RSU vs Stock Options vs ESPP: Which Equity Compensation Is Best?

Last updated: February 3, 2026

You just got a job offer with "equity compensation." Congratulations! But what does that actually mean? Is it RSUs? Stock options? ESPP? And more importantly, which one is better for building wealth?

The answer depends on your situation, risk tolerance, and the company's growth stage. Let's break down all three types of equity compensation so you can make informed decisions about your career and finances.

💰 Calculate Your RSU Taxes: Use our free RSU Tax Calculator to see exactly how much you'll pay in federal, state, and FICA taxes when your RSUs vest.

Quick Comparison: RSU vs Stock Options vs ESPP

What Are RSUs?

Restricted Stock Units (RSUs) are a promise from your employer to give you actual company shares after a vesting period. They're the most common form of equity compensation at public tech companies.

How RSUs Work

The grant: You receive 1,000 RSUs worth $100 per share today.

Vesting schedule: Typically 25% per year over 4 years.

Year 1: 250 shares vest. The stock is now worth $120 per share.

Tax event: You owe taxes on $30,000 (250 shares × $120).

What you receive: After 22% federal withholding, 7.65% FICA, and 9% state tax (California), you get approximately 158 shares (the rest are sold to cover taxes).

Result: You own 158 shares worth $18,960. If you hold and the stock rises to $150, your shares are worth $23,700.

RSU Tax Treatment

RSUs are taxed as ordinary income when they vest, just like your salary. There's no way around this.

Example: $50,000 RSU vest in the 24% tax bracket

• Federal tax: $12,000 (24%)
• State tax (CA): $4,500 (9%)
• FICA: $3,825 (7.65%)
• Total taxes: $20,325
• After-tax value: $29,675

Important: Your employer typically withholds 22% for federal taxes, but if you're in a higher bracket (24%, 32%, or 35%), you'll owe more at tax time. Use our RSU Tax Calculator to calculate your exact tax bill.

Capital gains: If you hold the shares after vesting and later sell at a profit, you pay capital gains tax on the growth.

RSU Pros and Cons

Pros:

• ✅ Always have value (even if stock drops from grant price)
• ✅ No money required from you
• ✅ Predictable vesting schedule
• ✅ Simple to understand
• ✅ No risk of expiring worthless

Cons:

• ❌ Taxed immediately upon vesting as ordinary income
• ❌ No tax control (can't choose when to trigger taxes)
• ❌ Limited upside compared to options
• ❌ Can trigger wash sales if you trade company stock

Best for: Employees who want guaranteed value and lower risk. Great if you're at an established company with stable stock price.

What Are Stock Options?

Stock options give you the right to buy company shares at a fixed price (the "strike price") in the future. If the stock price rises above your strike price, you profit. If it stays below, the options expire worthless.

There are two types: Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs).

How Stock Options Work

The grant: You receive 10,000 options with a $10 strike price.

Vesting: 25% per year over 4 years (2,500 options each year).

Stock price at Year 4: $50 per share.

Exercise: You buy 10,000 shares at $10 = $100,000 cost.

Value: Those shares are worth $500,000 at current price.

Profit: $400,000 (before taxes).

The risk: If the stock never goes above $10, your options are worthless. You just wait and hope.

NSO vs ISO: Key Differences

Non-Qualified Stock Options (NSOs):

• Given to anyone (employees, contractors, board members)
• Taxed as ordinary income when exercised
• Tax due on spread: (market price - strike price) × shares
• No holding period requirements

Example NSO taxation:

• Exercise 1,000 options at $10 strike when stock is $50
• Spread: $40 per share
• Ordinary income: $40,000
• Federal tax (24%): $9,600
• You pay $9,600 in taxes even if you don't sell the stock

Incentive Stock Options (ISOs):

• Only for employees
• No ordinary income tax at exercise (just AMT risk)
• Qualify for long-term capital gains if held correctly
• Must meet holding requirements: 2 years from grant, 1 year from exercise

Example ISO taxation (qualifying disposition):

• Exercise 1,000 ISOs at $10 when stock is $50
• No immediate tax (except possible AMT)
• Hold for 1+ year, then sell at $70
• Long-term capital gain: $60 per share × 1,000 = $60,000
• Tax (20% LTCG): $12,000
• Much better than NSO treatment

The AMT trap: When you exercise ISOs, the spread may trigger Alternative Minimum Tax (AMT). This is complex and catches many people off guard. Always consult a tax professional before exercising large ISO grants.

Stock Option Pros and Cons

Pros:

• ✅ Unlimited upside potential
• ✅ Tax control (choose when to exercise)
• ✅ ISOs can qualify for favorable capital gains treatment
• ✅ Massive wealth creation if company grows 10x-100x

Cons:

• ❌ Can expire worthless if stock doesn't rise
• ❌ Requires cash to exercise
• ❌ Complex tax implications (especially ISOs and AMT)
• ❌ 10-year expiration (use it or lose it)
• ❌ High risk

Best for: Early employees at startups or high-growth companies with potential for explosive growth. Only valuable if you believe the stock will rise significantly.

What Is an ESPP?

An Employee Stock Purchase Plan (ESPP) lets you buy company stock at a discount, typically 15% off market price. You contribute a percentage of your paycheck (usually up to 15%), and the company uses that money to buy shares on your behalf at predetermined intervals (quarterly or semi-annually).

How ESPP Works

Enrollment period: January 1 - December 31.

Contribution: You elect 10% of your $120,000 salary = $12,000 per year = $1,000/month.

Purchase periods: Every 6 months (June 30 and December 31).

Discount: 15% off the lower of the price at the start or end of the period (called a "lookback provision").

June 30 purchase example:

• Stock price on Jan 1: $100
• Stock price on June 30: $120
• Purchase price: $85 (15% off the Jan 1 price of $100)
• You buy: $6,000 ÷ $85 = 70.6 shares
• Value: 70.6 shares × $120 = $8,472
• Instant gain: $2,472 (41% return in 6 months!)

ESPP Tax Treatment

ESPP taxation is more complex because it depends on how long you hold the shares.

Qualifying Disposition (hold 2 years from offering date, 1 year from purchase):

• Ordinary income: The lesser of:
  • Actual discount (15% of offering price), or
  • Gain from offering price to sale price
• Capital gains: Any additional gain

Disqualifying Disposition (sell before holding requirements):

• Ordinary income: Actual discount received at purchase
• Capital gains: Any gain beyond the discount

Example qualifying disposition:

• Purchase at $85 (15% off $100 offering price)
• Hold for 2+ years
• Sell at $150
• Ordinary income: $15 (15% discount on $100)
• Long-term capital gain: $50 per share ($150 - $100)
• Much more tax-efficient

Example disqualifying disposition:

• Purchase at $85
• Sell immediately at $120
• Ordinary income: $35 per share ($120 - $85)
• No capital gains
• Taxed like a bonus

Most employees sell immediately for the guaranteed 15% profit. But if you can afford to hold and the stock is stable, qualifying dispositions offer better tax treatment.

ESPP Pros and Cons

Pros:

• ✅ Guaranteed 15% discount (instant profit)
• ✅ Low risk - you're buying at a discount
• ✅ No vesting period (buy shares regularly)
• ✅ Forced savings and investing
• ✅ Lookback provisions can create 30-40%+ returns

Cons:

• ❌ Requires cash from your paycheck
• ❌ Limits on contribution (usually 15% of salary, $25K max per year)
• ❌ Concentration risk if you don't sell immediately
• ❌ Complex tax treatment
• ❌ Can trigger wash sales if trading company stock

Best for: Employees at stable public companies who can afford to have money withheld from paychecks. Nearly always worth participating if offered.

RSU vs Stock Options: Which Is Better?

The answer depends on the company's growth stage and your risk tolerance.

Choose RSUs if:

• You're joining an established public company (Google, Meta, Amazon, etc.)
• You want guaranteed value regardless of stock performance
• You prefer lower risk and predictable compensation
• You're in a higher tax bracket and want to avoid exercise costs
• The company's stock is already highly valued and unlikely to 10x

Why: RSUs always have value. Even if the stock drops 50% from grant price, you still own shares worth something. This is valuable at mature companies where explosive growth is unlikely.

Example: Meta grants you $200,000 in RSUs vesting over 4 years. Even if the stock stays flat, you receive $50,000 worth of shares each year (minus taxes). That's real, guaranteed compensation.

Choose Stock Options if:

• You're joining an early-stage startup
• You believe the company could 10x or 100x
• You can afford the exercise cost when the time comes
• You're comfortable with high risk, high reward
• You want to qualify for long-term capital gains tax treatment (ISOs)

Why: Options have leverage. A $10 strike price could become worth $100 or $1,000 if the company succeeds. That's life-changing wealth. But there's real risk - if the company fails or never goes public, options are worthless.

Example: Join a startup at Series A with 10,000 options at $5 strike. Company IPOs 5 years later at $80 per share. Your options are worth $750,000 (before taxes). With ISOs and proper holding periods, you might pay only long-term capital gains.

The Hybrid Reality

Many companies now offer both:

• Public companies: Majority RSUs + small option grants for senior roles
• Late-stage startups: Mix of RSUs and options as they approach IPO
• Growth companies: Shifting from options to RSUs as they mature

When you have both: RSUs provide a stable base, while options offer upside leverage. This is often the best of both worlds.

ESPP vs RSU vs Stock Options

ESPP is different from RSUs and options - it's not either/or.

If offered ESPP, participate if you can afford it. It's essentially a guaranteed 15% return (often much higher with lookback provisions). That's better than any savings account or bond.

ESPP strategy:

1. Contribute the maximum allowed (usually 15% of salary or $25K/year)
2. Sell immediately each purchase period to lock in the 15% gain
3. Reinvest proceeds into diversified index funds
4. Don't hold company stock unless you have high conviction

Why sell immediately? You avoid concentration risk. Many employees hold ESPP shares and later regret it when the stock drops. Take the guaranteed profit.

Exception: If you believe in the company long-term and can afford the risk, hold for the qualifying disposition to convert ordinary income to capital gains. But this only makes sense for stable, growing companies.

Real Example: Comparing All Three

Let's say you're evaluating two job offers:

Offer A (Public Tech Company):

• Base: $150,000
• RSUs: $100,000/year (vesting over 4 years)
• ESPP: 15% discount, contribute up to 15% of salary
• Total comp Year 1: $150K salary + $25K RSUs + ~$4K ESPP gain = $179K

Offer B (Series B Startup):

• Base: $140,000
• Stock options: 50,000 shares at $2 strike (currently worth $0)
• Total comp Year 1: $140K salary (options are speculative)

Which is better?

Offer A advantages:

• Guaranteed $179K compensation
• ESPP provides extra $4K+ annually with minimal risk
• RSUs vest predictably
• Lower risk, more stable income

Offer B advantages:

• Potential for life-changing wealth if company succeeds
• 50,000 options could be worth $500K-$5M+ in a successful exit
• Earlier equity = more upside
• Better tax treatment with ISOs

Decision factors:

• Risk tolerance: Can you afford to bet on Offer B? Do you have savings?
• Financial situation: Do you need stable income for a mortgage, family, etc.?
• Company conviction: Do you believe the startup will succeed?
• Career stage: Early career = more risk appetite. Mid-career with kids = more stability.

Most people choose Offer A. The guaranteed compensation and lower risk outweigh the speculative upside. But if you're young, have savings, and believe in the startup's mission, Offer B could be worth it.

Tax Planning Strategies

Equity compensation creates tax complexity. Here are key strategies to minimize your tax bill:

For RSUs

Strategy 1: Sell immediately upon vesting

• Avoid concentration risk
• No additional capital gains if sold same day
• Diversify into index funds

Strategy 2: Increase W-4 withholding

• RSUs are typically withheld at 22% federal
• If you're in a higher bracket (24%, 32%, 35%), you'll owe more in April
• Adjust W-4 or make quarterly estimated payments

Strategy 3: Watch for wash sales

• If you sell company stock at a loss, RSU vesting within 30 days triggers wash sale
• Plan sales around vesting dates
• Use our RSU Wash Sale Guide

Strategy 4: Max out 401(k) to offset income

• RSU vesting increases your income
• Contribute more to pre-tax 401(k) to reduce taxable income
• 2026 limit: $23,000 ($30,500 if 50+)

For Stock Options (ISOs)

Strategy 1: Exercise early to start long-term capital gains clock

• Exercise in January to maximize time before sale
• Requires cash and AMT risk
• Only if company has strong trajectory

Strategy 2: Exercise in low-income years

• Between jobs? Take a sabbatical? Exercise then
• Lower tax bracket = less AMT impact
• Spread exercises across multiple years

Strategy 3: Exercise and hold for qualifying disposition

• Wait 2 years from grant, 1 year from exercise
• Converts ordinary income to long-term capital gains
• Massive tax savings if stock appreciates

Strategy 4: Watch AMT exposure

• ISO spread triggers AMT (28% rate)
• Calculate AMT before exercising
• Consider exercising fewer shares to stay under AMT threshold

For ESPP

Strategy 1: Sell immediately, pay ordinary income tax

• Guaranteed 15% profit
• Simple tax treatment
• Avoids concentration risk

Strategy 2: Hold for qualifying disposition (2 years from offer, 1 year from purchase)

• Converts some ordinary income to capital gains
• Only if you believe in the company
• Track purchase dates carefully

Strategy 3: Avoid wash sales with ESPP

• ESPP purchases trigger wash sales if you sold company stock at a loss within 30 days
• Plan sales around ESPP purchase dates
• Use our Wash Sale Calculator

Common Mistakes to Avoid

Mistake 1: Not Understanding Your Grant

Many employees don't know:

• How many shares they have
• When they vest
• What their strike price is (options)
• How taxes work

Solution: Read your equity grant documents. Mark vesting dates on calendar. Use our RSU Tax Calculator.

Mistake 2: Letting Options Expire

Options typically expire 10 years from grant date, or 90 days after leaving the company.

Real story: An employee left a startup with $200,000 worth of vested options. They had 90 days to exercise. They forgot. Options expired worthless.

Solution: Set calendar reminders. Exercise or sell before deadlines.

Mistake 3: Holding Too Much Company Stock

Concentration risk: If you have RSUs, ESPP shares, and options all in the same company, your financial future is entirely dependent on that one stock.

The danger: If the company struggles, you could lose your job AND your savings simultaneously.

Rule of thumb: Company stock shouldn't exceed 10-15% of your total net worth.

Solution: Sell vested equity regularly and diversify into index funds.

Mistake 4: Not Planning for Taxes

RSU vesting adds to your W-2 income. A $100,000 vest could bump you into a higher tax bracket and trigger:

• Higher federal tax
• Loss of deductions (phaseouts)
• Higher state tax
• Medicare surtax (0.9% if income exceeds $200K/$250K)

Solution: Calculate your total tax bill before vesting. Set aside 30-40% for taxes. Use our Federal Tax Calculator to estimate.

Mistake 5: Exercising ISOs Without Understanding AMT

ISO exercise can trigger huge AMT bills.

Example: Exercise ISOs with $200,000 spread. AMT rate is 28%. You owe $56,000 in AMT even though you didn't sell the stock.

Worst case: Stock crashes before you can sell. You paid $56K in taxes on phantom gains.

Solution: Work with a tax professional before exercising large ISO grants. Calculate AMT impact first.

Mistake 6: Trigger Wash Sales

RSU vesting and ESPP purchases both count as stock purchases for wash sale purposes.

If you sell company stock at a loss, those automatic purchases within 30 days disallow your tax deduction.

Solution: Read our complete RSU Wash Sale Guide and use the Wash Sale Calculator.

Action Steps: What to Do Today

1. Inventory your equity compensation

• Log into your broker (E*TRADE, Fidelity, Schwab, etc.)
• Document all RSUs, options, and ESPP shares
• Note vesting dates, strike prices, and quantities

2. Calculate your tax liability

• Use our RSU Tax Calculator for upcoming vests
• Estimate total tax including federal, state, FICA, and Medicare surtax
• Set aside cash or adjust W-4 withholding

3. Build a sell plan

• Decide: sell immediately or hold?
• If holding, set price targets and stop-losses
• Calendar reminders for quarterly reviews

4. Diversify

• Calculate what % of net worth is in company stock
• If over 15%, sell and reinvest in index funds
• Don't let company loyalty override financial sense

5. Understand your specific grants

• Read grant agreements
• Know expiration dates (especially options)
• Understand vesting cliffs and acceleration clauses

6. Check for wash sales

• Review recent company stock sales
• Check upcoming RSU vests and ESPP purchases
• Use our Wash Sale Calculator to avoid disallowed losses

Which Is Best for Building Wealth?

The honest answer: It depends on the outcome, which you can't predict.

Statistically:

• RSUs provide the most consistent wealth building
• Stock options provide the most explosive wealth building (when they work)
• ESPP provides the best risk-adjusted returns (15%+ with low risk)

For most employees:

1. Participate in ESPP if offered (nearly free money)
2. Understand your RSU grant if at a public company - it's guaranteed compensation
3. Don't overvalue options unless you're very early at a startup with huge potential

Best-case scenario: Join a late-stage startup that offers all three. Get options that appreciate 10x, RSUs that vest as the company matures, and ESPP discounts along the way.

Realistic scenario: Join a public tech company, get RSUs and ESPP, sell equity regularly, and diversify into index funds. This builds wealth predictably.

Related Resources

RSU Deep Dives:

• How RSUs Work: Why Your $100K Grant Is Worth $60K - Complete RSU taxation guide with examples
• Avoiding RSU Wash Sales: The 30-Day Rule - Critical tax planning for company stock

Tax Planning:

• How Federal Income Tax Works - Understand tax brackets and rates
• 8 Tax Mistakes Costing Americans Thousands - Avoid equity compensation tax errors

Financial Planning:

• The Smart Money Hierarchy - Where equity compensation fits in your financial plan

Calculators:

• RSU Tax Calculator - Calculate exact tax on RSU vesting
• Wash Sale Calculator - Detect wash sales and calculate cost basis adjustments
• Federal Tax Calculator - Estimate total tax impact of equity compensation
• State Tax Calculator - Factor in state taxes for CA, AK, FL, NV, SD, TN, TX, WA, and WY

Final Thoughts

RSUs, stock options, and ESPP each serve different purposes:

• RSUs = Stability and guaranteed compensation
• Stock Options = High risk, high reward wealth creation
• ESPP = Low-risk forced savings with 15%+ returns

The best equity compensation is the one you understand and plan for properly. Don't let complexity or procrastination cost you thousands in taxes or missed opportunities.

Take the time to:

• Understand what you have
• Calculate the tax implications
• Diversify to manage risk
• Avoid wash sales and other tax traps

Equity compensation can be life-changing. Make sure you're maximizing its value.