Difference Between RSU and ESOPs

Difference Between RSU and ESOPs

5 mins readComment
Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Apr 15, 2024 13:38 IST

RSUs are direct stock grants to employees that vest over time, providing guaranteed value. ESOPs are options to buy company stock at a set price, offering potential profit if the stock price increases after vesting. RSUs offer more certainty, whereas ESOPs carry the potential for higher gains based on market performance.

Let's imagine two employees, Alice and Bob, working at the same company. Alice receives Restricted Stock Units (RSUs) as part of her compensation. These RSUs will become her shares after a certain period, known as vesting, offering her a guaranteed value regardless of the stock's market price.

On the other hand, Bob gets Employee Stock Option Plans (ESOPs), which allow him to buy company shares at a set price in the future. If the company's stock price goes up, Bob can buy the shares at a lower price and potentially make a profit.

This scenario illustrates the key difference between RSUs, which provide a certain fixed benefit, and ESOPs, which offer a potentially higher reward based on the company's stock performance.

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Table of Content

RSU vs ESOPs: Comparative Table

Aspect

Restricted Stock Units (RSUs)

Employee Stock Option Plans (ESOPs)

Definition

RSUs are company shares given to employees, which vest over time and can be sold once vested.

ESOPs are options given to employees to buy company shares at a predetermined price after a vesting period.

Vesting

RSUs have a vesting schedule, post which employees receive shares or cash equivalent.

ESOPs allow employees to purchase shares only after options have vested and usually within a certain time frame.

Payment

RSUs are usually paid in shares, sometimes with a cash option.

ESOPs require employees to purchase shares, typically at a discounted price.

Financial Benefit

Employees gain from RSUs if the company's stock value increases after vesting.

Employees benefit from ESOPs if the stock price is higher than the option price at the time of exercise.

Risk

Lower risk as employees receive shares irrespective of stock price movement (post-vesting).

Higher risk as benefit depends on stock price exceeding the option price.

Control Over Shares

No control over share price; employees receive shares as per vesting schedule.

Employees can choose when to exercise options, offering some control over timing and share price.

Tax Implications

Taxed as income when vested, and as capital gains when sold.

Taxed at exercise as income and as capital gains when sold if the share value increases.



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What is RSU?

An RSU, or Restricted Stock Unit, is a type of employee compensation offered by companies. Essentially, it's a promise from the employer to give the employee company shares or their cash value in the future. These shares are "restricted" because they come with a vesting period – a set time that the employee must work for the company before they can receive the shares. Once the vesting period is over, the employee gets the shares, which they can then keep or sell. RSUs are a way for companies to reward employees and encourage long-term commitment.

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What is ESOP?

ESOPs, or Employee Stock Option Plans, are a form of employee benefit that companies offer to their employees. Essentially, they are options given to employees to buy shares of the company at a predetermined price, often lower than the market value. However, employees can't buy these shares immediately. They have to wait for a specified period, known as the vesting period, to be able to exercise these options. ESOPs are a way for companies to motivate and retain employees, as they get the opportunity to own a part of the company and potentially benefit from its growth.

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Difference Between RSU and ESOPs

Definition: RSUs are grants of company stock given to employees, which become theirs after vesting, while ESOPs are options to buy company stock at a fixed price after a vesting period.

Vesting: RSUs vest over time and are then owned by the employee, whereas ESOPs allow employees to purchase stock only after vesting.

Financial Benefit: RSUs offer value regardless of stock performance post-vesting; ESOPs provide potential profit if the stock price exceeds the option price at exercise.

Risk: RSUs pose less risk as they have value after vesting, while ESOPs carry more risk as benefits depend on stock price appreciation.

Control Over Shares: RSUs offer no control over share price at vesting, while ESOPs allow employees to choose when to exercise options based on share price.

Tax Implications: RSUs are taxed at vesting and then as capital gains, while ESOPs are taxed upon exercise and then as capital gains if the shares are sold at a profit.

Conclusion

Restricted Stock Units (RSUs) and Employee Stock Ownership Plans (ESOPs) serve different purposes and mechanisms for employee compensation. RSUs are company shares given to employees as part of their compensation, vesting over time, and taxed upon vesting. ESOPs involve employees gaining stock ownership through a company-funded trust. It potentially enhances their retirement benefits, with diverse tax advantages.

Top FAQs on Difference Between RSU and ESOP

What is the main difference between RSUs and ESOPs?

RSUs (Restricted Stock Units) are direct grants of company stock that vest over time and are taxed as income, whereas ESOPs (Employee Stock Ownership Plans) provide employees with stock ownership through a company-funded trust, offering retirement benefits and tax advantages.

How are RSUs and ESOPs taxed?

RSUs are taxed as ordinary income at the time of vesting based on the market value of the shares. ESOPs allow employees to defer taxes until the shares are distributed during retirement, potentially at a lower tax rate.

Can RSUs and ESOPs both be used for any type of company?

RSUs are commonly used by public and private companies for employee compensation. ESOPs are typically utilized by privately held companies and are particularly popular as a succession planning tool.

What are the benefits to employees in having RSUs or ESOPs?

RSUs provide straightforward equity compensation that can be converted into cash upon vesting. ESOPs offer a share in company ownership and align employee interests with company performance, potentially increasing job satisfaction and loyalty.

 

 

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio