A friend of mine spent three years at a Series B startup, watched the stock price roughly quadruple on paper, then exercised his options and netted about $11,000 after taxes and the exercise cost. A colleague who joined a public company two years earlier with RSUs in a slower-growing stock made more from the same four-year vesting period. The mechanics of how equity is structured matter a lot more than most people realize when they’re signing an offer.
The basic mechanics
Stock options give you the right to buy shares at a fixed price (the strike price) at some point in the future. If the stock goes up significantly, you buy at the old price and profit from the difference. If the stock doesn’t rise above your strike, the options are worth nothing. The risk is real and the outcome is binary in a way most people underestimate.
RSUs are a promise to give you actual shares on a schedule, no purchase required. When your RSUs vest, you own the shares outright. They’re worth whatever the stock is worth that day. They can lose value if the stock falls, but they never become worthless the way options can.
The tax situation is genuinely complicated
With RSUs, the tax treatment is fairly direct: when shares vest, the value counts as ordinary income for that year. If $20,000 worth of RSUs vest in March, that $20,000 gets added to your W-2 income. You pay taxes at your marginal rate, same as salary.
Options split into two types. Incentive stock options (ISOs) can get favorable capital gains treatment if you hold the shares long enough after exercising, but the exercise itself can trigger the alternative minimum tax, which is where people get surprised by five-figure tax bills. Non-qualified stock options (NSOs) are taxed as ordinary income at exercise. The timing of when you choose to exercise, relative to a liquidity event, changes the math significantly. I’d genuinely recommend talking to a CPA before exercising a large option grant rather than relying on a blog post including this one.
Who gets which, and roughly when
Early-stage startups almost always grant options. The logic is that the company’s valuation is low, so the strike price is low, which means there’s theoretically a lot of upside if things go well. Options also cost the company nothing until they’re exercised. Most pre-Series C companies default to options.
Public companies almost always grant RSUs. Once shares are publicly traded, options become complicated to administer and the tax reporting burden increases. RSUs are cleaner. Employees prefer the predictability.
The transition from options to RSUs usually happens somewhere around the late Series C to pre-IPO stage, generally when a company’s valuation is high enough that the difference between current strike price and likely IPO price is smaller. A Carta analysis of equity grants found this transition happens on average around 5-7 years after incorporation, though that number varies widely by sector and funding pace.
Double-trigger vesting, which trips people up
Private company RSUs often have what’s called double-trigger vesting: you don’t actually own the shares until both conditions are met. First, you serve out your time-based vesting schedule. Second, a liquidity event happens, typically an IPO or acquisition. If the company stays private indefinitely, your RSUs could be fully “vested” on paper but still not convert to real shares or cash.
This is, in my view, underexplained in most offer conversations. If you’re joining a late-stage private company and the recruiter says “these RSUs vest over four years,” it’s worth asking specifically whether there’s a liquidity condition attached. The answer changes what your equity is actually worth.
Which is better?
This is where I’ll give you an opinion that might be wrong: for most people who aren’t planning to stay at a company for 7-10 years or more, RSUs are more likely to produce an outcome. Options require a lot of things to go right in sequence: the company has to grow, the strike price has to be significantly below exit value, you have to exercise at the right time, and you have to handle the tax correctly. RSUs just require the company to not fail completely.
Options have higher ceiling outcomes at early-stage companies, and there are absolutely people who made generational money from options at Amazon, Google, and Stripe in their early years. But the base rate of “employee got rich from startup options” is lower than startup mythology suggests. The Crunchbase data on startup outcomes is humbling reading.
What you actually have is only worth something when you can sell it. Everything before that point is math on paper.