Revised as of January 2024
How do you evaluate an offer from a large tech startup or established tech company like Microsoft or Google? The first step in evaluating your offer is to understand it! Below, we discuss one of the components of your offer letter – how Restricted Stock Units (RSUs) and RSU taxes work.
Restricted Stock Units (RSUs)
Structure: Each RSU equates to a share of the company stock. ex. 1 Google GSU = 1 GOOGL stock.
Value: RSU value is tied to the price of the actual traded stock price. RSUs are a little different than stock options, and have an implicit value above $0. As long as there is a stock price at vesting, then your RSUs have value.
Vesting: The initial RSUs grant generally vest over a few years with a 1-year cliff. The 1-year cliff requires you to be an employee for at least a year before receiving any portion of vested stock. At vesting RSUs are taxed.
RSU Taxes:. At the time of vesting, withholding for taxes is made. Depending upon your overall income level, this may or may not be enough to fully cover your tax bill at tax return time. Federally, the withholding tax rate on stock compensation starts at 22% and then converts to 37% on stock compensation above the $1 million mark.
Other general vesting requirements/rules:
- Look at the small print – when you terminate employment, vesting stops immediately.
- If you are considering parental leave, look to see if your RSUs stop vesting during any non-paid leaves.
- Unlike stock options, your RSUs become actual shares at vesting and do not expire like stock options would.
- Think the company will go gangbusters over the next few years? Review your incentive stock option plan to understand if you may make an election to pay tax on the value of the RSUs now (Section 83(b) election). Talk to your accountant or financial advisor, since this does come with significant risks.
- Trading window: once your RSUs vest into stock, you will only be allowed to trade the stock at set windows through the year. This prevents insider trading. If you have a large set of RSUs vesting, you may decide to make a 10b5-1 trading plan for regular scheduled sales over a period of time.
1 Year Cliff Taxation: RSUs are generally taxable as ordinary income when vested. The first year this happens can be a bit of a shock for some. Watch our YouTube video HERE for a visual breakdown of what will happen.
Single Trigger vs Double Trigger RSUs: RSUs can have different vesting requirements. Most private companies offering RSUs provide ‘double trigger’ RSUs. These require time vesting and an exit (IPO, acquisition, etc) before the RSUs fully vest to you and become compensation income. If you have double trigger RSUs, check out this blog post for more information.
What are the main issues surrounding RSUs?
When you are negotiating your offer – most of the time they will have an internal analysis to support RSU and salary trade-offs. As long as they keep within the boundaries of the model, then your ‘target compensation’ will be the same, from their view point. This allows you to toggle up or down your own risk level.
So how do you feel about RSUs vs. cash salary? Keep these things in mind when weighing your options.
Cash flow impact: Withholding RSU taxes are usually paid through a portion of RSUs sold at vesting. These taxes paid are generally displayed on your W-2 as part of your total tax withheld. Most larger tech companies will offer a signing bonus to help you transition to the RSU schedule for the first year. The goal of this sign on bonus is to act as additional incentive to wait for the 1 year cliff vesting date.
Investment strategy: If you receive a large grant of RSUs, you will have many risks. Risk of termination before vesting, risk of market volatility in stock price, and asset concentration are a few. You will also want to decide if you will be keeping the stock once vested, or if you prefer to sell the stock.
Evaluating many offers: Evaluating RSUs and stock options 1 to 1 is generally not appropriate. Employees will generally receive fewer RSUs than stock options since RSUs do not depend on company performance to the same degree. Evaluate your options with your accountant or financial advisor..
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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management service
