Therefore I would not enter them into my tax software as RSUs, but as normal stocks. What does the future of the company look like? I will be more careful about how much trust I will put into Turbo Tax in the future.
Will Your Money Last Through Retirement?
As always, please understand this answer is not offered as advice, but only to provide general information. There is no substitute for getting sound advice from a professional.
Since there are many considerations involved with the complexities of these transactions, you really need to have personalized advice specific to your circumstances. Please check out LawTrades in order to connect with an experienced startup attorney for additional guidance about evaluating RSUs and stock options.
A stock option can be turned into a share that can be sold while the company is still private. This usually requires permission but it can be done whereas an RSU cannot be transferred.
A stock option can be exercised at almost any time to qualify for reduced taxes via Long Term Capital Gains or no taxes through Qualified Small Business Stock. Even after the IPO, a stock option can be retained while still appreciating in value and deferring the taxes. The exercise price and associated taxes act as a retention mechanism to discourage employees from leaving the company. Even when exercised early to obtain tax benefits, the effect of having skin in the game better aligns the interests of the employee and company.
Rapidly rising FMVs are bad for employee taxes. As such, it is fortunate that companies are motivated to slow down the growth of the a FMV while issuing options. If an employee exercises, the company actually gets cash. If the employee pays taxes on options, the company gets a tax deduction. Especially if they are concerned about having to leave and pay the high exercise price in order to retain the shares.
Exercising can trigger a lot of tax. NSOs are always subject to immediate withholding tax upon exercising. Options typically expire within 90 days of leaving a company. Until an optionee finally recognizes the income tax on a stock option, the company does instead.
A stock option can be under water and worthless if the FMV is below the exercise price. Since options are initially granted at the FMV, recipients are often unsure of the value. As such, they focus on percentage ownership instead which is an unsustainable model for companies. There is no exercise price for the employee to purchase.
They get the whole value of a stock equivalent for free as such an RSU is never under water. Companies that care about reporting earnings can take a more predictable hit to earnings than they would with options.
Companies have a clear sense for how to grant fairly between employees arriving at different times. An RSU will always be taxed at the high ordinary income tax rates upon vesting. An exception is filing an IRS 83 i election to get a 5 year deferral. Ordinary income tax will still be due on the RSU value but additional increases in value are eligible for capital gains treatment. Meanwhile, RSUs typically expire within 5 to 7 years and companies are not obligated to reissue them.
An RSU cannot be sold or transferred while the company is still private. However, you can either file an 83 i to defer taxes or sacrifice a portion of the shares to cover taxes. If a company grants large blocks of RSUs at an early stage because they seem cheap, they might make employees who don't care about taxes happy but it could ruin the company. These employees can quit even after one year and hold the RSUs a long time. The early departures will get most of the benefit and that won't be fair.
Even worse, if the number of departures is large, it will dilute the cap table and discourage investors and encourage restructuring which invites lawsuits. Just bad all around. Startup consulting, on demand. From idea to exit, top startups hire Toptal experts to support rapid and scalable business growth. Learn More at toptal.
You dismissed this ad. The feedback you provide will help us show you more relevant content in the future. Related Questions More Answers Below If left with a choice between being compensated in options versus RSUs, why would an employee ever choose stock options? My company is offering a choice between stock options or RSUs or a mix.
What is the best option? Why can RSUs be more expensive than common stocks? What was Facebook's stock options strike price before the change to RSUs? How does it feel to walk away from unvested stock options or RSUs?
Answered Dec 14, Have I made or lost money? If I sold some or all of my shares what else would I do with the cash? What does the future of the company look like? If the company is listing, why? Is it to raise more capital or to provide an exit for the founders? What are the C-level execs and company directors doing? Join over 10 million Grammarly users and see what better, clearer writing can do for you. Learn More at grammarly.
Answered Dec 3, I met with a client recently who was given the choice of receiving the equity portion of his compensation as a percentage of stock options or restricted stock unit RSUs. An RSU is a grant valued in terms of company stock, but company stock is not issued at the time of the grant.
After the recipient of a unit satisfies the vesting requirement, the company distributes shares or the cash equivalent of the number of shares used to value the unit. Depending on plan rules, the employee or employer may be allowed to choose whether to settle in stock or cash.
The most important variable is how the equivalent number of options is set to RSUs. RSUs are preferred if the same number of options are offered. However, most companies typically offer a third to a fifth of the number of RSU shares than they would have granted in options.
This is because the options are worthless if the share price never gets above the grant price during the vesting period. Employers offering stock options are giving you the opportunity to buy a specific number of company shares during a stated period at a particular price. With RSUs, your employer is granting you, but not actually giving you, a specified number of company shares.
The employer attaches a "vesting" requirement to the grant, and the worker must fulfill the requirement before taking possession. This could involve working for the company for a specific period or achieving certain individual performance ratings. To meet the vesting requirement, you must still be employed by the company three years from the grant date. The employee gets the opportunity to buy company stock at a discounted price. If the stock increases in price, the employee can make a substantial profit by buying at the lower price and selling some or all shares at the higher market price.
The potential opportunity to make a windfall profit, without the usual market risk, through an immediate or future sale of employer stock is the primary benefit of stock options. The employee also has the right to become an "owner" of the company by purchasing company stock at a discount. Because the employer grants RSUs to employees, they needn't worry about the volatility of company stock.
Unless their employer goes bankrupt or ends operations, employee RSUs will retain some value. Because the employer is promising to "give away" its restricted stock, the worker need not spend money buying company shares.