RSU vs stock options is the most consequential compensation decision most startup employees ever make — and most make it by default, without understanding the tax math until it is too late.
At public companies, RSUs are the near-universal standard. At early-stage startups, options dominate. The difference in after-tax outcome on a $500K equity grant can easily exceed $100K depending on timing, structure, and what you do when you leave. Here is the complete framework.
How RSUs Actually Work
An RSU — Restricted Stock Unit — is a promise to deliver shares once you hit a vesting milestone. Standard startup vesting is 4 years with a 1-year cliff: you receive 25% of your shares after year one, then vest monthly or quarterly thereafter. No payment required. No exercise decision. When shares vest, you own them.
The tax treatment is straightforward: the full fair market value of vested shares is taxed as ordinary income in that year. If you vest 1,000 RSUs when the stock is worth $50, you owe ordinary income tax on $50,000 — roughly $17,500–$22,000 at the 35–44% combined federal and state rate. Most public companies automatically withhold shares to cover the tax bill.
One important variant at late-stage private companies: double-trigger RSUs. These require two events before shares deliver — (1) your vesting schedule and (2) a liquidity event such as an IPO or acquisition. Double-trigger RSUs protect employees from owing taxes on illiquid shares that they cannot sell.
How Stock Options Actually Work
A stock option gives you the right — but not the obligation — to purchase shares at a fixed price called the strike price (or exercise price), set at the time of grant based on the 409A fair market value. If the stock price rises above your strike price, the difference is your gain. If it falls below, the options are underwater and worth nothing.
There are two types, and the difference matters enormously:
The 90-day exercise window is the single biggest risk in startup options. When you leave a company — whether you quit, get laid off, or are terminated — you typically have 90 days to exercise your vested options or forfeit them permanently. Exercising requires cash equal to your strike price multiplied by shares, plus you may owe income taxes on the spread immediately. Most employees cannot afford it and walk away from years of vested equity.
RSU vs Stock Options: The Tax Math Side-by-Side
Assume an employee receives equity worth $100,000 at grant — either 10,000 NSOs with a $10 strike price, or 1,000 RSUs at $100 FMV. Four years later, the stock is worth $50 per share ($500K exit value for 10,000 option shares; $50,000 for 1,000 RSU shares). Here is how the tax math plays out:
| Factor | NSO Options ($10 strike → $50) | RSUs ($100 → $50 at vest) |
|---|---|---|
| Cash required to exercise | $100,000 (10,000 × $10) | $0 |
| Taxable income at vest/exercise | $400,000 (spread taxed as ordinary income) | $50,000 (full FMV at vest) |
| Tax owed (37% rate) | $148,000 | $18,500 |
| Total equity value | $500,000 | $50,000 |
| Net after-tax gain | $252,000 (after exercise + tax) | $31,500 |
The options win here — but only because the stock rose 5x from the strike price. If the company's valuation had compressed or stagnated, the RSU holder would still walk away with $31,500. The option holder would have a sizable tax bill, a $100K exercise cost, and shares that may be illiquid.
Early Exercise and the 83(b) Election
The biggest tax optimization available to early startup employees is early exercise: buying all of your options immediately at grant, then filing an 83(b) election with the IRS within 30 days. This starts your long-term capital gains clock immediately and locks in the current (low) 409A valuation as your cost basis.
If you early exercise 100,000 ISO shares at a $0.10 strike and the company exits at $50 per share, your taxable ordinary income is zero (spread at exercise was zero since you exercised at FMV). Your entire $4.9 million gain qualifies for LTCG rates if you hold for the required period. Without early exercise, the same outcome could generate $1.8 million in ordinary income tax.
Early exercise is most valuable in the first 6–18 months of employment, when the 409A is lowest and the company is still pre-product-market-fit. I've seen founders and early employees make millions on this decision alone. The risk: if the company fails, you've written a check for shares that become worthless.
When RSUs Win vs When Options Win
Prefer RSUs When:
- ✓ Joining a public company (RSUs are the standard)
- ✓ Joining a late-stage private startup where the 409A is already $10+ per share
- ✓ You don't want to write a check at exercise or departure
- ✓ You want simple, predictable tax treatment at vest
- ✓ Company offers double-trigger RSUs (protects from illiquid tax events)
Prefer Options (ISOs) When:
- ✓ Joining pre-seed or seed stage (low 409A = high upside per share)
- ✓ You can afford to early exercise and have cash to cover exercise + potential AMT
- ✓ You plan to stay until liquidity and can hold shares 1+ year post-exercise
- ✓ Your federal tax rate would create a large LTCG benefit on long-term gains
- ✓ You have a high degree of conviction in the company's outcome
Before you accept any equity offer, run three numbers: (1) the cost to exercise all vested options at departure, (2) the tax owed on the spread at that moment, and (3) whether you can realistically afford both within a 90-day window. If the answer is no, you are signing up for equity you may never be able to capture. Negotiate for an extended post-termination exercise window — more companies are offering 1–5 years as the standard is evolving.
Track your equity alongside your cap table exposure on the Startup Benchmarking Dashboard at Value Add VC.
The 90-day exercise window has cost startup employees more wealth than any other single clause in a compensation agreement. Know your strike price, your 409A, and your exercise cost before you sign — not on the day you leave.
Stay current with VC and startup trends at Value Add VC. Originally published in the Trace Cohen newsletter.