Stock Options vs. RSUs vs. Actual Shares: What You Have and What It Means

The four types of equity

Most startup equity falls into one of four categories. They're not interchangeable, and the differences matter tremendously for taxes, timing, and what you can do with your shares.

Stock options (ISOs or NSOs) - the right to buy shares at a fixed price

RSUs (Restricted Stock Units) - a promise of shares that vest for free

Common stock - actual shares you already own

Preferred stock - the special shares venture investors get (rare for employees)

Let's walk through each one and what it means for you.

Stock options: ISOs vs. NSOs

A stock option is the right to buy shares at a fixed price called the strike price or exercise price. You don't own the shares yet - you have the right to purchase them.

There are two flavors: ISOs (Incentive Stock Options) and NSOs (Non-Qualified Stock Options). The difference is almost entirely tax-based.

ISOs (Incentive Stock Options) are available only to employees, and they get preferential tax treatment. If you hold ISO shares for more than 2 years from the grant date and more than 1 year after exercise, any gains are taxed as long-term capital gains (usually 15-20% federal tax). This is the best tax outcome.

The downside: ISOs have a limit of $100,000 value per year (at exercise price), and you might owe Alternative Minimum Tax (AMT) in the year you exercise if the shares have gained a lot of value.

NSOs (Non-Qualified Stock Options) are available to employees, contractors, consultants, and advisors. The tax treatment is worse: when you exercise NSOs, the gain (the difference between the strike price and the current fair market value) is taxed as ordinary income at your marginal rate (up to 37% federal, plus state and FICA). Then when you sell the shares, you pay capital gains tax on the gain from exercise price to sale price.

In other words, NSOs get taxed twice - once at exercise, once at sale. ISOs only get taxed once if you hold them long enough.

What "exercising" means

When you exercise options, you're buying the shares at the strike price. This costs money out of your pocket.

Most people don't have $5,000+ lying around to exercise thousands of options. This is why many startups have become more generous with RSUs - they don't require cash outlay.

The 90-day exercise window

Here's a critical trap: if you leave your company, you usually have 90 days to exercise your vested options. After 90 days, you lose them forever.

This creates a weird situation. If you leave and want to hold onto your options (because you believe in the company), you have to come up with the cash to exercise within 3 months, even if the company isn't liquid and you can't sell the shares.

Many people don't realize this until after they've already left, and then they have a choice: exercise and potentially pay taxes on gains you can't realize, or let the options expire.

RSUs (Restricted Stock Units)

RSUs are a more modern form of equity compensation. Instead of giving you the right to buy shares, the company promises to give you shares for free as they vest.

RSUs don't require any cash outlay - you don't exercise them. They just vest, and you own the shares.

At public companies, RSUs are straightforward: they vest, they're taxed as ordinary income at the FMV on the vesting date, and then you can sell them anytime. Most of the Silicon Valley tech worker wealth came from RSUs at public companies.

At private companies, RSUs are more complicated. When they vest, you're supposed to pay ordinary income tax on the fair market value. But there's no public price, so what's the FMV? Usually it's the 409A valuation, which is often much lower than secondary market value.

This means RSU vesting can trigger significant tax bills with no easy way to pay them (since you can't sell the shares yet). Some private companies give you the cash value of the RSU instead of the shares, or let you vest in cash. Ask your HR about this.

The other issue with private company RSUs: even though the tax treatment says they're shares, secondary investors treating them as shares. Some RSU grants come with restrictions that prevent you from selling them in the secondary market. Always check your grant agreement.

Actual shares (common stock)

Some employees, especially founders or very early hires, get actual common stock shares directly, with no vesting requirement (or with a vesting schedule in their equity agreement).

If you own actual shares, you own them outright. You don't have to exercise them or vest them. You can sell them (subject to the company's ROFR - right of first refusal), transfer them, or hold them indefinitely.

Common stock is the cleanest form of equity. But it's rare for new employees because companies prefer options or RSUs (they preserve the ability to set the exercise price low for tax purposes, and they create vesting retention).

What you can sell in the secondary market

This is important: not all equity is equal in secondary transactions.

Exercised options / common stock: Fully sellable. Once you exercise your options or own common shares outright, you can (usually) sell them in the secondary market subject to ROFR and applicable securities laws.

Unexercised options: Generally not sellable. A secondary buyer wants actual shares, not the right to buy shares at an old strike price. Some platforms will help you exercise before selling, but it's complicated.

RSUs: Depends on the grant agreement. Some allow sales, some don't. Always check before assuming you can sell.

Preferred stock: Sellable, but you'd need special permission from the company or investors.

If you're thinking about selling shares in the secondary market, your first step is understanding what type you hold and whether your grant agreement allows it.

The 83(b) election

If you receive restricted stock (shares with a vesting schedule), you have 30 days to file an 83(b) election with the IRS. This is a technical move that lets you start the capital gains holding period immediately, rather than waiting for vesting.

For early employees who expect huge appreciation, this is valuable. It lets you lock in a low cost basis and treat all future gains as long-term capital gains.

Most people who get this option don't file it because they don't know it exists. If your company ever gives you actual restricted shares (not options or RSUs), ask your tax advisor about it immediately.

Quick comparison

ISOs: Best tax treatment if you can hold for 3+ years. Limited to $100k/year. Employees only.

NSOs: Worse tax treatment (ordinary income at exercise), but no limits. Available to anyone.

RSUs: Tax-efficient once they vest, but at private companies the vesting creates tax bills. Simple process (no exercise), but limited secondary market liquidity.

Common stock: Cleanest structure, but rare for new employees. Full ownership once granted.

The bottom line: understand what you have, understand the vesting schedule, and plan for tax consequences before you exercise or sell. And if you ever leave the company, remember the 90-day exercise window for options.