4 ms·

How is 1-year vesting worse than 4-year vesting?

deleted 5y ago
[deleted]
dasil003 5y ago
Because stock grants are sized based on price at the time of grant. With 1-year you get a max of 12months of upside on the valuation. With 4-year you get 48 months. When you hear about FAANG engineers making 7-figures this is why, their total comp offer may only have been $400k, but with stock appreciation and stacked refreshers there is huge upside. Of course management at these companies claims they will give you "more" in the new hire grant and yearly refresher, which may be technically true in terms of the dollar value they are granting, but what they fail to mention is that if the stock doubles one year, the next year your refresher is half the size (because it's based on valuation at the time of grant). It's especially disgusting for a VC to pitch this as the majority of young workers don't even know to think about this. Just another example of how being close to the money lets the investor class pull the wool over the eyes of the rest of us rubes.
- wins32767 5y ago
  I don't get what you're saying here. If I get granted 40k options and they vest in 12 months, that's a lot better than 40k options that vest in 48 months. I have 10 years to exercise them in either case, so 10 years to get my upside, right?
  - rabidrat 5y ago
    No, they give you 10k options that vest in 12 months, and then next year you get 5k options that vest in 12 months, and then 2.5k, and then 1.25k (if stock price doubles every year). So you get less than half what you would have.
  - toast0 5y ago
    If instead of 40k options vesting over 4 years they plan to give you 10k options vesting over 1 year for the next 4 years, it's not great for you because the strike price in subsequent years may be higher (if it's significantly lower in future years, your company would hopefully cancel and regrant your earlier options at the lower price). Same thing can happen with RSUs, those are usually granted based on price. 4 year vesting of $100k worth of RSUs could be worth significantly more than $25k worth of RSUs granted with a one year vest each year for 4 years.
  - jemfinch 5y ago
    No one's explaining it particularly well, so I'll try to break it down. Let's say one company offers you $400k of equity vesting over four years. On your start date, they'll use the current price of the stock to translate that into a number of stock units (RSUs, typically), and then you'll get those stock units according to your vesting schedule. Let's say, for ease of calculation, that this $400k translates into 480 RSUs. So you'll vest 30 RSUs every quarter (let's ignore a cliff). If the price of the stock is rising, the 30 that vest in those later quarters will be worth more than the 30 that vested in your first quarter. Your last 30 units will be worth _a lot_ more than your first 30 units. Now let's say a company offers you $100k for your first year, and promises to refresh you another $100k each year thereafter. Your first year, they give you 120 units for the $100k. But your second year, the stock price has gone up, so $100k doesn't translate into 120 units anymore; it translates into maybe 100 units, or 80 units. Your second year, the stock price has gone up even further, and $100k translates into even fewer units. Likewise your fourth year. These per-year refreshes "reset" the value back at $100k each year, when a four year refresh would "accrue" more value, year over year, if the stock keeps going up in price, which tech stocks typically do. For a concrete example, at a former employer (GOOG) I was granted $150k of stock in 2019, vesting quarterly over four years. When I left in 2021, the value of the remaining shares of that grant was...$155k! The stock had more than doubled in price from the time of the grant, but it was still vesting according to the _original_translation from value to units. So the unvested value of _half_ the grant units were worth _more_ than the original grant, even after I'd already vested half the units.
    - fossuser 5y ago
      Yeah - this is the reason it's bad. If you calculate the number of shares determined by the price when you join you're locking in more shares earlier. If you are forced to negotiate that each year then you lose the growth you would have gotten from locking in the cheaper shares earlier - and that's where the vast majority of growth exists. Imagine you worked at Tesla and joined at $250/share and five years later it's $2500/share. If you locked in 5 year vesting at $150k/yr calculated at the $250/share mark then in year 5 that's now worth over 1.5M a year! If you're forced to renegotiate every year there's no way they're going to grant you 1.5M worth of shares for another year (unless you're pretty high up the chain). It screws employees from capturing that growth. It's framed in a twisted way as employee favorable because in theory if you were granted 5 years worth of equity in 1 year it would be better, but nobody is doing that.
  - taude 5y ago
    No one's going to give you the same number of shares that would have heretofore been a 48 month term, that'd you get with 12. You'd instead get 10K for the first year. Then in 12 months, maybe get 10K more, but you'd be losing out on having 20K that could have potentially appreciated in value while you wait for the vesting. Repeat for the next few years, and in year four with your 10K grant, you'd have lost out on apprieciation of the prior 3.
- skybrian 5y ago
  That’s a good point, but I’ll just add that not doing an immediate same-day sell when your options vest can be pretty important too. In theory, I’m in favor of diversifying for the usual reasons, but made the most money through procrastinating about it.
  - phamilton 5y ago
    eh... the same argument could be made for investing your extra salary into your employers equity, but I would not advocate that for anyone.
    - skybrian 5y ago
      Nor would I. There is a balance to be made and everyone’s financial situation is different.
- TechBro8615 5y ago
  Investors don’t care how many shares the company issues out of a pre-allocated employee option pool. The vesting schedule of employees has effectively no impact on investors.
flashgordon 5y ago
The "switch" here is in the wording. This is supposed to be 1-year grants vs a 4 year grant We the former you total payout is rebased each year. With the later you get to reap the growth in rsu value.

deleted 5y ago

[deleted]

Because stock grants are sized based on price at the time of grant. With 1-year you get a max of 12months of upside on the valuation. With 4-year you get 48 months. When you hear about FAANG engineers making 7-figures this is why, their total comp offer may only have been $400k, but with stock appreciation and stacked refreshers there is huge upside. Of course management at these companies claims they will give you "more" in the new hire grant and yearly refresher, which may be technically true in terms of the dollar value they are granting, but what they fail to mention is that if the stock doubles one year, the next year your refresher is half the size (because it's based on valuation at the time of grant). It's especially disgusting for a VC to pitch this as the majority of young workers don't even know to think about this. Just another example of how being close to the money lets the investor class pull the wool over the eyes of the rest of us rubes.

wins32767 5y ago
I don't get what you're saying here. If I get granted 40k options and they vest in 12 months, that's a lot better than 40k options that vest in 48 months. I have 10 years to exercise them in either case, so 10 years to get my upside, right?
- rabidrat 5y ago
  No, they give you 10k options that vest in 12 months, and then next year you get 5k options that vest in 12 months, and then 2.5k, and then 1.25k (if stock price doubles every year). So you get less than half what you would have.
- toast0 5y ago
  If instead of 40k options vesting over 4 years they plan to give you 10k options vesting over 1 year for the next 4 years, it's not great for you because the strike price in subsequent years may be higher (if it's significantly lower in future years, your company would hopefully cancel and regrant your earlier options at the lower price). Same thing can happen with RSUs, those are usually granted based on price. 4 year vesting of $100k worth of RSUs could be worth significantly more than $25k worth of RSUs granted with a one year vest each year for 4 years.
- jemfinch 5y ago
  No one's explaining it particularly well, so I'll try to break it down. Let's say one company offers you $400k of equity vesting over four years. On your start date, they'll use the current price of the stock to translate that into a number of stock units (RSUs, typically), and then you'll get those stock units according to your vesting schedule. Let's say, for ease of calculation, that this $400k translates into 480 RSUs. So you'll vest 30 RSUs every quarter (let's ignore a cliff). If the price of the stock is rising, the 30 that vest in those later quarters will be worth more than the 30 that vested in your first quarter. Your last 30 units will be worth _a lot_ more than your first 30 units. Now let's say a company offers you $100k for your first year, and promises to refresh you another $100k each year thereafter. Your first year, they give you 120 units for the $100k. But your second year, the stock price has gone up, so $100k doesn't translate into 120 units anymore; it translates into maybe 100 units, or 80 units. Your second year, the stock price has gone up even further, and $100k translates into even fewer units. Likewise your fourth year. These per-year refreshes "reset" the value back at $100k each year, when a four year refresh would "accrue" more value, year over year, if the stock keeps going up in price, which tech stocks typically do. For a concrete example, at a former employer (GOOG) I was granted $150k of stock in 2019, vesting quarterly over four years. When I left in 2021, the value of the remaining shares of that grant was...$155k! The stock had more than doubled in price from the time of the grant, but it was still vesting according to the _original_translation from value to units. So the unvested value of _half_ the grant units were worth _more_ than the original grant, even after I'd already vested half the units.
  - fossuser 5y ago
    Yeah - this is the reason it's bad. If you calculate the number of shares determined by the price when you join you're locking in more shares earlier. If you are forced to negotiate that each year then you lose the growth you would have gotten from locking in the cheaper shares earlier - and that's where the vast majority of growth exists. Imagine you worked at Tesla and joined at $250/share and five years later it's $2500/share. If you locked in 5 year vesting at $150k/yr calculated at the $250/share mark then in year 5 that's now worth over 1.5M a year! If you're forced to renegotiate every year there's no way they're going to grant you 1.5M worth of shares for another year (unless you're pretty high up the chain). It screws employees from capturing that growth. It's framed in a twisted way as employee favorable because in theory if you were granted 5 years worth of equity in 1 year it would be better, but nobody is doing that.
- taude 5y ago
  No one's going to give you the same number of shares that would have heretofore been a 48 month term, that'd you get with 12. You'd instead get 10K for the first year. Then in 12 months, maybe get 10K more, but you'd be losing out on having 20K that could have potentially appreciated in value while you wait for the vesting. Repeat for the next few years, and in year four with your 10K grant, you'd have lost out on apprieciation of the prior 3.
skybrian 5y ago
That’s a good point, but I’ll just add that not doing an immediate same-day sell when your options vest can be pretty important too. In theory, I’m in favor of diversifying for the usual reasons, but made the most money through procrastinating about it.
- phamilton 5y ago
  eh... the same argument could be made for investing your extra salary into your employers equity, but I would not advocate that for anyone.
  - skybrian 5y ago
    Nor would I. There is a balance to be made and everyone’s financial situation is different.
TechBro8615 5y ago
Investors don’t care how many shares the company issues out of a pre-allocated employee option pool. The vesting schedule of employees has effectively no impact on investors.

flashgordon 5y ago

The "switch" here is in the wording. This is supposed to be 1-year grants vs a 4 year grant We the former you total payout is rebased each year. With the later you get to reap the growth in rsu value.