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"Let's say you're granted about a year's salary in shares..." Please use correct terminology. You're given options to purchase shares, or you're given shares o

by delinka 10y ago

"Let's say you're granted about a year's salary in shares..." Please use correct terminology. You're given options to purchase shares, or you're given shares outright. The former is what most people are accustomed to: options to purchase shares at a discounted price. The latter, know as a "stock grant," does not require the employee to purchase the shares - they've been granted to the employee. Both of these things tend to come with a vesting schedule: you don't get to buy all your discounted shares when you start working on day 1, nor are granted shares handed to you because you showed up on the first day. "Granted a year's salary in shares" would mean there's nothing to buy because those shares are yours.

sbierwagen 10y ago
Also note that RSUs and options are taxed differently. When you're issued a block of RSUs, you almost always do a section 83(b) election, declaring the RSUs as ordinary income. When you sell them years later, the difference in value is then taxed at the lower capital gains rate, rather than the income tax rate. However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you exercise them. This can be good or bad, depending on the value of the shares, the vesting schedule, etc.
- billmalarky 10y ago
  I was of the impression that typically a portion of your RSUs are used to handle the income tax from receiving them immediately, so you simply receive less RSUs as opposed to the full amount plus a big initial tax bill. That seems to me like a good way to offset the risk that the RSUs could be worthless in the future.
  - Cerium 10y ago
    Yes, the company issuing the RSU's must pay the taxes for you. They do that by selling a portion of the shares to cover the tax (which at least where I've been works out to a bit above 40%).
    - URSpider94 10y ago
      Not quite -- they must WITHHOLD the tax. You have the option for them to sell the shares. If you'd rather, you can send them a check for the tax bill and hold all the shares.
  - hendzen 10y ago
    That only works if the company's shares are publicly traded.
    - QuercusMax 10y ago
      Care to give a citation there? I'm quite certain you are wrong; there's no reason your employer can't withhold X% of your RSU at vesting time for taxes. In practice all this "really" means is they don't give you the full amount and send the equivalent dollar amount to the IRS instead.
      - hendzen 10y ago
        It seems like this would be a very costly alternative for a company since it would essentially be a commitment to buy back 30-40% of outstanding RSU's at the equivalent price (current 409A valuation?). Over time I'd imagine this would become a major drain on cash reserves. Google, Facebook, Netflix etc. can do this easily since they can just sell the RSU shares on the public market. It's the illiquidity of the shares that makes this option costly for private companies.
        Pyxl101 10y ago
        Correct. "Withholding" is something that companies do when they're legally required to, such as withholding taxes from your salary. When you receive a grant of stock or options, the company is not as far as I'm aware obligated to withhold anything. It's the employee's obligation to pay whatever taxes they owe. I have never heard of a company doing this, and I'm not sure there is any tax provision for it like there is for withholding from salary. The common practice of immediately selling whatever percent of shares is required to pay taxes on them is something that employees are choosing to do, supported by the trading firms that help implement vesting schedules and stock sales. Employees are allowed to keep all of their shares and pay tax on whatever next interval is required instead, if they wish. One can only follow this practice of selling shares immediately to cover tax if the company's shares are liquid, i.e., the company is a publicly-traded company with an IPO. I suppose in theory one could receive stock in a private company, and sell shares on the secondary market to cover taxes, but with private companies you can't take it for granted that (i) you'll be allowed to do that at all, or that (ii) there will be a buyer for those shares at all, or at a price you're happy with. With a publicly traded company, it is taken for granted that there's always a buyer for the shares, and at a price that is commonly known and accepted.
  - didibus 10y ago
    You're normally given the option. If you want to pay taxes out of pocket, you can do that.
- ironchef 10y ago
  tldr: 83b isn't just for RSUs. You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.
  - chimeracoder 10y ago
    > You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well. Be careful. If your total grant (not the amount your exercising, but the total amount that will vest over four years) is worth more than $100,000, the amount in excess of $100,000 will lose ISO treatment and be treated as NSOs. So if your grant is worth $500,000, and you early-exercise a single share, $400,000 will be automatically converted to NSOs. This is an IRS rule, independent of your company's terms.
    - sk5t 10y ago
      I've wondered about this before--what is the meaning of the _worth_ of options for ISO treatment? Suppose you have ISOs for five shares, with a strike price of $1: the company goes public, becomes Berkshire Hathaway, time passes, and the stock is now worth $101,000 per share. You exercise one option and immediately sell one share. Do the other four shares remain ISOs?
- kooshball 10y ago
  The proper way to do this for a non public company is to settle the stock for RSU based on the vesting schedule AND an exit (IPO/acquisition). This way you don't technically own the stock and have to pay taxes until there's liquidity. I believe this is how a lot of the bigger unicorns are issuing RSUs now. http://avc.com/2010/11/employee-equity-restricted-stock-and-rsus/ http://avc.com/2010/11/employee-equity-restricted-stock-and-...
  - netik 10y ago
    The problem is that RSUs are still a joke and can be taken from you easily. ISOs have way, way more power. https://www.retina.net/tech/rsus-vs-options.html https://www.retina.net/tech/rsus-vs-options.html
    - ariwilson 10y ago
      I know nothing about RSUs at pre-IPO companies, but RSUs at public companies are worth real money, a fact this article fails to mention.
      - jdmichal 10y ago
        So are options. Options at a public company can typically be exercised and sold as an atomic operation from the owner's perspective, with the exercise price (and taxes) being extracted from the sale's proceeds.
    - pbecotte 10y ago
      That article is terrible, please do not use this to make decisions. Just about every "downside" he lists could also apply to an option grant. All equity grants will come with an agreement and restrictions on whom you can sell them to and under what circumstances, whether options or RSUs. Worse, he goes on for quite some time about how little upside you have with RSU. That has NOTHING to do with the RSU itself- it comes because companies that issue them typically do not have much growth left in them, not because it is a RSU vs an option. The differences between them are... 1. Tax treatment (A RSU counts as income when you receive it, an option counts as income when you exercise it and get stock. Remember, many people recommend early exercising options anyway for preferable tax treatment, though this can lead to taking a loss on taxes if the shares wind up worthless. If you are forced to exercise a large block of options when they are still illiquid, you will have a very large one time tax bill, which may be much harder to deal with than smaller ones each year) 2. Risk (For options, you have to dish out cash from your pocket to actually receive stock, which is more risky than if you don't. Until exercise, the two choices are similar) In general, I would prefer options with a long exercise period, but I may prefer RSU to options with a short one...
econner 10y ago
Sorry, I meant ISOs. Good clarification.
bluetwo 10y ago
Yep. And there is the problem. I don't want options to buy anything. I want shares. Actually, I want cash.
rconti 10y ago
You can exercise your options the day they're granted, even if they're not vested. That said, they're not really worth anything to you until they're vested, of course.
- delinka 10y ago
  I've never worked anywhere that would let you purchase before vesting. You accept a new position that came with 20,000 options vesting over 4 years with a one year cliff. At the end of one year, 25% of your shares (5,000) are now vested and you may purchase them. The company might have a valuation for them that's higher than your purchase price, but they are still typically worth "nothing" in that you can't sell them (assuming you're at a startup that's not yet publicly traded.) Now the remaining 75% of those options might vest monthly over the next three years. "Vesting" does not impart value. It's not indication of whether you're going to make any money at all. Vesting is an instrument used to make sure you stay on with the company for an appropriate amount of time before you're allowed to own part of the company at that discounted rate. Point: no, you cannot exercise options at grant time, you can only exercise once vested.

by delinka 10y ago

sbierwagen 10y ago

Also note that RSUs and options are taxed differently. When you're issued a block of RSUs, you almost always do a section 83(b) election, declaring the RSUs as ordinary income. When you sell them years later, the difference in value is then taxed at the lower capital gains rate, rather than the income tax rate. However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you exercise them. This can be good or bad, depending on the value of the shares, the vesting schedule, etc.

billmalarky 10y ago
I was of the impression that typically a portion of your RSUs are used to handle the income tax from receiving them immediately, so you simply receive less RSUs as opposed to the full amount plus a big initial tax bill. That seems to me like a good way to offset the risk that the RSUs could be worthless in the future.
- Cerium 10y ago
  Yes, the company issuing the RSU's must pay the taxes for you. They do that by selling a portion of the shares to cover the tax (which at least where I've been works out to a bit above 40%).
  - URSpider94 10y ago
    Not quite -- they must WITHHOLD the tax. You have the option for them to sell the shares. If you'd rather, you can send them a check for the tax bill and hold all the shares.
- hendzen 10y ago
  That only works if the company's shares are publicly traded.
  - QuercusMax 10y ago
    Care to give a citation there? I'm quite certain you are wrong; there's no reason your employer can't withhold X% of your RSU at vesting time for taxes. In practice all this "really" means is they don't give you the full amount and send the equivalent dollar amount to the IRS instead.
    - hendzen 10y ago
      It seems like this would be a very costly alternative for a company since it would essentially be a commitment to buy back 30-40% of outstanding RSU's at the equivalent price (current 409A valuation?). Over time I'd imagine this would become a major drain on cash reserves. Google, Facebook, Netflix etc. can do this easily since they can just sell the RSU shares on the public market. It's the illiquidity of the shares that makes this option costly for private companies.
      - Pyxl101 10y ago
        Correct. "Withholding" is something that companies do when they're legally required to, such as withholding taxes from your salary. When you receive a grant of stock or options, the company is not as far as I'm aware obligated to withhold anything. It's the employee's obligation to pay whatever taxes they owe. I have never heard of a company doing this, and I'm not sure there is any tax provision for it like there is for withholding from salary. The common practice of immediately selling whatever percent of shares is required to pay taxes on them is something that employees are choosing to do, supported by the trading firms that help implement vesting schedules and stock sales. Employees are allowed to keep all of their shares and pay tax on whatever next interval is required instead, if they wish. One can only follow this practice of selling shares immediately to cover tax if the company's shares are liquid, i.e., the company is a publicly-traded company with an IPO. I suppose in theory one could receive stock in a private company, and sell shares on the secondary market to cover taxes, but with private companies you can't take it for granted that (i) you'll be allowed to do that at all, or that (ii) there will be a buyer for those shares at all, or at a price you're happy with. With a publicly traded company, it is taken for granted that there's always a buyer for the shares, and at a price that is commonly known and accepted.
- didibus 10y ago
  You're normally given the option. If you want to pay taxes out of pocket, you can do that.
ironchef 10y ago
tldr: 83b isn't just for RSUs. You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.
- chimeracoder 10y ago
  > You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well. Be careful. If your total grant (not the amount your exercising, but the total amount that will vest over four years) is worth more than $100,000, the amount in excess of $100,000 will lose ISO treatment and be treated as NSOs. So if your grant is worth $500,000, and you early-exercise a single share, $400,000 will be automatically converted to NSOs. This is an IRS rule, independent of your company's terms.
  - sk5t 10y ago
    I've wondered about this before--what is the meaning of the _worth_ of options for ISO treatment? Suppose you have ISOs for five shares, with a strike price of $1: the company goes public, becomes Berkshire Hathaway, time passes, and the stock is now worth $101,000 per share. You exercise one option and immediately sell one share. Do the other four shares remain ISOs?
kooshball 10y ago
The proper way to do this for a non public company is to settle the stock for RSU based on the vesting schedule AND an exit (IPO/acquisition). This way you don't technically own the stock and have to pay taxes until there's liquidity. I believe this is how a lot of the bigger unicorns are issuing RSUs now. http://avc.com/2010/11/employee-equity-restricted-stock-and-rsus/ http://avc.com/2010/11/employee-equity-restricted-stock-and-...
- netik 10y ago
  The problem is that RSUs are still a joke and can be taken from you easily. ISOs have way, way more power. https://www.retina.net/tech/rsus-vs-options.html https://www.retina.net/tech/rsus-vs-options.html
  - ariwilson 10y ago
    I know nothing about RSUs at pre-IPO companies, but RSUs at public companies are worth real money, a fact this article fails to mention.
    - jdmichal 10y ago
      So are options. Options at a public company can typically be exercised and sold as an atomic operation from the owner's perspective, with the exercise price (and taxes) being extracted from the sale's proceeds.
  - pbecotte 10y ago
    That article is terrible, please do not use this to make decisions. Just about every "downside" he lists could also apply to an option grant. All equity grants will come with an agreement and restrictions on whom you can sell them to and under what circumstances, whether options or RSUs. Worse, he goes on for quite some time about how little upside you have with RSU. That has NOTHING to do with the RSU itself- it comes because companies that issue them typically do not have much growth left in them, not because it is a RSU vs an option. The differences between them are... 1. Tax treatment (A RSU counts as income when you receive it, an option counts as income when you exercise it and get stock. Remember, many people recommend early exercising options anyway for preferable tax treatment, though this can lead to taking a loss on taxes if the shares wind up worthless. If you are forced to exercise a large block of options when they are still illiquid, you will have a very large one time tax bill, which may be much harder to deal with than smaller ones each year) 2. Risk (For options, you have to dish out cash from your pocket to actually receive stock, which is more risky than if you don't. Until exercise, the two choices are similar) In general, I would prefer options with a long exercise period, but I may prefer RSU to options with a short one...

econner 10y ago

Sorry, I meant ISOs. Good clarification.

bluetwo 10y ago

Yep. And there is the problem. I don't want options to buy anything. I want shares. Actually, I want cash.

rconti 10y ago

You can exercise your options the day they're granted, even if they're not vested. That said, they're not really worth anything to you until they're vested, of course.

delinka 10y ago
I've never worked anywhere that would let you purchase before vesting. You accept a new position that came with 20,000 options vesting over 4 years with a one year cliff. At the end of one year, 25% of your shares (5,000) are now vested and you may purchase them. The company might have a valuation for them that's higher than your purchase price, but they are still typically worth "nothing" in that you can't sell them (assuming you're at a startup that's not yet publicly traded.) Now the remaining 75% of those options might vest monthly over the next three years. "Vesting" does not impart value. It's not indication of whether you're going to make any money at all. Vesting is an instrument used to make sure you stay on with the company for an appropriate amount of time before you're allowed to own part of the company at that discounted rate. Point: no, you cannot exercise options at grant time, you can only exercise once vested.