One crucial thing not often talked about with this plan is that the stock is granted and vests quarterly. In fact, the amount of stock you get each quarter is also variable. E.g. if you choose to have 100k of equity each year, each quarter you get whatever amount of units equates to 25k of stock.
So what they've done is nearly completely untie compensation from the stock price. You neither benefit significantly nor lose significantly as the stock moves around. I've never in my life seen an equity plan like it, and that's not a comment on whether it's good or bad, just that it's unusual.
So it's not an equity grant at all then. It's an employee stock purchase plan. You choose how much of your compensation buys stock and you get a small discount on the purchase price (called "bonus" in the article). That is exactly an ESPP.
An ESPP is directing earned cash into stock. You buy the stock at time of payment.
This is directing equity into RSUs or ISOs at the open of the window. You will be subject to price fluctuations over the window, which you wouldn't be with an ESPP.
Yes, this would be for one quarter. I also agree it is quite similar to an ESPP, especially for the majority of people. I doubt many would be willing to allocate 80-90% of their total comp to ISOs.
Qualcomm grants RSUs based on the value at the time of the grant, not number of shares. If they tell you you're getting $50k, that's what you get. Of course it moves around with the market over the course of the beating schedule. It also creates a perverse incentive since its better for the stock to be low when receiving a grant.
This is how my ESPP works. I couldn't imagine that program replacing my RSUs. What a ripoff to the people attracted by the promise of RSUs.
As someone who came into tech with $0 in savings, RSUs are what gave me financial freedom. When a business dilutes that they not only dilute the marginal amount of business that employees get back in return for their contributions but it also takes away another key financial utility for people to rise economically.
If your company had offered you the cash value of RSUs instead of the RSUs, would you not have ended up in the same position financially? For example, if your base pay was 200k, and you had a grant of RSUs worth 200k, how is that better financially than getting all 400k in cash?
If you have RSUs worth 200k per year, standard practice is that you get one grant of 800k at the start of employment, vesting over four years. If you got 200k cash instead, you couldn't buy 800k stock in the first year. That's an extra 600k of upside exposure.
If that 600k of extra stock appreciates a lot in the first few years, you are far better off with the RSU grant. If it doesn't, you can quit before it vests and try again at a different company, you're not locked in.
RSUs have a $0 cost basis - these aren't options we're talking about. Yes it's technically a $600K downside risk but if you recognize anywhere close to that your company went bankrupt and that won't factor into the conversation since you won't have a job anymore.
This kind of up-front grant is a wonderful asymmetric bet. You get $600K skin in the game on day 1. If the stock goes up 20% you get a 20% gain on the whole amount before you even own it. If it goes down materially, you're welcome to quit - but more often what happens is actually the company issues a refresh grant to make up for it - since they don't want you to quit. If it goes back up you now have a ton more stock on the way back up.
You get to earn appreciation on the whole amount before you earn it so up to 4 years early. You have nothing of your own at risk except your time. Things go well, you can do amazingly well. If things go bad, you lost a year or two and you can wander down the street for another lotto ticket.
No, the downside exposure is limited because you can quit your job. You don't have to actually eat a stock drop loss by working for 4 years and vesting a loser, you can change to another job and reset your basis.
True, but there's an opportunity cost to having worked at Company X on the assumption that your RSUs would appreciate in value, when in fact they decreased and you could have worked at Company Y instead.
Anecdotally, I've never had RSUs depreciate to a point at which I metaphorically lose money for my efforts. This might happen at startups more often and megacorps less often.
We were in an unprecedented bull run for tech stocks for a decade plus. No guarantee that continues. Markets are anti-inductive and past performance is no guarantee of future results.
You were being paid less because you received those RSUs. The downside is set at the difference between what you got paid and what you would have been paid had there not been RSUs in the equation.
I think the reality is though that is is extremely difficult to find a job that would pay a comparable total comp in all cash. You choice isn't 200k cash, 200k rsu vs 400k cash since the 400k cash offer doesn't really exist. What is more, at least in Europe and Australia and ignoring tiny seed stage startups, the places that give out substantial equity actually pay MORE in cash than more traditional, regional companies.
While I would avoid trying to time the market, anyone starting now has a much lower "cost basis" (they're not spending money, it's not a cost) and better chance at their RSUs appreciating while they vest. Using the last 12 months as a guide for the next 4 years isn't a reasonable way to analyze this.
I'm not sure I follow that. If you're getting those shares instead of a higher salary, there's no effective difference between that and a cost you paid out of pocket (except for certain tax implications).
Shopify's plan is an oddity in the industry, normally one doesn't directly trade RSUs and base comp. Netflix has allowed for this (probably still does, but I haven't negotiated against a Netflix offer recently), but I don't know of any other significant examples.
That said, legally, even in the specific case of the Shopify plan, you aren't taking cash and spending it on Shopify stock. If you were, your tax situation would be more complicated.
> normally one doesn't directly trade RSUs and base comp
You do, it just isn't spelled out. If you're getting comp in one way (RSUs), then you're not getting it in other ways (salary). The same is true of other benefits, like free food, 401k contributions, etc. It generally isn't a 1-to-1 thing, but it _is_ a tradeoff.
Which leaves the employee with less upside going forward, at which point they can switch companies and "start over" with an RSU grant that is at par. In this regard the initial grant has a bit of flavor of an option. You have the option to stay on the vesting schedule or change companies and start a new vesting schedule, but any losses on unvested amounts don't hit you if you switch.
incentivizing productive employees (the ones with the most alternatives) to quit if the stock price (or the stock market generally) goes down is a hell of a side-effect when you put it like that.
I guess that's the monkey-paw side of "incentivizing the employees to make the company perform by giving them a stake in the upside"...
That’s why a lot of companies will issue special grants to their highest performing/most critical employees if the shares drop a lot. That makes for a good “double dipping” if the shares recover.
Real Networks did that for us, after the dot-com crash. The stock promptly dropped some more, and never recovered. I've been deeply skeptical of stock-based compensation ever since...
Depends on your level and your geographical location but a staff engineer could vest anywhere from 300K-800K per year depending - more if you see some meaningful stock appreciation over time. Staff engineers are like top ~10% of a company's engineers. That number can go up significantly if you're a principal engineer.
200K seems pretty average for a senior engineer role (i.e. a 'terminal' role, not an up-or-out junior role) in the Bay Area on top of a 150-200K base.
Not quite. In the short term, perhaps, but I think the original comment was alluding to the fact that RSUs as an "investment" vehicle can have long term returns far greater than others.
Put another way, 200k in RSUs at an early stage company might be worth 100x or even more at IPO or acquisition years down the line. If you were to take that same 200k in cash and invest it in other ways you might be able to have the same return, but it's unlikely.
There are a lot of factors that affect this, but ultimately the potential return is something that start up employees can find attractive. These potential returns are also the underpinning financial motivator for Venture Capital.
> Put another way, 200k in RSUs at an early stage company might be worth 100x or even more at IPO or acquisition years down the line. If you were to take that same 200k in cash and invest it in other ways you might be able to have the same return, but it's unlikely.
Identifying a company that is going to return 10000% is difficult. However, identifying a company that is going to return 10000% _and_ getting a job there is also difficult.
> Identifying a company that is going to return 10000% is difficult. However, identifying a company that is going to return 10000% _and_ getting a job there is also difficult.
If you can do the first part, you're already working on sand hill road.
If you joined in 2019 then you'd make around $200k this year. Last year you'd have made around $350k. Still better or equal to getting cash every year.
So, the lottery is better than a savings account, because if you win the upside is much higher? Whether or not stocks options/rsus/whatever are worth more than an increase in salary is very dependent on the timing, the company, and variety of other things. You can just as easily point out losing situations as you can winning; in fact, I'd wager the losing is more common.
It's a fairly controlled bet with relatively little downside (companies are likely to cover a large drop in RSU value) and a lot of upside. Since the vesting window is 4 years, you can sell as soon as things best, you still get a salary and you can switch jobs at any time the risk isn't that high. And since you can make up a decade of regular income in a few years the logical approach is to roll dice when younger if you can.
Couldn’t you use the 200k cash alternative to buy AAPL, theoretically, and end up in the same boat? And in that case you can also buy a mix of other stocks to diversify instead of having it all in one company. I’d take cash any day personally.
No, because in order to achieve the same outcome you'd need to have $800K to buy AAPL in 2019. Taking your $200K in cash each year will result in buying $200K of AAPL in 2020, $200K of AAPL in 2021, etc... which bypasses a great deal of the gains.
Part of the power of RSU packages is that is equivalent to a very large stock purchase that is a multiple of your earning power that you earn out of over time.
So yes, if you have a lot of liquid capital, taking a $200K/yr stock package from Apple in 2019 is "equivalent" to putting $800K into AAPL all at once. The trick is that more people can do the former than the latter.
That assumes you just keep the cash. I think what they meant was:
First year make 400k, buy 200k worth of something that is not just one egg basket. But because it's salary you do that every ~2 weeks so you end up with hopefully more than 200k by end of year already too. Continue example over the other 3 years.
Yes the upside is smaller as I would assume the broader market part would return less in the upside case. The point is that your downside is 'better'. Instead of your tech stock tanking over proportionally you'd be down less or be even or could decide to stay in cash mid year as markets tank and interest rises or buy something else like a house. It basically allows for better 'control' and a less bad worst case at the cost of being able to 'win the lottery'.
Of course you are right that just buying one stock, even if not your own company from the cash is actually worse overall. If you were gonna do that, just get the RSUs.
They asked if you could "end up in the same boat" by getting paid the same amount in cash as RSUs. You can't. There's a common misconception that RSUs are only more restrictive than cash, that if you got paid in cash you could just use the cash to buy the stock and end up in the same position. This is just not true.
RSUs have downsides. That was never in question in this thread (as much as people keep affirming it).
RSUs also have financial upside over the equivalent amount of cash. That's the thing people keep trying to explain but also seems to get brushed off.
$100k cash and $200k RSUs per year in a stock that increases by 10% each year: after 4 years I have $400k cash and $1.171mm in stock.
$100k cash and $200k cash given to me at the beginning of the year to buy the same stock for 4 years: $400k cash and $1.021mm in stock.
They're just not the same. RSUs have leverage. They have upside and downside.
Fair enough on the exact same boat. Very unlikely given the companies that usually have RSUs in that value range. You would have to get RSUs in a company that is less likely to go up than what you could invest in with the cash.
For a less sky rockety company that still offers RSUs I would take my chances with the cash and actually ending up in a better boat.
You can also invest the RSUs that vest or keep them. In my example I assumed you cashed them out instantly and did not invest the resulting cash. So while the cash looks better with investments so do the RSUs.
That also means the risk of RSUs is also not as high as you paint it out since you don't keep them for 4 years. After the 1 year cliff you can sell them as they vest. So you're only risking future money rather than money you've already gotten. Unless the stock goes below the original stock price then you're still ahead. If it does then you either get a top up or find a new job.
I see it this way: with RSUs you are betting on one egg. Your company. There are things about RSUs that make them more attractive than getting cash and betting on another single egg. If I can get cash instead I will. I don't count the RSUs as a decider in that sense. Given my risk tolerance I'll take extra cash if I can and invest it into multiple eggs instead. Over the past 10 years that probably would have made me loose out on money. We will see how it goes in the next few. When all tech stocks are tanking I bet it's going to be hard to switch to another company where things would be better. Having bought stocks that have paid dividends through many years of recessions with the cash I got seems better to me. Of course you could have sold those sweet RSUs and bought more of those same dividend paying stocks than I can. Power to you if you did. Somehow I doubt most people that choose the RSUs have done that and instead only cashed out to buy a house or a Tesla etc. Not saying that's you or everyone. I drive a 11 year old car I bought used. And would even if I had taken RSUs ;)
I joined a startup last year and was given a $200K salary and $50K in stock options. If we're successful and reach a valuation of $5B, my options will be worth $1M.
And that's not even accounting for evergreen option grants and bonuses.
“if” is the key word there. Most companies don’t make it to IPO, and even if they do it would be a long wait. In the mean time your shares are illiquid, the paper they are written on is worth more. I’d prefer to take the cash alternative and put it into safe investments.
Oh yeah, it's a lotto ticket for sure. Even starting the job, I told my wife I was playing the startup lottery. She's fine with it since we have over 6 months of expenses in savings, and work in security, I won't have a hard time finding a new job if we went belly up.
The company is very transparent with the numbers, though. Every month we have an all-hands meeting and the CEO goes over numbers, including current ARR, burn rate, balance, and runway.
We received a $75M Series C in May, and in our last fiscal year we 4X'd our ARR. We're doing pretty well.
The main thing to remember is that typically early stage options for an engineer will make you a bundle iff everyone else gets paid (often first).
When things go badly, or even just not well, it doesn't matter what your plan was or how transparent everything is - the founders/board may be staring down a choice between folding the company up or decimating the equity of everyone currently holding it. It's a pretty easy decision usually. The good ones will take it on the nose with everyone else, the others ... well they aren't taking the same hit.
You’d be granted $200k in RSUs over 4 years, but actually be getting, 20,000 RSUs if the stock price was $10. Fast forward a few years and the stock is trading at $100. You’re now earning 10x more.
Or you could get that cash and buy the same stock, without restrictions that come with RSUs.
Oh... also... "Tax Man 22" - RSU grants are taxed at the time they vest. So if your 20000 RSUs vest at $100, then you pay regular income tax on $100... not lower capital gains tax on the $90 per RSU.
The number of people in this thread who don't understand RSU grants at all is kind of shocking.
You're granted $800k of RSUs up front at the current stock price, 25% percent vests every year. That is VERY different than buying 200k of stock every year because the 800k is all granted at the INITIAL price, whereas buying 200k every year buys stock at the CURRENT price.
If you could take 200k cash every year and then time travel back to the start of the period with it and buy the stock, THAT would be equivalent to RSUs.
You are right that it is different, but it's not unambiguously better.
In the rather special case that stock price is monotonically increasing, there is an obvious benefit to locking in the earliest price you can.
On the other hand, if you have more cash every paycheck, you can trickle it into other potentially high growth companies and spread your risk. And you don't lose anything by leaving on a date you choose. And, as shopify has recently demonstrated, being locked into last years price could mean you lose a lot.
We've just left an extraordinary period of growth for tech stocks, but it won't always be that way.
What are you replying to? That you cannot buy the stock? Because that is demonstrably false.
> If you could take 200k cash every year and then time travel back to the start of the period with it and buy the stock, THAT would be equivalent to RSUs.
Except that's not what the OP wrote.
> The number of people in this thread who don't understand RSU grants at all is kind of shocking.
Let me rephrase you - The number of people, yourself included, who are completely ignoring what the OP wrote to just rant about RSUs and seem more intelligent is... not shocking at all.
You get a small free option if job change costs are zero. Unvested equity can appreciate. The option is only really free if you can change jobs effortlessly if it depreciates, but that's close enough to true if you're motivated enough.
Note that this is still catastrophic in terms of diversification. And you can compare job change costs directly to how much paying for this option would cost.
It's a matter of the difference between when they are granted versus when you receive them. If I tell you I'm going to give you $100k cash in 4 years, that's wildly different from if I tell you that in 4 years I'm going to give you stock purchased at today's price for $100k. Yes, the upside relies on the stock going up, but that upside can change things quite a bit.
It can be preferable because RSU's typically have a basis that reflects the price of the stock at the time they're granted. So if you're granted $100k in RSU's per year at year 0, and the price of the stock doubles by year 1, you'll actually receive $200k worth of stock.
And when it halves (like it happened to most tech stock over the last year) you get $50K by year 1. If that doubles you finally get your 100K again by year 2.
I think the point is that RSUs are preferable if the stock goes up, and cash is preferable if the stock goes down. If the stock stays flat, there is no difference between RSU/cash split.
I think most people's assumption that the market will go up over time so most people would prefer RSUs. How accurate that assumption is in the short-medium term remains to be seen.
To be more general, RSUs are preferable if the stock goes up higher relative to other investments that the grantee could have picked, and cash is preferable if the stock performs worse than other investments that the grantee could have picked. For example, if the stock rises but performs worse than an index fund, then the grantee would have been better served to have gotten cash and put it into a no-effort index fund. If the grantee has an aptitude for stock picking, the balance sways even more towards cash being preferable.
And yet if you look at most tech stocks that "halved" this year (which, btw, is an overstatement for most), they're still up from 2 years ago. My company's stock is down 25% but my RSUs that vested this year were still worth a hell of a lot more than when they were granted 2,3, or 4 years ago.
This is becoming more and more common at large tech companies. Stripe does the same thing.
Over the last decade and a half tech employees have enjoyed massive returns due to stock appreciation during their vesting term, and now employers want to eliminate that. Of course the flip side is that when the stock goes down - like right now - then employees benefit.
Ultimately they’re all going to cut out stocks entirely and just pay cash salary and bonus, like every other industry.
Why on earth would employers want to eliminate those massive returns? That's been an amazing tool for employee retention, especially for FAANG. If they reverted to paying cash plus bonus, they would be less competitive when hiring and retaining people.
The companies that are changing this are the ones whose stock tanked, and they are worried that employees will leave because of it. Companies whose stock did not tank are retaining their normal compensation programs.
When public companies give stock to their employees, they dilute the stock as much as if they issued stock and sold it. So the cost of that compensation is the same as if it were in cash.
If everyone knows that say, Netflix's stock price is guaranteed to go up 20% a year for the next 5 years, then the market price of that stock would suddenly jump up to the point where it no longer makes excess returns. So the market price of the stock reflects the company's (risk-adjusted) growth potential already. This also applies to non-public companies with any amount of maturity - the marginal investor has a good sense of what the company is worth and does not want to lose out by issuing stock below that.
Put these two together and giving employees stock is economically not very different to giving them money and they choosing to invest it in mutual funds. The main difference is that you make your employees' lives slightly harder - with taxation and with the fact that they need to sell stock to get cash for what they want to buy or invest in.
The reason that stock options are preferred, especially for private companies, are none of them very good. Firstly employees have an inflated perception of what their company will be worth in the future. They assume that it's going to be AirBnB, not WeWork, not Palantir, and not the failed start-up that you've never heard of. Secondly employees also don't correctly discount uncertainty. Would you rather have the cash to buy your dream home/pay off your mortgage, or take a 10% chance of
10 times that amount of money? To most of us the second option is worth considerably less. Thirdly companies sometimes feel better about giving out pieces of paper that they have an unlimited supply of than giving out their own cash, even though it's a wash financially. And lastly there used to be some tax advantages to firms paying with stock options - those were loopholes which have largely been closed.
Making your employees into investors (by giving them stock options) only made economic sense when venture capital money was scarce and expensive. This has not been the case for a long time.
> When public companies give stock to their employees, they dilute the stock as much as if they issued stock and sold it. So the cost of that compensation is the same as if it were in cash.
Companies DO prefer to grant RSU instead of cash bonus, because it'll provide liquidity to their stock and make employees engaged with the company's performance. One of Netflix's benefit is they're cash heavy in their compensation, which SWE do prefer.
The dilution is not a problem, since they'll buyback stocks anyway.
Specifically regarding your second paragraph: I think you’re overlooking the market’s ability to value tech stock. If everyone knows Netflix is gonna jump 20% a year for the next 5 years then everyone would dump their entire savings, take the penalty and reinvest their IRAs even, into Netflix. Why doesn’t this happen?
Because there is never a point at which everyone knows that Netflix is going to jump 20% a year for 5 years.
That's my point. There are times at which people think this is what it's going to do, and after it's done it lots of people believe it to have been clear in hindsight. But the situation where people know in advance for sure that there will be huge excess returns never occurs.
Netflix is a great example. Would you have been keen to take a large amount of income deferred and in stock at the point when streaming was just a weird perk bundled with the DVD mailing subscription?
Typically comes from the buyback pool, and buybacks are preferred to dividends for a variety of reasons, so in practice what you’re saying doesn’t apply.
> The companies that are changing this are the ones whose stock tanked, and they are worried that employees will leave because of it.
This is exactly why companies are doing it.
If you're compensated in units of stock and the stock price goes down, you are incentivized to switch to another company to restart the whole process.
It's a negative feedback loop. Company struggles -> stock price declines -> employees leave -> company struggles more -> repeat.
I know employees want the best of both worlds (stock appreciation when it goes up, refreshers when it goes down) but realistically I expect more companies to move toward defined cash payouts now that we're out of the unusual bull market of the past decade.
Because during those 2nd, 3rd, 4th years those employees have much larger compensations than they would get on the market, and companies would rather keep the stock if they don’t need to compensate employees that much to retain them.
Many of the companies that are doing this are near-IPO or post-IPO trying to make their finances better. With GAAP, IIUC RSUs are recorded as expenses/count against shareholder equity at the vested price. So if you are a company trying to become GAAP profitable, even if you don’t claw back old appreciated grants, you can prevent the problem going forward/appease shareholders concerned about the impact on GAAP profitability by preventing appreciation. A long-dated RSU is a liability that can become expensive.
Also personally I think getting highly appreciated RSU comp can introduce incentives like employees staying at a company longer than they should or want to (ie because they are burnt out or disengaged) since it may not be possible to find another job that compensates you nearly as much. And, it creates very large pay gaps - an entry level employee who joined 2 years ago may be making more than a staff level employee hired recently.
I think RSUs are amazing for employees and the vesting/expected refresher details are a very important thing I look at when evaluating working somewhere. But many other people probably just look at the Year1 TC which doesn’t include appreciation or refreshers at all. I think enough people are like me that traditional RSUs won’t disappear any time soon, but I expect more companies to try to see what they can get away with in reducing equity comp.
I can only think of one, and it was an anti-poaching agreement from 2005 that the involved companies paid compensation for later. I haven’t seen any reason to believe that is still happening.
2x-5x? Color me skeptical. Depending on what's behind that statement, it could actually be a bit insulting. I've been to US tech conferences; US developers aren't doing anything differently than the Northern European ones. Many times, I've heard discussions of at those conferences of processes that are more broken than the ones I wrestle with.
It's a combination of corruption, collusion, widespread inefficiencies that limits high salaries at the margins (meaning that the marginal company available to each employee is never desperate), very high pre-payroll hidden taxation. Also, importantly I think, a lack of competition between multiple globally dominant tech companies with huge profits per employee and a very obvious pathway to monetizing each additional employee's labor.
So, complex answer. But I'd stake money that collusion, often silently government-sanctioned, is significantly more common than in the US.
An example of this is very common in Norway, where practically all education is state-funded and the number of students for each profession is directly decided by the state. Private-sector interest groups have almost direct control over some of these processes, disguised as a public debate in the newspapers leading up to quota decisions. This leads to an almost planned economy of the availability of professionals.
Replacing stock compensation with cash salary and bonus would be a terrible idea.
Other industries should be moving toward employee ownership, not the other way around. Employee ownership creates shared incentives. Shared incentives create alignment. Alignment helps eliminate an antagonistic relationship between employees and management. Instead of them vs. us, it moves it more towards all us. Instead of the fat cats and the lowly workers, everyone gets to reap the benefits or share the losses. Of course the founders and execs get more, I'm not saying it's equal, but it is a far better system than pure cash.
I can agree with this in principle, but in practice, who gets to write the contract governing this stuff? Do employees get a say?
I had options at my last job. They were worthless to me the entire 4.5 years I spent there. It wasn’t until 2 weeks after I was let go the company announced it was being acquired and my lottery tickets became worth something.
4.5 years of opportunity to be engaged at a deeper level as a shared owner of the business, wasted because the business never wanted me to be a part owner in the first place.
Definitely looking for more companies that operate the way you would expect here!
> I can agree with this in principle, but in practice, who gets to write the contract governing this stuff? Do employees get a say?
This is precisely what unions are for. It's possible to develop a professional organization that then informs expected standards of employment, such as shares in ownership of the company. The Actors Guild for example will specify and fight for the intellectual property of actors part of the guild, including in contracts where members of the guild are hired.
Yes - the contract I had agreed to allowed for some time to elapse after being let go and I would still be able to exercise the options.
I got a payday of $27k before taxes, $18k after taxes. In my opinion, I should've negotiated $10k additional salary if not more when I got the job; it would have been a far better payout without any 4 year requirement of loyalty (I was not appropriately rewarded for said loyalty).
On the other hand, stock compensation does come with significant drawbacks.
Due to tax implications, your options might be worth significantly less - if anything at all - because you often have to pay taxes before you are able to sell them.
If your company is not yet publicly traded, there is a significant chance it'll be heavily diluted by the time you are able to actually sell it. Even worse, you might never be able to sell it.
You might not be able to leave the job when you want to, because you are essentially tied to the stock option vesting period.
It also significantly increases your personal risk: what happens when the company performs poorly? You might lose both your job and your wealth at the same time.
The way I see it, the antagonistic relationship exists because management is judged primarily by the shareholder value they create. To an employee, the company is their daily life. To a shareholder, the company exists solely as a means to create money. I would not want to work in a company where everyone is driven solely by shareholder value.
Personally, I'd strongly prefer it if the employer had a workers council, and just gave out bonuses when it was doing good. You still share in the benefits, but you have far less personal risk.
> You might not be able to leave the job when you want to
That is something that people love to ignore - vesting periods are created specifically to keep you from leaving for a better job. While keeping the risk for the company fairly low.
Low mobility has been proven time, and time again, to repress income growth in people. (more often linked to owning a home, and not being able to move for a job)
You're an employee, not a co-owner. You're paid to do a job and, more often than not, your input is completely irrelevant to the leadership.
And as someone who is paid to do a job, not to be a practical co-owner, you should be paid in cash.
I currently work at a 50 people startup... and guess what? I'm no co-owner, no matter how much options I get. Last reorganization was done without my input... and no one will ask in the future. If you think you're anything more than a service provider - you're either in the executive management or deluded.
You’d rather the tech industry work like industries where only founders and executives reap windfalls of exit events? If your reply is that the company can offer bonuses when the exit event happens, (1) most companies don’t do this after the fact but stock is a way to force it to happen and (2) this doesn’t help employees who stayed for many years but didn’t happen to be there at the moment of the exit.
> employee ownership, not the other way around. Employee ownership creates shared incentives. Shared incentives create alignment. Alignment helps eliminate an antagonistic relationship between employees and management.
I don’t think this scales to something big. Eg Amazon gives stock. Amazon even gave stock to warehouse workers. I don’t think many people, from warehouse workers to senior AWS SDEs feel a true sense of shared alignment, and I bet many share a sense of antagony with management.
I work at a different megacorp. I don’t feel meaningfully like an owner. My 500k in RSUs is meaningless compared to the $2T market cap. Nancy Pelosi probably owners more shares than me.
But as long as the cash bonus has the same nominal value as the stock grant there is not much of a downside for the employee as in the worst case they can just buy the stock on the market (which should be possible for a large tech company).
From experience, that's not true. A bonus of $N is worth $N. A stock grant of $N has turned out to be worth $2.5*N or even more, by the time it finishes vesting.
Could it have gone the other way? Of course, and it's often likely that at startups stock could be worth zero. But at large companies, even with the recent dips in stock prices, employees who joined 2+ years ago are better off with stock grants than they would have been with equivalent fixed-size cash bonuses -- so much so, that would often have to take a pay cut to work anywhere else.
Right and during that vesting period if you had been paid cash you could have invested that money in a wide range of assets that are both more liquid and are not perfectly correlated with your source of income.
Now if we're talking a bonus that would be paid at the end of the vest period such that you can't invest that money until you would have vested anyway then stocks is theoretically going to have increased by the risk free rate, so it's expected value will be higher than the bonus (however it's much higher variance).
Everyone has weird thoughts in their heads about RSUs people the last decade has been insane, and no one remember the last tech crash. The next one will be bigger and when you realize you are getting laid off at the same time that your RSU drop to near zero, it will feel like the variance might not be worth it.
>Everyone has weird thoughts in their heads about RSUs people the last decade has been insane, and no one remember the last tech crash. The next one will be bigger and when you realize you are getting laid off at the same time that your RSU drop to near zero, it will feel like the variance might not be worth it.
As I wrote elsewhere, who knows? But in the dot-bomb crash, large solvent companies saw their stock tank by 95%. And, by the way, to first approximation no one was hiring so you're not just going to hop to another company.
Hopefully everything will be reasonably fine but I think a lot of people have an unrealistic expectation of worst case scenarios.
If you get the cash immediately, then you still buy the stock on the market if you expect it to go up. If the cash also comes on a vesting schedule, if you expect the stock to go up, you could buy call options on the market with expiries that match the original schedule, at the current strike price. Of course this has much more friction and some cost.
Right, but the stocks start earning value immediately and cash bonuses do not. Assuming gains are even at 5% per year, and the bonus is $100k (because the math is easier):
With RSU's, you get $400k1.05^4 (4 years of compounded growth)
With cash, assuming you immediately invest the money, you get $100k1.05^4 + $100k1.05^3 + $100k1.05^2 + $100k *1.05
Running those numbers, the RSU's are worth $486,202 at the end and the cash is worth $452563. RSU's appreciated by $86k over the duration, cash appreciated $52k over the duration.
It's the time value of money. Getting it earlier makes it worth more.
You aren't allowed to do this in the US. Lot of regulations on your RSUs and when you can sell etc. including derivatives on your vested and unvested stock.
We are talking about a scenario in which you get cash not RSU.
Also I'm not familiar with the US case, but I understand those limitations are contractual not regulatory and thus have no bearing in what's would be optimal for the employee.
30K of missed growth on 400K doesn’t seem so bad to not have 400K tied up in a single company.
If, along those 4 years, your company tanks 25% (Shopify tanked over 50%), you’ll be able to abandon the investment (and get 100k a year of something else), or double down and get more shares (aka dollar cost averaging).
If I'm an employee earning equity vs cash, I damn well want to make sure my incentives are aligned with the companies, e.g. the value increasing. This seems a bit perverse.
The best way to increase stock value in short/mid term - cut costs... (aka your salary/position)
Your incentives never align with any of the publicly traded major tech companies.
Small startups - yes, you have more leeway. Google, Facebook, Apple - yeah, no... outside of top management, your fixes to their mapping application have sweet all to do with stock value.
Great point! As a non FAANG employee, I am mostly considering the startup landscape, where I do expect my contributions to directly correlate to share value.
Not when the best the nimble upstarts are offering in positions where equity is on the table are options, not shares.
I’m all for more employee ownership and engagement from being a shareholder in addition to an employee, but I’d love to see startups equally interested in that.
I don't think you want this. Even in a firm that is under 10 mil., if you are granted hard equity, you're going to be liable for taxes on those shares, which will be extremely illiquid. Options or RSUs let you have your cake and eat it too, at a small price.
You're right - I don't want to touch equity any more. I know how to buy stocks and bonds for mid-to-long term investments, I hope and expect my next employer to prioritize cash/salary-based compensation.
Stripe does this, and Coinbase's move to annual equity grants also has a similar effect. There are a lot of tradeoffs in all directions, but the fundamental one is that the reduction in risk naturally carries an equivalent reduction in ability to participate on the upside (eg table at the bottom here: https://www.aeqium.com/post/a-survey-of-equity-refresh-progr...).
You can also argue that it's not good for employees, because downside is capped (stock goes to $0, you keep your salary) but upside is unlimited (Shopify becomes the next Microsoft, you're still driving a Kia).
The reality is that RSUs are a better deal because of the unlimited upside. If my RSUs go to zero, I jump to another company and reset my cost basis- there is actually little risk here beyond the first year lock up.
That's effectively an implicit call option. You can buy an explicit version on the public market.
The question is "Is the cost of an explicit call option greater than the cost of finding a new job?"
There is some benefit in that with an explicit call option, you have to pay up front, while with job switching, you only incur the cost if the implicit option "expires worthless". But that's balanced by the fact that with the implicit option you're exposed to sector-wide risk (eg, see the current tech-wide turndown), while you're not with the explicit one.
Pretty much. Also with the call option you have to pay the premium (and possibly the rollover cost if for some reason you wanted to match exactly the equivalent RSU schedule), on the other hand if the stock price goes down at worst you lose the premium, while the downside with RSU can be much larger.
In practice it would be foolish to invest a large part of your salary in call options of the company you work for. But for the same reason RSUs are also similarly risky and you should always prefer cash and diversify your risk instead.
Edit: If you buy an at the money call and sell the equivalent put you can reduce the premium and replicate the risk profile of the RSU. But I'm not an option trader.
> they've done is nearly completely untie compensation from the stock price.
Not entirely, they've created a relationship, but it is the opposite of what is normally considered in "line goes up" thinking.
Usually when a company/market does poorly, people don't have a strong reason to stick around as the possible compensation dwindles down.
The stock price on your joining date somewhat controls how many stock items you get. This is mostly luck - your "birth" into the company controls the payout multiple for the next 4 years.
Once the company starts doing poorly, it struggles to justify handing out extra compensation to employees and even if a select few are handed out more stock, it is usually not enough to keep a majority of folks in the building.
So with standard RSU models it'd be a good idea to join a company which is currently rated a BUY, but it is not great to stick around and try to wait for a turn-around if you got RSUs issued in boom times.
The "buy 100k$ every quarter" sort of model flips that thinking around. When the company does poorly, you get to sort of double down your bets on on the recovery path. And if your work pulls off a recovery, then you get rewarded directly for sticking through the bad patch (or if you don't believe in it - sell it the same day you get it and put it in ETFs, but not quit from a pay dip).
Also if the company is "buying" stock with cash intended for an employee instead of issuing it from some pool (also without an RSU discount), then this also has a nice effect of masquerading as a stock-buyback.
So it directly incentivizes people to stick at a company through a bad spot or at least softens that loss of critical talent when the company hits a rough patch without any additional distraction to the board.
This might be better for most of employees. Big companies rarely benefit from the standard “lock in folks on the upswing” and “incentivize them to leave on the downswing” that stock grants usually do.
When the stock goes up, difficult conversations emerge when the company realizes it’s paying someone the equivalent of an entire team. On the way down it’s hard to manage comp expectations. An individual engineer rarely impacts the bottom line in a material way.
Which is to say, if tech workers can demand high six figure pay - it should probably be mostly cash for most public companies and individuals.
It is even worse than an ESPP, but also pushes your compensation out up to 90 days from when you should be earning it. It's literally the worst combination of all the options.
> So what they've done is nearly completely untie compensation from the stock price.
Dirty secret is at somewhere the size of Spotify no normal employee is going to move the stock price on their own to any extent, so these incentivization things even if they were aligned to increasing when the price increases only could incentivize positive behavior towards increasing the stock price if the employee didn't understand tragedy of the commons or something.
Stock Grants are not an "expense" under Generally Accepted Accounting Principles. So by paying in stock, instead of salary, it increases profits on paper. It does help with cash flow and other tangible benefits.
Most employees would be wise to divest much of their company stock as soon as they are allowed. Don't have all your eggs in one basket.
This is incorrect by almost every reading. (There is a "technically correct" reading that the grant is not an expense, but the vesting thereof is and most of your post is concerned with the "paying in stock" angle, not the granting of future paying in stock.)
What you might be confusing it with is non-GAAP accounting, which some companies prefer to cite/reference in management conference calls and letters to investors, where equity-based compensation is often backed out to arrive at the non-GAAP figures.
This is not my understanding at all. Share compensation is considered an expense because it reduces the value of the shares held by other shareholders.
It's advantageous for cashflow but neutral vs cash on the income statement.
Disclaimer: I am not an accountant, this is not financial or accounting advice.
Disclosure: I work for Shopify, but this should not be taken as a statement about Shopify's accounting or financial practice.
- The company may have to issue new stock for this. That's like a loan: some entity gives cash, in exchange for a piece of the pie. Not in the expense side of the ledger. This is where the value of the shares gets diluted, but I don't think that fluctuations in the value of stock go into the ledger Publicly traded stock fluctuates all the time; that can't be going into the books!
- If the entity is some body of the company itself which is buying the stock, in order to give it to employees, than that plausibly looks like an expense. Buying stock (in anything) would normally be recorded as an asset, I would think, but if the intent is to give it away, then it looks like an expense. Analogy: a laptop bought for company use would be an asset, but if it's intended to be ginve away as a door prize in a raffle, then it's an expense.
> You neither benefit significantly nor lose significantly as the stock moves around. I've never in my life seen an equity plan like it, and that's not a comment on whether it's good or bad, just that it's unusual.
I thought Stripe moved to this compensation model last year
Yes we have this (I work at Stripe). It is an annual recurring grant that has a one year cliff then renews automatically to vest quarterly.
Say you get an offer with $100k in RSUs. That’s then divided by the stock price and that’s your initial grant. It vests in one year. After that you would do the same math again, except this time 1/4th vests quarterly.
It has pros and cons. It works well in challenging macroeconomic environments for the reasons others have mentioned.
I have heard of these. I wouldn't accept an offer like this unless the fixed comp was 2-3x normal market value for my services.
(The stock of my employers usually goes up during my vesting periods, and usually by well more than is needed to double my total comp -- the 2-3x is risk adjusted)
If your career mostly spans the last decade, it should be noted that this was a really really weird decade in terms of asset appreciation vs inflation.
If there is a vesting start delay then it's still not equivalent to an ESPP. But once you're in the middle of the pipeline I guess it's pretty similar.
this is a massive pay cut for anyone working at a growing company. you lose so much potential upside with the stock if you keep “buying in” each quarter/year instead of once at the beginning of a 4 year grant and hoping it goes up.
this looks like a great way for companies to protect themselves from spending too much on employee stock compensation and frame it as a gift of choice
Using the example above, you get $25,000 in stock every 3 months. So the number of shares are variable, so the price is irrelevant to you. If you sell as soon as you get it, it's the same as $25k cash, e.g. completely divorced from the stock price.
If it was tied to the stock price, like every other RSU program on the planet, you'd get x number of shares. So as stock price goes up, your compensation goes up. Your compensation is tied to the stock price.
My experience is probably not relevant to the audience here, but having worked at startups largely in non-engineering support roles that got smaller or heavily diluted grants, I've lost about $3,000 on options in 10 years in tech.
I paid in $17,500 at two places where I had vested any options, all ISOs, and cashed out ~$14,500: broke even on an IPO at $7,500 vested, and lost $3k of $10k after the company was sold for less per share than the strike price of my options.
If I had stayed at the IPO'd company longer I could've gotten a higher-class of option, but my salary there was $15k/year less than the bootstrapped no-equity company I left them for, and the returns over two years of vesting would've still been less than one year of difference in salary.
At most of the places I worked, I either didn't make enough money or experienced too much external financial distress to actually buy all of the options I vested. Which is good, because none of them appreciated and most depreciated in value by 20%. If I had exercised all of my vested options I would've lost up to another $5-7k - at best I would have lost another $2-3k.
The only RSUs I was ever offered vested 2 weeks after I left a job that I'd had for almost six years, for a role elsewhere paying $25k/year more. The RSUs were a surprise bonus worth less than $5,000 and tacked onto everyone at the company, including roles that had already gotten larger RSU grants. If I had stayed two weeks longer and vested them, then when the company sold they would've been worth less than $4,000. Between the salary difference, a much smaller insurance deductible at the new job, and a 4x larger 401k match, I had effectively made up the difference by my fourth paycheck (eight weeks) just on salary.
On my experience I'd take the cash every single time. Reading the replies here, it seems like engineers, managers, and early hires live in a completely different reality regarding equity.
I think the answer is that for everybody who brags about the equity package there are 9 other people who don't talk about the underwater options or the losses they ended up taking
Working at a company for almost six years, with equity as a significant part of the compensation, and losing 20% of what I exercised - in my fourth startup with an equity component, none of them doing better than break-even - means I just do not care about equity when offered it anymore.
If I'm offered, say, $150k + ISOs now, my brain just chucks it out the other end as $150k + $0. And I got to that place even before the market started to fall over.
I remember a recruiter in the offer stage of one job describing the ISOs - "if we go 2x, your options will be worth $XX,XXX. If we go 10x, they'll be worth $X,XXX,XXX" - and I had to cut her off as gently as I could so we could get to the health insurance that I would probably be maxing out the deductible on instead. (That job didn't last long enough to vest any of the options; laid off after a leadership change/re-org.)
In no way do I speak for my employer, but on a personal level, this has been amazing for me and I'm so grateful the company did this.
I'm very conservative about investing, and don't want to have a large amount of my portfolio tied up in the company I work for. I'm maxed out on cash (there's a minimum equity portion at my level) and my additional income goes into a broader portfolio of investments.
>don't want to have a large amount of my portfolio tied up in the company I work for.
Just before the .com bust a company I worked for decided to remove the option for employees to just dump their 401k contributions into company stock, and removed the option to direct a massive % of their paycheck into the company stock purchase plan. (I believe some of these limits became law later on but at the time it was legal)
Some folks got really upset by that. The argument at that time was "we don't to be a part of employees suddenly being broke if things go south".
About a year later they were right, things went south. Our stock did sorta well in the long term (not great short term of course), but IMO it was a good choice.
I grew up near Ottawa, and had a lot of friends whose parents worked at Nortel. They were compensated with a lot of stock, which they held onto (it keeps rising, after all). Their pension plan was mostly invested in the company stock too.
When the company fell apart (let's set aside whose fault that is- different topic), they lost their jobs, their savings, their pensions, in their 40s and early 50s mostly.
It boggles my mind when people vest RSUs and just leave them there, hold onto their employers' stock and don't sell & diversify. The RSU vesting day is equivalent to having bought the stock on that day, there's no tax advantage to holding onto it. Whether at SHOP or at AMZN/MSFT/GOOG, why keep all your eggs in the same basket?
Let alone, a lot of people seem to think that they get the lower capital gains tax on the RSUs... and most companies fail miserably to educate their employees.
Not to mention the horror that is the tax code in US, causing you to underpay taxes... because the company that does RSUs doesn't communicate well with your regular payroll company.
Yeah, even if I think my company will do well, having a large part of my net worth tied up in stock of my employer always feels a bit of an "eggs in one basket" scenario - if something happens to majorly impact the stock value, there's a decent change it will consequently impact my job security.
Because up until about 6 months ago, the 3-4 year run to that point you were better off holding. I'm sure lots of people have had a very expensive (on paper) lesson this year about how much vested stock they should hold on to (if any).
Yeah I knew some folks at the time (.com days) who had life changing type money in company stock and they were able to sell a good portion of it at will. They didn't sell... it did not work out for them.
To this day I don't get why they didn't sell at least say $1million and stash it someplace. Sure let the rest ride if you want to do that but man save some. I never asked them about it after their company tanked, I imagine they don't want to think about it.
Isn't one benefit of these programs(from the employer side) that employees are more directly tied to company outcomes, and thus will put out better work/product? Of course one person won't shift the stock price, but as a collective, over time, it certainly would.
I think it is, but the question is how much of an incentive do you want (some) but maybe not overwhelming incentive where a bad quarter is completely demoralizing or worse...
Hence the wondering part, I personally have never been in such a structure, so I don't have first hand experience. BUT from everything that I have read, extrinsic motivation such as "work harder so your company does better so your stock goes up" doesn't seem like it would really hold up for too long.
It's also nice that I happen to live in a country that gives a tax break on your (monetary, not stock) income, so that makes the choice for money even easier.
Reinvest it in an index fund, and forget about it. Yeah, I might miss out on significant gains, but I might also not. Less risk for a reasonable yield.
When people ask about what it’s like doing tokenomics for crypto projects, well, it’s an exercise in applied systems design. Bravo on this system man! Any plans on open sourcing some of the stuff, like the math?
I obviously don't want to give financial advice, but every time I've traded cash for stock in comp it's worked out for me in spades in the long run. This doesn't happen for everyone, it might not happen for you, but it's been very good to me on three separate occasions.
Just remember that it's terribly illiquid and you're going to doubt your decision, potentially up to a decade later.
If you did this at any time in the last 10 years you were probably rewarded handsomely. However the macro environment has significantly changed and I don't think your past behavior would be predictive of future performance.
For the tech sector it's really been more like the last 22 years. There hasn't been an extended downturn in US tech stock since the original dot-com bubble. The 2008 recession ended up being a 1-2 year blip. The COVID contraction was extremely brief. By comparison, if you invested in the NASDAQ in 1999/2000, you'd need to wait 12-14 years to break even.
I don't have a crystal ball, of course, but to me things are looking a lot closer to 2000 than 2008.
But did the bubble already burst in tech? Valuations are very low right now. I don't think we're necessarily at the bottom yet, but I think the worst has already come to pass.
Nobody can predict the bottom, or how low things will go.
But I disagree that valuations are very low. Frankly, many tech companies (Uber, Twitter, etc) are still unprofitable money-losing machines with high valuations because of their potential growth and expectations of future profitability. There's an argument these companies should be worth much, much less.
For the past ~10 years in particular, investors haven't cared about profitability; a market downturn may change that.
Also, as the recession or depression continues, advertising is going to get scaled back and may destroy ad-tech companies like Alphabet/Google and Facebook.
Your prediction is as good as mine, of course. But I'm a bear, expecting a river of blood to flow through the streets of Silicon Valley.
I agree with your general assessment of the economy, but those are all factors everyone knows.
The adjustment we saw earlier this year was going from “the economy is booming and interest rates will be 0 forever” to “interest rates are going to 4% and we’re going to have a recession.” That’s an absolutely massive adjustment in expectations and stock prices, especially of high growth tech companies, reflect that adjustment.
In order for valuations to drop substantially further, a similar expectation adjustment would need to happen. Something like “I thought we were going to have a recession but now it’s worse than the Great Depression”. Simply adjusting expectations from “minor recession” to “moderate recession” isn’t big enough to crater the markets like we saw earlier this year.
Shopify's explosive stock growth always struck me as kind of scammy - or to be more charitable, the results of a very well targeted marketing campaign. It's back to where it should be - along the way, VTEX and BigCommerce jumped on the IPO train at exactly the wrong time. Everyone was sniffing their own farts in that sector for the last two years. Glad to see it come back down to earth.
Lots left to go down. Think of the global events right now - all we need is one or two more destabilizing events and we're in a bigger heap than we are currently.
The bubble may have burst but doesn't mean you've bottomed. Still haven't seen many companies go belly up or VC fund shutdown. All we've seen is valuations drop and some layoff but not big layoffs and also the valuation dropped from their spectacular highs so its all relative.
That's in the realm of a dotcom bubble style implosion. There are plenty of other prominent names to add to that list. Having lived through the dotcom destruction, this rhymes, even if it's not exactly the same.
Very true. But the crazy thing is, in the opinion of many people, these companies were so overvalued that -80% feels like a "correction" more than a "crash".
Like Nikola is down 94%, but it's still worth $3 billion on paper. This is for an electric vehicle company that staged a video of one of their vehicles being driven, only for us to learn in a fraud trial that it was rolling down a hill, with the excuse that they never claimed the vehicle was moving under its own power, just that it was "in motion." The company is worth nothing at the moment; any "worth" it currently has is a speculative bet that it will eventually produce something of value.
We need to start seeing the GOOG, META, AMZN, etc. stocks tank 80% before we can compare to the dotcom bubble, IMO.
I'm amazed at how many people that get a significant portion of their comp as RSUs hang on to their shares after vesting.
During this insane bull market it's happened to work out, but having your income and a major portion (for most tech workers) of your assets perfectly correlated is absolutely a bad investment idea, not to mention the fact that you can only trade during approved windows and are not allowed to do any hedging (such as buying protective puts).
Even if you're wildly bullish on your company, at the very least diversify a bit with highly correlated stocks (for example if you're a GOOG during the last decade at least split it up among other FAANG). This way you can at least protect yourself in the event that your particular company gets hit hard.
It's incredible how far away the dotcom burst is in people's minds (or even 2008). Cheap money has led to an insane period of growth in tech, but investing as though that were the norm is very risky (without even optimizing your reward for that risk).
The best financial decision I ever made was to sell my shares after vesting.
I realised that even if I believed in the long-term business model of the company, having a significant portion of my money tied up with a single stock was not a good idea.
It would have still been a good idea even if those shares hadn't lost 90% of their value in the following year.
I was working for a major tech company—definitely not a startup during dot-comb. I had some amount of vested shares which seemed a lot at the time. I spent some but held onto a few tens of K$. Stock went down from over $100 at peak to about $4. By years later had recovered to about $25–and then Dell acquired for a premium.
There's literally no advantage to hang onto them, versus selling them on vest day and reinvesting in a wide set of tech stocks (if that's what you want to invest into).
There is an advantage if you are in the middle of a tech rally, and the other option is the investing in whole market.
All you need to do is time the next downturn...
I have (and continue to) err on the side of diversification. Without fail, I have simultaneously regretted it and done better than colleagues that held and tried to time the market.
I could have realisitically made 2x what I did. However, I also could have made half as much (and know people that did halve their income playing these games). Halving my income would have had a much bigger impact than doubling it.
There's still no advantage in a tech rally, you'd be far better of reinvesting highly correlated companies, where you have much more liquidity (since you're not only allow to sell during trading windows) and you also are allowed to perform better hedging in the case the market does start to get shaky, plus your portfolio will not drop based on the possible misstep of a single company.
> I have (and continue to) err on the side of diversification
I'm in the same camp as you, and the point I always make is that:
If I'm wrong and our company stock sky rockets, beating everyone else in the market, then great! I still have unvested RSUs, we'll get larger bonuses, plus my job security has increased, sure I missed out on even more gain but I'm in a good place!
If I'm right, and something bad happens to my employer, at least my loses will be reduced by my other investments. I don't have to worry about everything falling apart at once.
Which I suppose is the entire point of variance reduction in the first place: it makes the great times a bit less great, but also makes the worse times not so bad.
I generally agree with selling as soon as possible but there are some significant capital gains tax advantages for holding vested RSUs for a year. 15 to 20% vs. 32 to 37%.
They’re taxed as ordinary income when they vest, and only gains and losses from that point are considered capital gains or losses. And your cost basis is the value they vest at, so it’s no different than getting cash and buying those shares immediately. No special advantage to holding for a year vs any other stock you acquire with cash.
That's correct, whether you sell them immediately or hold them.
> and only gains and losses from that point are considered capital gains or losses
That is also correct and was my original point. If you sell immediately, you've already paid the (personal income rate) tax and you're done. But if you don't sell immediately, waiting a year is preferable so you are able to claim the long term capital gain rate instead of paying the short term/income rate.
But those benefits and trade-offs have nothing to do with RSUs, it’s just how all stocks are treated. And thus not relevant to a consideration of whether to hold RSUs or sell immediately on vest.
My data point is the opposite, the one time I accepted equity in the form of options, stayed 4 years to vest it all, and got lucky where the company was acquired, the payout before taxes was worth less than if I had simply negotiated an additional $10k before taxes on my salary.
I’m not optimistic for future employers offering me equity actually worth more than cash over the 4 years it takes to vest.
Isn't this dependent on timing and isn't part of the point of DCA to mitigate timing risks?
E.g., If I loaded my 401k just before the bottom fell out of the market, you need a much higher proportion of good years to dig out from that hole. With DCA, you would have a shallower hole to climb out of.
(Possible I misinterpreting what you meant, or that I am just not financially saavy enough to chime in)
But on average the market goes up. You can lose with lump sum investment as early as possible. But you will be more likely to lose by waiting and only slowly purchasing in. The value of DCA is in emotional regulation since it softens swings at the cost of reduced expected value.
Doesn’t this ignore the asymmetry in risk? The colloquialism is that a bull climbs the stairs and a bear jumps out the window. Implying there’s much more downside risk to bad timing than upside potential. Is there work on a risk-based comparison between the two?
It depends on what stage your company is, but the vast majority of start ups fail… so for most people at startups, cash is going to be much more reliable. I worked at two startups prior to my current job that both went out of business. I had a few opportunities to take more equity or cash, and I’m glad I took cash every time. I would have gotten zero if I took the equity.
When they were printing money endlessly and rates were low, your strategy is sound. However, the house of cards is now crumbling and there is no end in sight to rate rises.
My hedge fund manager friend for a private family office is saying we will see double digit rates by end of 2023. If you believe this then you know what to do. If not, you should at least think what such macro conditions would do to liquidity.
Sounds like the thing to do now is sell everything vested so far, then hodl new vests. Falling prices means the vests will hit with lower income (and smaller tax bill) but are likely to go up when interest rates fall again.
People invest more in companies when interest rates are low, because shoving it into lower risk vehicles becomes less profitable / likely to beat inflation. As interest rates rise, the value of safer places to put your money, such as bonds, increases.
- Higher int rates make it more expensive for companies to borrow, and to invest in additional production capacity. Depending on the company, this can cause their stock price to decline as lower investment usually signals lower revenue growth in the future.
- Higher int rates also encourage consumers to put money into savings accounts and bonds instead of stock markets, which lowers demand for stocks --> lower stock prices --> market indices fall as well (S&P500, Dow Jones Industrial Average). Movements in these indices are considered a barometer for the broader economy.
It means that there will be less investment cash pumping up the valuation of startups.
High rates means that there is less liquidity overall (people don't want to borrow money and invest it), and it means that there are decent alternatives to investigating in startups (if T bonds pay 10% guaranteed, why burn cash on a company that will probably fail?)
Stock price is calculated as a sum of future cash flows (dividends D, for example) discounted by time value of money (risk free rate r, for example): sum(P_n), where P_n = D / (1 + r) ^ n and n is a year. When rate r is up P automatically down.
it'd mean your savings account would beat the S&P500 (after it finds a bottom obviously; this year having cash in a 0% savings account has been amazing!).
> it's been very good to me on three separate occasions.
Were those occasions during the mass retirement of the boomer generation leading to accelerating liquidation of stock market positions while the replacement generations are inadequate in number to replace the retirees during the collapse of globalization likely causing drops in worker productivity? Or were they during the longest stock market bull run in history?
It's funny seeing the example they give has total comp at 200K considering that a year ago they were still paying less than 100K USD (sightly over 100K CAD) for senior staff
Glad to hear it! I remember reading news that they increased pay across the board. Probably to deal with the exodus of fully vested senior staff that happened during covid.
Personally if I was a shopify employee and I was looking at all these layoffs coinciding with rate rises with more to come, I would think liquidity will quickly dry up and opt for cash.
I am open to rebuttals but I'm hearing that we will be seeing double digit interest rates again like the 70s.
I guess it depends on your financial goals. I'm a younger big tech employee that has at times seen my income drop in half. However, I personally believe tech will have a massive rebound in the next 2-10 years and long term capital gains tax is really nice.
I think the better move for most of these folks is to wring as much cash as they can out of their current gig at Shopify and trade up to a new gig with a fresh stock grant at basically any other company. Joining G / Meta right now gives you incredible leverage if things bottom out any time soon.
So what they've done is nearly completely untie compensation from the stock price. You neither benefit significantly nor lose significantly as the stock moves around. I've never in my life seen an equity plan like it, and that's not a comment on whether it's good or bad, just that it's unusual.