Offer Letter Basics: RSUs and taxes

How do you evaluate an offer from a large tech startup or established tech company like Microsoft or Amazon?  The first step in evaluating your offer is to understand it!  Below, we discuss one of the components of your offer letter – how Restricted Stock Units (RSUs) work and taxes.

Restricted Stock Units (RSUs)

Structure: Each RSU equates to a share of the company stock.  ex.  1 Amazon RSU = 1 AMZN stock.

Value: RSU value is tied to the price of the actual traded stock price.  RSUs are a little different than stock options, and have an implicit value above $0.  As long as there is a stock price at vesting, then your RSUs have value.

Vesting: The RSUs generally vest over a few years with a 1-year cliff.  The 1-year cliff requires you to be an employee for at least a year before receiving any portion of vested stock.

Other general vesting requirements/rules:

  • Look at the small print – when you terminate employment, vesting stops immediately.
  • If you are considering parental leave, look to see if your RSUs stop vesting during any non-paid leaves.
  • Unlike stock options, your RSUs become actual shares at vesting and do not expire like stock options would.
  • Think the company will go gangbusters over the next few years?  Review your incentive stock option plan to understand if you may make an election to pay tax on the value of the RSUs now (Section 83(b) election.  Talk to your accountant or financial advisor, since this does come with significant risks.
  • Trading window: once your RSUs vest into stock, you will only be allowed to trade the stock at set windows through the year.  This prevents insider trading.  If you have a large set of RSUs vesting, you may decide to make a 10b5-1 trading plan for regular scheduled sales over a period of time.

Taxation: RSUs are generally taxable as ordinary income when vested.

What are the main issues surrounding RSUs?

When you are negotiating your offer – most of the time they will have an internal analysis to support RSU and salary trade-offs.  As long as they keep within the boundaries of the model, then your ‘target compensation’ will be the same, from their view point.

So how do you feel about RSUs vs. cash salary?  Keep these things in mind when weighing your options.

Cash flow impact: tax usually paid through a portion of RSUs sold at vesting.  These taxes paid are generally displayed on your W-2 as part of your total tax withheld.

Investment strategy: If you receive a large grant of RSUs, you will have many risks.  Risk of termination before vesting, risk of market volatility in stock price, and asset concentration are a few.  You will also want to decide if you will be keeping the stock once vested, or if you prefer to sell the stock.

Evaluating many offers:  Evaluating RSUs and stock options 1 to 1 is generally not appropriate. Employees will generally receive fewer RSUs than stock options since RSUs do not depend on company performance to the same degree. Evaluate your options with your accountant or financial advisor.

Do you feel prepared to accept or negotiate your offer now?  If you are interested in further guidance, reach out to me for a quick start project on transitioning jobs.

PS – If you decided to take an offer at Amazon or Microsoft, check out our new pages discussing the Amazon Benefits Package and Microsoft Benefits Package!

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

1 comment on “Offer Letter Basics: RSUs and taxes

  1. Pingback: Making the most of your change from corporate to start-up | Tech Financial Advisor | CPA

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