They're RSUs, Airbnb hasn't been given options for the last 7 years or so. Techcrunch is just reporting it wrong.

Does anyone recall if Airbnb were one of the firms to institute more employee-friendly exercise windows? If so that takes some of the pressure off the decision.

They are probably double trigger rsus with 10y expiration

You mean if you're still an employee? I've read their RSUs have 7y expiration, which is part of the whole Airbnb IPO problem because the ones from 2014 will start expiring next year.

But what's the window to exercise once you leave the company? I doubt it's until expiration.

RSUs normally expire only if there’s no liquidity event (ipo or sale) and once vested remain yours even after end of employement. Ofx that depends on specific contract

Forgive my ignorance but how do RSUs expire? I thought those are just stocks?

If these are double trigger RSUs they don’t fully vest until two conditions are met:

1) the usual employed by the company for a certain period of time

2) some qualifying liquidity event (ipo / sale)

This is to avoid employees needing to pay taxes after #1 even though the stock can’t be sold. However for tax reasons there has to be time limit when they either vest or expire worthless. Depends on which lawyer you ask how long that can be, but generally most are less than ten years.

They are RSUs, at least in the US.

Long term employees have options. All newer US based employees should have RSUs

I haven't seen RSUs outside of publicly traded companies.

Late stage startups have to offer RSUs, as the equivalent option package becomes extremely unattractive if you depart before the company is public.

Imagine, for example, an initial option grant of 180K shares at $2.00, which expire 90 days after you leave. Then fast forward two years: The valuations have doubled every year, and half are vested, so you have 90k options priced at $2, but that last valuation puts at $8 each. Sounds like you have a lot of potential money right? Maybe, but not if you leave. If the company isn't public, you either have to rely on some secondary market that might be really shady, or have to hold your shares until IPO. To do so, you need to spend $180K, and prepare for an AMT tax hit of, roughly, 28% of the gains. 90k shares, with $6 a a share paper gains, means $135k in taxes that year.

So barring that secondary market for the shares, we are talking about spending $300k exercising the options. Few people can, or are willing, to put that much money in, even if on paper they are up hundreds of thousands of dollars.

RSUs will demand action at IPO, as you can't delay the exercise forever, but it's far better than, in practice, letting a majority of options lapse, even when you are pretty sure they'll be deep in the money at IPO.

RSUs are common in late stage startups. The share price at the time of grant is calculated based on an estimated valuation. If I remember correctly, in the year or two leading up to IPO, Uber issued RSUs to employees at a valuation of $49/share so the IPO price of $45 was already below grant price for many that joined late.

Non listed companies do give RSUs. For example: Stripe

I got an RSU offer from Pinterest a couple years back when they were private, though I turned it down.

Yet they are quite common in late stage pre-ipo companies bc few will take their options

I thought RSUs are only given by public companies. Anyway, they would be crazy not to exercise.

Hopefully they have cash to cover the exercise and the taxes!

Tough choice to make right when you just lost your job. The tax bill could be tens of thousands of dollars or more.

If they don't have the money they can take a loan (maybe hard without a job) or try to raise it (lots of people will be happy to invest). Let's not forget that many of these individuals have been making top dollar. Airbnb is known to be very competitive, even with FANNG level salaries.

I don't see it as a tough choice. Airbnb will IPO, it's just a question of when. It's a safe investment to make. This is a company operating all over the world that had $4.3B in revenue last year. If not COVID-19 they would've probably IPO'd very soon. They will get through it.

Their 2020 revenue will likely be less than a quarter of that. And 2021 might not be much better. They have a struggle ahead.

It would be nice if you could just hand over a percentage of the options to the government as a tax, instead of having to pay in dollars at a guess of the value.

I am surprised that isn't an option it certainly is in the UK

I'd expect the options might be under water based on recent funding announcements. Probably still expensive to exercise, but I can't see how there would be a tax liability if they are under water.

i’m not super in the know here, but why would corporate financials be relevant to the tax obligations of individuals?

It's pretty much impossible for us to say in this case since the terms weren't disclosed that I know of. They've been described as debt and equity. It's reasonable to assume the equity component would imply a certain valuation, and that valuation could be down from previous valuations.

If you received options at a strike price at the peak valuation, then the current valuation may be below that level.

Yeah it's going to be a hard decision to make for a lot of these people, especially given some of the bad press that these kind of gig factories have been enduring.

Some private companies offer RSU grants. I've been offered them.

Why would you not want optionality? Optionality always has carries an intrinsic positive value.

1 RSU is worth 1x the stock price. 1 option is worth the delta between the stock price and the strike price, meaning 1 RSU is always worth more than one option.

Usually you get more options than you would RSU’s to compensate for this, but there’s still a risk/reward tradeoff. I have had stock options that ended up worth $0 because they were underwater. RSU’s would have been worth $non-zero.

The fact that RSU’s retain some value when the stock price goes down is highly relevant to a company like AirBNB which is undoubtedly struggling with the current situation. Also relevant may be that AirBNB isn’t a public company yet, making their shares relatively non-liquidifiable. This can pose problems both ways: if you get RSU’s in that situation you’ve received “taxable income” in the form of a non-liquidifiable asset and if you get options, you have to choose whether to buy stock in a travel accommodations company in the middle of a pandemic that just laid off 1/4 of their workforce, hence potentially incurring a very strong risk of loss.

You don't necessarily get taxable income from RSUs [edit: when they're granted] if they're structured in a 'Facebook Style' RSU which has an expiration if the company does not IPO within a certain time frame.

As long as there's a real risk of loss you can avoid the taxable income and private companies with high valuations will do this to help employees avoid the bad tax situation on an illiquid asset (without need to have huge amounts of cash to exercise options).

Options similarly must expire after 10 years for similar risk of loss tax reasons (as I understand it).

I was told the RSUs are 'Facebook Style' because they were the first to pioneer this.

Even options with a low strike price can be problematic because tax law is dumb and charges tax on the spread before sale when you exercise (so you can end up with a huge tax bill on exercise without the ability to sell the shares to cover it). ISOs were supposed to prevent this, but AMT has not increased to match inflation over time and was never updated to accommodate for this case specifically so you still have to pay tax if you hit it (which you will because it's low). This wasn't considered originally because companies intending to IPO were not private >10yrs so expiration risk was not a serious problem and you could just wait for the IPO before exercise.

So with options even if you save the exercise cash you have to save a large amount for taxes depending on the spread, or deal with a bunch of loan shark like companies that will take a cut to front you the capital.

For most people RSUs are probably preferable unless you get in really early and can exercise all the options when the spread is zero (preferably with an 83b election for early exercise on non-vested shares).

i think you're saying this, but just to clarify:

RSUs (even facebook-style) are definitely taxable. With options, you're in control of when to take the tax hit. With facebook-style RSUs, the tax hit comes when the stock gets distributed (taxed as ordinary income) -- usually in the form of withholding some amount of shares.

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Important to remember with RSUs in pre-IPO companies: even though you might get shares distributed at IPO, you're usually subject to a lock up. This is unfortunate because if you receive stock at IPO, you have to pay taxes at them -- so if your company IPOs at $50, then drops to $20 when the lockup expires, you have to pay taxes on the shares you received at $50 value even though you couldn't sell shares at that value.

Yes, thanks for the clarification.

My understanding is they're taxable, but only after they're liquid which makes it easier for the employee. I think most companies doing FB style do something fancy to avoid the distribution tax lockout issue (witholding some to cover tax or direct listing to avoid lockout).

The situation where you have a huge tax bill and no cash to pay it (or worse a huge tax bill and your illiquid stocks have crashed to $0) shouldn't happen, though I guess there's still a chance in the pathological case you describe? Not sure if that's avoidable.

The other thing I forgot to mention is that if you do risk all this cash on option exercise/taxes and your company does go to $0 you do get to take a $3000 AMT tax credit each year until you die (but maybe only if you don’t have kids or something, can’t remember) - it’s not great.

Actually, underwithholding can still happen. Employers may withhold at a flat 22% federal rate, which can be significantly lower than a highly paid employee's actual marginal tax rate. So the employee may still need to increase the withholdings on their regular pay, or make an estimated tax payment for each quarter of RSU income.

This is one thing I've struggled to understand.

Scenario A: RSUs have an expiration date. RSUs you own expire before the company hits a liquidity event.

Scenario B: RSUs do not have an expiration date but the company goes bankrupt/dissolves and never hits a liquidity event.

Is one of these scenarios taxable and the other one not? One of my biggest fears about joining a startup (pre covid) was scenario A happening.

This is my current possibly incorrect understanding:

Scenario A there’s no tax, but the company is failing to hold up their end of the bargain and this would probably lead to everyone quitting or some sort of RSU regrant.

Scenario B I think you’re taxed when they vest. If there’s no IPO then you don’t get any money.

The other relevant point, in favor of RSUs is they usually have a double trigger for settling. One is service time, and the second is an equity event. Which is nice because you basically earn the RSU based on service time, but it doesn't truly settle until there's a liquid market available to dispose enough shares to cover tax liabilities.

This is why you'll see recently IPO'd companies reporting large one-time equity compensation numbers.

edit: s/vesting/settling. I believe "settling" is the term actually used.

Yeah I’ve never seen how this works during an IPO cycle, just in an already-public company.

If you started working at Boeing exactly a year ago and were leaving today, would you rather have been granted RSUs at a notional initial value of $371.60/sh or been granted options at a strike price of $371.60/sh?

Wouldn't you pay income tax on the RSUs based on the notional initial value, and only pay tax on the options if you exercised them?

Not really. RSU’s don’t have a “notional initial value” for public companies; if you get them, you pay tax on the number of RSU’s you got times the stock price at the time you get them. Your vesting schedule will just say, “X units of ABC on 5/1/20” with no dollar figure.

Brokerages will typically set things up so you can automatically sell enough shares to cover your tax liability as soon as they vest.

Typically you have to amend your cost basis on your tax return for this to actually work, for some stupid bureaucratic reason. Probably a conspiracy to make people who get equity compensation buy the more expensive version of TurboTax.

(Under US law,) You pay income tax on RSUs only when they are both vested and released. (These typically happen on the same day, but in the future, not on the grant date.)

At my employer they withhold taxes from the RSUs themselves as they vest (taxes are withheld at the bonus tax rate using integer multiplication, I believe).

E.g.: you'll get Math.floor(x * (1-bonus_tax_rate)) shares and will owe no income tax (unless your marginal tax rate is over the bonus tax rate). After that point, you'll only owe taxes on possible capital gains from price at the time of vest to the time you sell.

Well, yeah, that's Boeing, but if I'm going to work at a startup I want options, I want lots of them, and I want a good strike price. After all, if it's not going to do damned well next year why am I even going there?

RSUs, as structured at companies I've been at, always have upside: you can sell them for the stock price, which is a least $0. At the worst, you make nothing. Tax is paid upon acquiring them by selling a number of the acquired RSUs to pay for the tax.

Options, however, can have downside: tax can't be paid with the excerised option itself, because you can't sell the exercised option. So you have to pay the tax out of pocket. Meanwhile, the company can go under, and render the options worthless: you've lost the tax amount. If the company's valuation increases significantly, the taxes can be fairly significant. But you also can't just wait to see if the company succeeds, either: every company I've been at forces you to exercise within a certain amount of time if you leave the company.

You don’t have nearly as much “optionality” when you have to come up with $X00,000 within 90 days of leaving your job or forfeit your equity

Dumb question here, I don't really understand what an option is in this context - can you just think of it as a call with a expiration of the vesting date and strike price at whatever they set? So they're giving you calls, with a $0 premium?

Not a dumb Q at all.

It's a call option, with no premium paid, a strike price specified [typically the last 409A valuation or other better proxy of current value], subject to vesting [cannot exercise before this date], but with an expiration some number of years into the future (typically 10 years from the date of the grant).

So you had it basically correct, except they don't expire at the vesting date.

Options are awful. Exercising them can trigger AMT, where you get to pay taxes on money you don't have yet (and cannot get) at a time when you probably just spent a lot of your savings to purchase the options.

Bc you lose your optionality after leaving the company - terminated employees would need to decide whether or not to exercise their vested options within some post-termination window (typically 30-90 days)

Which would you rather have: a $100 bill or the option to buy a $100 bill?

The RSU and the options aren't priced equally, though.

More like a $50 bill or the option to buy a $100 bill for $25

There are other factors at play. Most employers offering options don't pay as much in total as those employers offering straight up RSUs.