conditions for a start-up concession. The timing and amount depend on the legal interest, plan and personal facts.

For tax-deferred interests, the ATO describes deferred taxing points by reference to matters such as real risk of forfeiture, disposal restrictions and, for rights, exercise and the status of the resulting share. A maximum deferral period can apply.

Ceasing employment is no longer itself a deferred taxing point where the relevant taxing point occurs on or after 1 July 2022. Plan-based consequences of leaving still matter, including forfeiture, acceleration or a shortened option exercise window.

A later sale of the shares can be considered under the capital gains tax rules after the ESS discount has been dealt with, subject to specific rules such as treatment of a disposal within 30 days of the ESS taxing point.

Do not assume:

  • RSUs are always taxed at vest;
  • options are always taxed at exercise;
  • employer withholding equals the final Australian liability;
  • an overseas tax guide applies to an Australian resident;
  • a grant from an Australian start-up automatically qualifies for the start-up concession.

Compare the real value, not the number of awards

One RSU and one option are not directly equivalent.

When comparing an offer or grant, consider:

  1. Current company value: What valuation or listed share price is being used? ‍
  2. Exercise price: What must be paid to turn an option into a share? ‍
  3. Number of awards and dilution: What ownership could the grant represent on a fully diluted basis? ‍
  4. Vesting: Is value based on time, performance or both? ‍
  5. Liquidity: Is there a listed market, approved secondary sale or credible exit pathway? ‍
  6. Expiry: How long does an option remain exercisable? ‍
  7. Leaver treatment: What happens after resignation, redundancy, death or disability? ‍
  8. Tax: When could tax arise, on what value and in which country? ‍
  9. Funding: Can you fund exercise and tax without relying on an uncertain sale? ‍
  10. Concentration: How much income and existing wealth already depends on the company?

A grant with an impressive headline value may produce a different outcome after vesting, exercise, dilution, tax and liquidity are considered.

Questions for listed and unlisted companies

Listed company

  • What trading windows and pre-clearance apply?
  • How are shares sold or withheld for tax-related amounts?
  • In which market and currency will transactions occur?
  • What broker records and ESS statements will be provided?
  • How will future grants affect total employer exposure?

Unlisted company

  • What valuation method supports the offer?
  • What rights attach to the resulting shares?
  • Are transfer restrictions, buyback rights or drag and tag provisions relevant?
  • Is a secondary sale permitted?
  • What happens in a funding round, sale or listing?
  • Can you afford to exercise and pay tax without a liquidity event?

Legal review is more important where the instrument, shareholder rights or exit terms are not clear.

What happens if employment ends?

Check the plan before making a career decision.

An RSU plan may cancel unvested units, preserve some awards, accelerate vesting or apply different treatment to redundancy, retirement, death or disability.

An option plan may cancel unvested options and allow only a limited period to exercise vested options. That deadline can be much shorter than the original expiry date. Exercising may require cash at the same time salary stops.

A redundancy or separation agreement may affect the position. Obtain employment or equity-plan legal advice before signing. Then ask a tax practitioner and financial adviser to assess the consequences of each available path.

Build one decision map for both instruments

Record:

  • every grant, instrument and vesting condition;
  • vest, exercise and expiry dates;
  • exercise costs;
  • plan restrictions and leaver rules;
  • expected ESS reporting;
  • tax questions and cash reserves;
  • available trading or liquidity windows;
  • household goals the equity is intended to fund;
  • other exposure to the employer.

For RSUs, the key decision may be what to do when shares become available. For options, it may be whether and how to exercise before an expiry or role change. Both should be connected to the same household balance sheet.

Map your equity events and decisions

An Equity Compensation Decision Map can prepare the right questions for your employer, accountant, lawyer and financial adviser. It should not assign a definitive tax result from the words "RSU" or "option" alone.

Bring the complete plan rules, award agreements, cap table or listed-company information, vesting schedule, exercise terms, ESS statements and the financial goals the equity is meant to support.

‍Speak with one of our expert advisers about your equity decisions.

This article contains general information only. It does not take into account your objectives, financial situation or needs and is not tax or legal advice. RSU and option outcomes depend on the legal instrument, plan terms, tax regime, residency, company value, liquidity and individual facts.