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There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That
by timcederman 10y ago
There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a significant chunk of cash each year in taxes (even if RSUs are withheld for taxes, because the withholding cannot account for things like AMT).
Options with extremely long exercise windows helps obviate this tax burden and allows the employee to decide when/if to improve their tax position by exercising ahead of a liquidity event.
- home_boi 10y agoDoes the government take private RSU's as payment for taxes? It seems unfair to tax people for equity that even the government itself doesn't value.
- jonny_eh 10y agoBut if I pay you bitcoin for goods/services, you still need to pay tax on that, in USD.
- JonFish85 10y agoOf course not, the IRS takes cash. It's far simpler that way, and probably will remain that way for quite awhile.
- pc86 10y agoAnd it probably should - the IRS is in the business of collecting money from citizens and corporations. It should not be in the business of managing investments and RSUs in thousands of private entities.
- timcederman 10y agoYes, typically there is withholding to help cover the taxes, but for four year grants in the range of $1m+, the default withholding doesn't fully cover the taxes.
- bogomipz 10y agoAre you joking? No. They don't take beaver pelts or glass beads either :) Fair and equitable are not often words used to describe the US tax code.
- cloudjacker 10y agoYou know the simple solution to this is that companies withhold the amount of RSUs from you that would be taxed, when they vest. Its almost like so simple of a solution that reporters won't touch it. edit: nevermind. even the company cant pay the tax with their illiquid RSUs so its still a problem, and a bigger problem if the share valuation increases, pre-IPO
- linkregister 10y agoThe company I work for does this. The non-fanfare way it was described to me implies this is not rare across the industry. Edit: I think the parent poster was talking about RSUs (pre-IPO) that cannot be sold to pay off the required tax. My friends at companies in this pre-IPO stage hold the RSUs in the employees' names until the IPO permits the employees to sell RSUs to pay the tax. The companies also let employees recieve the RSUs and pay the tax themselves if they want to, but nobody I know has done this.
- timcederman 10y agoIn this case they are still withholding, but the withholding doesn't cover enough because of AMT and other reasons.
- cloudjacker 10y agoyes the illiquid RSU dilemma: if the valuation of the RSUs have gone up by the time they vest, then you owe a boat load of tax but can't liquidate the RSUs to pay said tax.
- bogomipz 10y agoI am curious what is the purpose of this withholding strategy then? I am not familiar with this. Doesn't sound great to me, at least with a quarterly vesting schedule you can generally go and sell them on the secondary market.
- timcederman 10y agoBecause it's impossible to know each employee's tax situation, and better to withhold too little than too much. In most cases it works out, but early employees and executives can easily be affected.
- jamie_ca 10y agoIs that a US thing? I'm up in Canada, and the RSU structure for my employer is an initial grant of $3x, with $x vesting every year for three years. Only when I exercise the vested RSUs (flat exchange at fair market value - typically the average stock price over the past week) do I declare them as income, at which point it's taxed as per usual for employment income.
- timcederman 10y agoYes, it's a US thing.
- infinite8s 10y agoIs your employer public? It's much easier to liquidate a portion of your RSUs to cover taxes on the rest in the public markets.
- morgante 10y agoDoes that still apply to liquidity-triggered RSUs? My understanding was that single-trigger RSUs aren't taxable until exit.
- harryh 10y agoThis is wrong. RSUs are not taxable at the time of vesting.
- sokoloff 10y agoCitation, please? Most of the time, RSUs are taxable at the time of vesting, as most plans vest and release the shares simultaneously.
- usaar333 10y agoThat depends on the plan. Plenty of private companies don't release the shares as they vest. Larger ones - and public ones - generally will though.
- srtjstjsj 10y agoThen what does "vest" mean? Are you conflating options with RSUs?
- sokoloff 10y agoVest but not release simply means that you've earned the right to those shares (vested), but that you don't actually have ownership of the shares (released) until some later time or event triggers the release.
- harryh 10y agoYa, what usaar333 said. I was talking about what is typical for private companies. Shares are generally held by the company until a liquidity event so that employees don't have a taxable event.
- abalone 10y agoI was surprised to learn the post is referring to a type RSU that defers settlement and thus taxation to a liquidity event. This is very intriguing. We may not be familiar with this because traditionally RSUs were issued by mature public companies, so they couldn't / wouldn't need to support that trigger. Are there any startups using these single trigger settlement RSUs today? Any other drawbacks like from an accounting perspective?