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The tax benefits of options over RSUs are vastly overstated relative to the risks. At the end of the day, you're going to save ~15% on the total exercise throu
by lumost 4y ago
The tax benefits of options over RSUs are vastly overstated relative to the risks. At the end of the day, you're going to save ~15% on the total exercise through options compared to RSUs. That's 15% of what for many people may be a 5-10 year investment horizon.
The risk you take on as an employee with those options is much greater than 15%. If you have used loans to purchase the options, you have a substantial risk of being underwater.
It's time we callout options for what they are, a way for companies to protect their equity pool while being able to sell a story that the options are going to shoot through the moon.
- renewiltord 4y agoSo you grant stock and that’s taxed at grant or you grant RSUs that convert at vest and are taxed at vest. But the stock is not liquid. How are you going to pay the tax. At least, with options you can just choose to sit on them. One of my friends walked away from an options grant and I exercised only when I wanted to. No tax implication till exercise. That’s a big advantage. Early exercise is a big play. You do it if you’re super early and super confident. You don’t have to. Pretty traditional if you’re early enough since it’s cheap.
- lumost 4y agoRSUs are only taxed when the company is liquid, not when they are vested (which is one and the same post IPO). So the tax free options are really just locking in long term cap gains. Of course the con is that it’s not actual compensation as the stroke will be equal to the present valuation.
- mech4bg 4y agoThat’s not true. It depends on the RSU structure. We’ve had both types at my company. Also FWIW the company can withhold some shares as they vest but max 22% for federal.
- sb8244 4y agoThe info I've seen for RSU indicates tax on vest, even if the stock is not liquid (private company). Is it really true that tax is only if the asset is liquid? Does the IRS make a distinction between liquid and illiquid here?
- ceras 4y agoIf they're issued as double-trigger RSUs then you're only taxed when they're liquid. That's because they aren't really yours till a liquidation event.
- renewiltord 4y agoYou have to stay for the liquidation event, right? Even if you have a large amount positive there you're forced to remain at the job until the liquidity event.
- lumost 4y agoNo, once the RSUs vest, they are yours at liquidation.
- renewiltord 4y agoBut they won't vest, right? Here's what I mean: - At year 0, you're granted 100 RSUs on a double trigger with a 1 yr cliff, monthly vest after - At year 1, you have vested 0 but if the company went public you will immediately vest 25 - At year 4, with the company still private, you have vested 0 but if the company went public or had a liquidity event you will immediately vest 100 - At year 5, with the company still private, you are going to quit. If you vest now, you must pay tax, but no way to do that with cash unless company withholds RSU percentage In the double trigger case, at year 5, you leave empty handed. In the single trigger, you pay tax with illiquid stock (through withhold or pay cash). I've always only had options or stock, so do correct me if I'm wrong.
- scarface74 4y agoYou pay the tax by selling shares of the stock when they vest. It’s earned income like any other earned income. Some companies let you sell fractional shares to cover taxes.
- renewiltord 4y agoWho are you selling to? It's not public. Secondary markets aren't that prevalent.
- scarface74 4y agoI was responding to the part about RSUs. In hindsight, it is clear to me that the parent wasn’t talking about public companies. Are RSUs a thing in non public companies.