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.
Share price 50, you get 100 shares as RSU grant, worth 5,000.
Share price 50, you get $5,000 in shares, that's 100 shares. Share price , you get 125 shares.
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 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.
It's also an extra 600k of downside exposure.
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.
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.
Again, usually it works out.
I remember getting a stock grant at IBM in 2011.
Let alone, OP's example is you get all cash equivalent of the full stock grant... not vesting part.
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).
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.
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.
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"...
I am clearly working at the wrong company.
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.
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.
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 had $200k in yearly cash compensation from Apple starting in 2019 then you'd make $200k this year.
If you had $200k in yearly RSU compensation from Apple starting in 2019 then you'd make $800k this year.
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.
If you got cash then you'd have made $200k the first year, $200k the second and $200k the third.
If you got RSUs then you'd have made $350k the first year, $660k the second and $800k the third.
If you got cash then you'd have made $400k the first year, $400k the second and $400k the third.
If you got RSUs then you'd have made $550k the first year, $860k the second and $1000k the third.
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.
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.
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.
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.
No you couldn't.
You'd have to put in several years of 200k of cash up front to end up in the same boat.
And that's not even accounting for evergreen option grants and bonuses.
It’s best to value the options at $0 and consider them a lottery ticket.
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.
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.
Edit: added “over 4 years”
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.
Just the tax benefit is higher on cash, than 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.
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.
That's a separate issue from the common misconception in this thread that cash is the same as RSUs.
RSUs have more risk than cash, and more potential upside. They are unambiguously different.
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.
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.
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.
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.
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.
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.
Of course, the stock price might have gone down, but also it might not. Companies don't usually time buybacks right to buy stock cheaply.
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?
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.
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.
If there was collusion going on, compensation never would have skyrocketed over the past decade.
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.
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 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!
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.
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).
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.
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.
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.
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.
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.
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.
Of course most people won't do it because is very risky. Yet getting RSUs has similar risk (or larger as you can lose more than the option premium).
There might be US tax implications that I'm not familiar with of course.
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.
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).
Therefore you get cash earlier, than any stock.
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.
If tech workers were united in fleeing giants to found or work at nimble upstarts, we would reap nearly all of the rewards.
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 joined GrubHub 3 months before the stock tanked. I haven't even vested the first tranche, before my RSUs tanked over 2x.
Thank god I learned enough in my life, to demand cash sign on bonus... that ended up being larger than the RSU grant.
Remember the golden rule - $1k today, is better than possible $10k in 4 years. (feel free to scale it up as you wish)
You can also argue that it's not good for employees, because downside is capped (stock goes to $0, you keep your salary) but upside is unlimited (Shopify becomes the next Microsoft, you're still driving a Kia).
The question is "Is the cost of an explicit call option greater than the cost of finding a new job?"
There is some benefit in that with an explicit call option, you have to pay up front, while with job switching, you only incur the cost if the implicit option "expires worthless". But that's balanced by the fact that with the implicit option you're exposed to sector-wide risk (eg, see the current tech-wide turndown), while you're not with the explicit one.
In practice it would be foolish to invest a large part of your salary in call options of the company you work for. But for the same reason RSUs are also similarly risky and you should always prefer cash and diversify your risk instead.
Edit: If you buy an at the money call and sell the equivalent put you can reduce the premium and replicate the risk profile of the RSU. But I'm not an option trader.
Not entirely, they've created a relationship, but it is the opposite of what is normally considered in "line goes up" thinking.
Usually when a company/market does poorly, people don't have a strong reason to stick around as the possible compensation dwindles down.
The stock price on your joining date somewhat controls how many stock items you get. This is mostly luck - your "birth" into the company controls the payout multiple for the next 4 years.
Once the company starts doing poorly, it struggles to justify handing out extra compensation to employees and even if a select few are handed out more stock, it is usually not enough to keep a majority of folks in the building.
So with standard RSU models it'd be a good idea to join a company which is currently rated a BUY, but it is not great to stick around and try to wait for a turn-around if you got RSUs issued in boom times.
The "buy 100k$ 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.
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.
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.
Is it just a user friction thing?
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.
https://carta.com/blog/what-is-asc-718/
https://www.investors.com/news/technology/amazon-stops-prete... (see the third paragraph about $FB)
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.
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.
GAAP are what they are.
I thought Stripe moved to this compensation model last year
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.
(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)
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
But it IS tied to the change in price- right?
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.
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.