How to get more from your RSU compensation

More than 50% of your compensation is paid in stock — don’t handle it right and you can become poor overnight.

  1. Getting paid in stock 101 — understanding RSU mechanincs.
  2. RSUs at different companies — why some pay more than others.
  3. Reducing portfolio risk — protect your stock from turbulence.
  4. Should you sell or hold? — how to know what's right for you.
  5. Tax tricks no one told you about — from deductions to trusts.
  6. What happens when you quit — what you keep and what you lose.
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Getting paid in stock is all fun and games until the market crashes - learn how to protect and manage your new-found wealth responsibly.

This guide is for anyone who gets paid in RSUs. Information only, not legal or tax advice.

Getting paid in public company stock 101

Tech compensation is unique in that in addition to salary employees receive substantial amounts of stock. At public companies, this stock has a cash value based on the stock market price. However, it’s crucial you understand that RSUs, or Restricted Stock Units, are not a cash equivalent.

Why?

Your company restricts when and how you get stock (which I’m sure you know by now). What’s less obvious is that your employer is likely to have additional restrictions on when you sell. In some cases, this makes it nearly impossible to cash out when you want to. That’s why it’s important to understand how RSUs work and plan actively on how you want to manage them.

First, here’s how RSU compensation at public companies works:

Why RSU pay is popular

RSU pay is a relatively new concept from the early 2000s. Due to changes in the accounting standards at the time, Microsoft decided to switch from paying in options to giving employees RSUs in 2003. By May the next year, two thirds of tech companies followed suit. Today, companies prefer paying in stock because it helps them balance expenses and compete for talent — many employees sign up based on the stocks’ potential and RSU pay is seen as a benefit.

Why Selling Your RSUs is Not Simple

Companies are afraid of being subject to insider trading fines by the government — it’s both expensive and leads to a lot of bad press. Insider trading happens when an employee acts on privileged information to buy or sell stock for profit. Because it’s so hard to define what is private and what isn’t — companies in tech have decided to broadly treat ALL employees as insiders. This makes trading stock incredibly difficult for you as an employee — it means that you can only sell if and when the company allows. Often this leads to negative outcomes — imagine not being able to sell when the market is crashing.

Negotiating RSUs at different public companies

If you’re new to negotiation, read this guide first. In this section, we’ll go over more advanced information for RSU pay at public companies.

Companies benchmark salaries against each other every six months or so. With so much at stake to get the best talent and a limited budget to hire — they often get creative in how stock compensation is structured. You might see the same overall amount of stock being offered, say $100,000. However, at some companies you might get it faster or earn more shares.

Does this sound a bit confusing?

It’s intentional. Companies want to make it difficult to compare salaries between them because it increases their ability to compete for talent.

Not all grants are made equal

How many shares of stock you get heavily depends on the date you join the company. Here’s how that works:

What this means for you

Since the number of shares is derived from dividing the grand value by the stock price — you get more shares (sometimes a lot more) if you join a company at a time their shares are trading low. Many tech employees, especially more senior folks, will time their career move with stock prices.

On the flipside, you can get significantly fewer shares if you join at a time when the market has been booming and the stock is overvalued at the time you join.

The Un-Intuitive Way Stock Price is Determined

When companies determine how many RSUs to give you when you start your new job, they use a 30 day moving average price of the stock. This means they take the price of the stock over the 30 days before your offer letter date. Savvy tech employees track prices at companies they’re following to time moving to a new company during a time period where the stock price has dipped. This strategy only works if you have high confidence the stock price will recover after you join so it involves doing a bit more analysis on stock trends and having more insight into the business model.

Offers are intentionally confusing

Companies structure their compensation intentionally in a way that makes it hard for you as a candidate to compare between job offers when it comes to the value of your RSUs.

Here are some examples from 2021 compensation models:

Facebook Compensation Model

1 year cliff to vest 25%, then quarterly vest, refresher & sign on bonus often paid in RSU

Let’s say you have a $100,000 stock grant as part of your job offer. You will have to wait a year to get 25%, or $25,000 of it. Then every quarter you will get a portion of the remaining stock awarded to you. In addition to this, you may get bonuses in stock — these are called “ refreshers”. A refresher is a new stock award for a job well done. Refreshers will vest on a new schedule that starts with the day you get the stock award.

Google Compensation Model

Frequently offers 40% vest first year vest, also known as a “ front-loaded” vest.

Let’s say you have a $100,000 stock grant as part of your job offer. You will have to wait a year to get 25%, or $25,000 of it. Then every quarter you will get a portion of the remaining stock awarded to you. In addition to this, you may get bonuses in stock — these are called “ refreshers”. A refresher is a new stock award for a job well done. Refreshers will vest on a new schedule that starts with the day you get the stock award.

Amazon Compensation Model

5% first year, 15% year 2, 40% in years 3 and 4.

While overall compensation at Amazon is very similar to other companies, the stock is backloaded. This means you get very little RSUs in your first 2 years. Fun fact: data shows most people leave amazon in 2.3 years. Based on that, you could be losing significant equity upside compared to Google or Facebook.

Netflix and Tesla Compensation Model

Candidates can choose what % goes to stock options.

Stock options are different than RSUs — with options you get the right to buy a limited amount of stock in the future at a locked-in price. For example, let’s say the price today is $100 per share and you get 50 options. If in a year the price is $400, you can still buy up to 50 shares of stock at the lower price of $100. Options can be lucrative but you essentially have to spend money to make money.

Snapchat Compensation Model

Candidates can choose between a 3 year and 4 year vesting schedule.

Planning when you get stock has some major tax benefits.

Lyft and Stripe Compensation Model

Yearly price resets.

Usually, the share price of your grant is locked in for 4 years at your start date. At Lyft and Stripe, that share price resets every year — this means that if the stock grows a lot over the years you'll miss out on the appreciation. If you think the company will appreciate a lot, make sure to discount the value of the RSUs relative to other companies.

How to compare offers

To compare salaries between these companies, you want to think of yourself as an investor. Act as if you’re putting $100,000+ of your own money in just one stock (because, technically, you are doing just that by accepting a job).

Is now a good time to join?

Look at the average price of the stock in the last 30 days. Consider if you’d be getting a good deal and how bullish you personally are in the price continuing to increase.

How does my equity vest?

Consider how long you have to wait to vest versus how long you plan to stay at a company. As a good benchmark, look at the average tenure of employees there.

Do I understand how this company makes money?

A good investor has working knowledge of the business model, the competitive landscape, product line and key employees. This is important when you join but even more so to help you time when to hold and when to sell.

Am I under special blackout?

Some roles are not allowed to sell their stock at any time or might have heavy restrictions. Often this happens when you work on something very secret or are in a function like finance. This means you need to factor in the risk of holding the stock for years.

Read our negotiation guide here for full details and conversation starters to negotiate your salary.

How to treat RSUs as an investment

Understand the risks

Many tech employees have over 50% of their salary in RSUs and over 90% of all of their wealth in the company they work for. This exposes you to several risks right off the bat.

Concentration Risk

If over 10% of your assets are invested in the same thing, that leads to over-exposure. Why is that bad?

What we’re taught in tech: As a company performs well, a concentrated equity position can provide tremendous benefits. The reason many hold huge amounts of stock is because the company has done tremendously well over years.

What happens in reality: No matter how well-managed a company is or how well it has performed in the past, there is a chance that its performance could change in the future. Just ask Lyft employees about how their wealth plummeted overnight during COVID.

But even if there’s no catastrophic event, the likelihood of your stock losing value over time is very high. A 2017 study published in the Journal of Financial economics finds that over the period from 1983-2006:

Liquidity Risk

You cannot sell your stock whenever you want — in fact, most tech companies tightly dictate trading windows. At Facebook, for example, you can only sell for 4 days every quarter. This means that if you’re holding an over-concentrated portfolio, you can’t react in real time when the market dips.

Company Risk

Both your wealth and your career are tied to one company and its stock performance. Something as simple as the company having a bad quarter can have a compounding negative effect on your wealth. If your company suffers layoffs, like AirBnB did in 2020, it will likely be financially catastrophic for you as a stockholder with a concentrated position.

Here’s how this plays out:

Loss in Year 1
Gain needed in Year 2 to Break Even
-5%
5.3%
-10%
11.1%
-20%
25.0%
-30%
42.9%
-40%
66.7%

Should you sell or hold your stock?

Considering all of these risks, it’s clear you have to take control of your decisions — whether you choose to sell or hold. A big factor here is your own tolerance for risk and the long-term financial goals you’re working towards.

Six things to think about before selling

When deciding to sell all or some of your RSUs, your first order of business is to make a strategy. If you’re the head of your household, discuss their risks and benefits with your partner or family.

Immediate Sale

Selling right away may feel attractive and easy but can quickly become a chore.

Pros: It would immediately protect you from the downside risk of the stock.

Cons: Remember, you can only sell when the company allows you to ( “trading windows”) and those can be very short. They’re often also not announced ahead of time since they’re timed with earnings calls. Because of this, you will constantly have to juggle timing of your sales and plan a new tax schedule for every new vesting grant — this gets overwhelming fast.

Staged Sale or 10b5-1 plan

A staged sale means you have to declare your plan of how you want to sell your stock ahead of time. In return for making a future plan, the government lets you avoid insider trading restrictions and sell at anytime, even when the company doesn’t normally allow it.

Pros: Selling consistently immediately reduces concentration and market risk- the two biggest hurdles for any tech employee. A Stanford study also found that these plans can lead to 6% better returns, on average. You can use a company like Candor to automate sales, taxes and diversification.

Cons: You have to decide how your stock will be sold ahead of time.

Hedging Strategies

For the sophisticated investor (read: don’t try this at home unless you have a financial advisor), there are additional strategies to hedge. Sometimes these are used in combination with a staged sale plan for risk-reduction.

Comparison of Hedging Strategies

Strategy
Summary
Advantages
Disadvantages
Protective puts
Purchasing put options on the concentrated position to create a price floor at the put's strike price
Downside protection while allowing full participation in stock's future appreciation
Purchase of puts is an out-of-pocket expense; does not provide liquidity or diversificiation
Covered calls
Selling (or "writing") call options on the concecrated position
Full participation in appreciation up to the strike price; proceeds from options sale can be used to enhance returns or diversification
No protection from price decline; no participation in appreciation above strike price; excercise (called stock) may trigger capital gains
Zero-premium collars
Simultaneously selling calls and buying puts to create a price ceiling and floor
No up-front premium; full participation in appreciation up to call strike price; full downside protection below put strike price
Downside exposure until put strike price is reached; no participation in appreciation above call strike price; no liquidity or diversificaition
Prepaid variable forward sales
Investor receives a set cash payment up-front in exchange for delivery of a variable number of shares at a future date; number of shares delivered depends on future stock price
Immediate liquidity for the stock; downside protection and some upside participation; voter maintains voting rights and dividends until delivery of shares
Proceeds for the stock are discounted from present market value; may create unique tax circumstances

Tax tricks no one told you about

Most tech employees don’t get sufficient information on their tax obligations. The result? A big unpleasant surprise from the IRS. To avoid writing a big check on tax filing day it is important to understand how your redemptions are withheld and taxed.

Here’s a quick primer:

When you start your job: you are promised equity in the form of a grant but you don’t actually own any equity — so, you’re not taxed.

When you vest: You become the owner of some of your stock and you get taxed on it as income.

Tax at vesting date is: # of shares vesting * price of shares = Income taxed in the current year

For 2021, income taxes rates are as follows:

Federal Income Tax
Income
Income
Brackets
(Married, filling Jointly)
Single Filers
22%
$81,051 to $172,750
$40,526 to $86,375
24%
$172,751 to #329,850
$86,376 to $164,925
32%
$329,851 to $418,850
$164,926 to $209,425
35%
$418,851 to $628,300
$209,426 to $523,600
37%
$628,301 or more
$523,601 or more

If you hold your stock: If you don’t immediately sell and the stock appreciates you get an additional tax on the appreciation — that's capital gains tax. If you sell within a year, you’re subject to “ short term capital gains”, which can be an additional 35%. If you hold for long periods of time, or over 1 year, you’re subject to long term capital gains, which is lower.

Tax here is: (Sales price – price at vesting) * # of shares = Capital gain (or loss)

2021 long-term capital gains tax rates are as follows:

Long-Term Capital Gains
Income
Income
Tax Rates
(Married, filling Jointly)
Single Filers
0%
$0 to $80,000
0 to $40,000
15%
$80,0001 to $501,600
$40,401 to $445,850
20%
$501,601
$445,851

How to plan for taxes

A little known fact: Most companies treat RSUs as supplemental income. This leads to them withholding much less tax and often leads to tech employees owing substantial amounts to the IRS.

First — check if you’re likely to owe taxes. Here’s a rough way to calculate that on your own:

  1. Look at your year-to-date income from all sources. You can find your job income on the bottom of your latest pay stub. If filing jointly, include your partner’s income too.
  2. See where your year to date income falls within the IRS income tax brackets.
  3. Multiply the tax rate from #2 by the gross value of your vested RSUs. Subtract the amount that was already withheld by your employer. Do the same for state taxes.

Next — plan for any amount you may owe:

Withhold more from your check or save cash

You can reach out to your HR representative to change your tax deductions. It will only affect your withholdings going forward so you may still owe taxes for the beginning of the year.

Automate sales and tax planning

Use a RSU management platform like Candor to sell your RSUs in a way that optimizes your tax outcome. Automated plans can also help you diversify into other investments.

Maximize tax deferred contributions

If you are holding RSUs to delay paying taxes on the gains, the proceeds from the sale can be used to max out tax-deferred accounts, like a 401k, and offset your tax bill (in addition to diversifying your investment portfolio).

Donor Advised Funds

If you want to offset a large portion of RSU taxes — you can do that by donating to charity. DAFs, or donor advised funds, let you open a fund with a set amount you want to donate over several years. The caveat? You can deduct it from taxes in year 1 if you want to. There are many startups in this space like Daffy, that can make this a simple process.

Deduction Bunching

If you have a large tranche of RSUs vesting in any given year, you should consider bunching deductions to offset some of this income. You can use deductions like mortgage interest, medical expenses or charitable deductions.

Defer by Hedging With Options

If you need to maintain a position in your company stock or to delay the tax bill to a potentially more favorable year — this strategy may help. But it’s definitely risky. You can use option calls or collars bet on the stock price movement and offset your taxes with any realized gain.

What happens when you leave your job

Generally, if you leave your company before your RSUs vest, you lose the unvested RSUs. You only own the stock that has already vested. As soon as you leave, all restrictions around trading your stock are lifted and you can start trading it at your leisure.

However, things get a bit more complicated when it comes to leaving involuntarily ( which is polite speak for “getting fired”) or if you have extenuating life circumstances. More recently, companies have implemented more nuanced policies in case of death, in particular. At many big tech companies, your vesting accelerates, if you were employed there at the time you passed away, as a benefit for your family. Google is famous for even continuing to pay half your salary to your family for a decade.

In case you’re curious how companies normally deal with extenuating circumstances — the 2019 Domestic Stock Plan Design Survey of the National Association of Stock Plan Professionals (NASPP) recorded some of the more common trends:


References

The Hidden Cost of Holding a Concentrated Position, Baird Bessembinder, Hendrik (Hank), Do Stocks Outperform Treasury Bills? (May 28, 2018). Journal of Financial Economics (JFE) Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse, By David F. LarckerBradford LynchPhillip QuinnBrian TayanDaniel J. Taylor Stanford Closer Look Series Corporate Governance Research Initiative January2021