More than 50% of your compensation is paid in stock — don’t handle it right and you can become poor overnight.
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.
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:
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.
How many shares of stock you get heavily depends on the date you join the company. Here’s how that works:
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.
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:
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).
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.
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.
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.
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.
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:
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.
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.
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.
A 10b5-1 paln 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.
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 10b5-1 trading plan for risk-reduction.
Comparison of Hedging Strategies
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:
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:
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:
Next — plan for any amount you may owe:
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.
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.
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).
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.
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.
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.
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:
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