{"id":6570,"date":"2020-05-27T00:00:00","date_gmt":"2020-05-27T00:00:00","guid":{"rendered":"http:\/\/www-staging.carta.com\/sg\/carta\/options-vs-rsus\/"},"modified":"2021-03-05T06:54:48","modified_gmt":"2021-03-05T06:54:48","slug":"options-vs-rsus","status":"publish","type":"post","link":"https:\/\/www-staging.carta.com\/sg\/blog\/options-vs-rsus\/","title":{"rendered":"Switching from options to RSUs"},"content":{"rendered":"\r\n<p>Companies move from issuing <a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/equity-101-stock-option-basics\/\">employee stock options<\/a> to restricted stock units (<a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/rsu-restricted-stock-unit\/\">RSU<\/a>) as they become larger for at least the following reasons:<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li>The value of RSUs are easier to understand compared to the upside of options<\/li>\r\n<li>The cost to exercising options becomes too large of a burden for employees<\/li>\r\n<li>The company wants to limit dilution<\/li>\r\n<li>Clear alignment between company and equity strategy (i.e: there\u2019s a plan to IPO soon)<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<p>In a <a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/the-great-pause-of-2020\/\">tougher economic climate<\/a>, it may make sense for companies to switch to offering RSUs instead of stock options because, unlike options, RSUs will still be worth something even if the price of the stock goes down. Option grants become \u201cunderwater\u201d if their fair market value falls below the strike price). However, if the <a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/what-is-a-409a-valuation\/\">409A valuation<\/a> of the company drops significantly for a temporary time and then rises, it may make options seem like a good deal in comparison to RSUs.<\/p>\r\n\r\n\r\n\r\n<p>Generally, later stage companies are the ones that look to switch to RSUs. Early on, options make sense for a company because of the relatively low strike price and higher anticipated growth rate.<\/p>\r\n\r\n\r\n\r\n<p>So if you\u2019re a CFO of a mid- to late-stage company, when do you switch? Timing matters. You want to ensure you aren\u2019t late (or early) to the game. This guide is here to help make sure you get this important decision right, because it has deep ramifications for your company and employees.\u00a0<\/p>\r\n\r\n\r\n\r\n<h2>Options vs RSUs<\/h2>\r\n\r\n\r\n\r\n<p>RSUs have benefits for both existing and newer employees. Including some major simplifications:\u00a0<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li>Less dilution<\/li>\r\n<li>No cost to exercise<\/li>\r\n<li>Less risk if stock price goes down\u00a0<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<p>But RSUs often have a certain type of vesting condition, called <strong>triggers<\/strong>, which can be <strong>performance <\/strong>or <strong>time-based<\/strong>. Most private RSUs have \u201cdouble-triggers,\u201d meaning they only vest after two conditions are met. Time-based triggers are like your standard vesting schedules. But performance-based triggers are tied to company milestones, like going public or undergoing a change in company ownership.\u00a0<\/p>\r\n\r\n\r\n\r\n<p>Here\u2019s a list of the major differences between RSUs and options:<\/p>\r\n\r\n\r\n\r\n<div id=\"footable_parent_7046\"\n         class=\" footable_parent ninja_table_wrapper loading_ninja_table wp_table_data_press_parent semantic_ui \">\n                <table data-ninja_table_instance=\"ninja_table_instance_0\" data-footable_id=\"7046\" data-filter-delay=\"1000\" aria-label=\"rsu-vs-options.csv\"            id=\"footable_7046\"\n           data-unique_identifier=\"ninja_table_unique_id_365548793_7046\"\n           class=\" foo-table ninja_footable foo_table_7046 ninja_table_unique_id_365548793_7046 ui table  nt_type_legacy_table selectable striped vertical_centered  footable-paging-right ninja_table_search_disabled ninja_table_pro\">\n                <colgroup>\n                            <col class=\"ninja_column_0 \">\n                            <col class=\"ninja_column_1 \">\n                            <col class=\"ninja_column_2 \">\n                            <col class=\"ninja_column_3 \">\n                    <\/colgroup>\n        <thead>\n<tr class=\"footable-header\">\n                                                                        <th scope=\"col\"  class=\"ninja_column_0 ninja_clmn_nm_equity \">Equity<\/th><th scope=\"col\"  class=\"ninja_column_1 ninja_clmn_nm_valueproposition \">Value proposition<\/th><th scope=\"col\"  class=\"ninja_column_2 ninja_clmn_nm_pros \">Pros<\/th><th scope=\"col\"  class=\"ninja_column_3 ninja_clmn_nm_cons \">Cons<\/th><\/tr>\n<\/thead>\n<tbody>\n\n        <tr data-row_id=\"218\" class=\"ninja_table_row_0 nt_row_id_218\">\n            <td><b>RSUs<\/b><\/td><td>The value of RSUs is much easier to measure. They\u2019re worth whatever the company stock is worth at the time of issuance. They don\u2019t need to be purchased so there\u2019s less risk. <\/td><td>RSUs will require less equity burn (from the company) to provide similar value to the candidate.<\/td><td>Employees have no control over the timing of the taxes or the tax rate (compensatory). Employees might even lose any RSUs they have \u201caccrued\u201d if they leave before both triggers are met.<br\/><br\/>Results in less alignment between workers and company. Offering RSU liquidity is currently really difficult.<\/td>        <\/tr>\n            <tr data-row_id=\"219\" class=\"ninja_table_row_1 nt_row_id_219\">\n            <td><b>Options<\/b><\/td><td>Provides more upside for those employed at  high growth companies. Employees can optimize for taxes in a way they cannot with RSUs.<\/td><td>Allows employees to have control over the timing of their tax obligation and allows for participation in liquidity programs such as tender offers.<\/td><td>Results in more equity burn in order to provide similar value to RSUs.<br\/><br\/>As companies mature, exercise costs become a barrier and the gap between preferred and strike price will fall, reducing inherent value.<\/td>        <\/tr>\n    <\/tbody><!--ninja_tobody_rendering_done-->\n    <\/table>\n                    <style type=\"text\/css\" id='ninja_table_custom_css_7046'>\n                        #footable_7046  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                \n    \n    \n<\/div>\n\r\n\r\n\r\n\r\n<div class=\"wp-block-spacer\" style=\"height: 36px\" aria-hidden=\"true\">\u00a0<\/div>\r\n\r\n\r\n\r\n<h2>When are companies switching to RSUs?<\/h2>\r\n\r\n\r\n\r\n<p>Here are some trends we\u2019ve seen, although this is based on limited data*:<\/p>\r\n\r\n\r\n\r\n<ol>\r\n<li>On average, companies switch to RSUs <strong>5.5 years after incorporation<\/strong><\/li>\r\n<li>On average, companies switch to RSUs at <strong>an average post-money valuation of $1.05B<\/strong><\/li>\r\n<\/ol>\r\n\r\n<p>&nbsp;<\/p>\r\n<figure class=\"aligncenter size-large is-resized\"><img loading=\"lazy\" class=\"wp-image-25654\" src=\"https:\/\/www-staging.carta.com\/sg\/wp-content\/uploads\/sites\/9\/2020\/05\/stats-1024x964.png\" alt=\"\" width=\"512\" height=\"482\" title=\"\"><\/figure>\r\n\r\n<p><br \/>This might seem too soon or too late for your company. A lot depends on your individual company\u2019s needs.\u00a0<\/p>\r\n\r\n\r\n\r\n<p>If you want to know when is the right time for your company to switch, download our free option and RSU grant calculator. This calculator lets you look at a specific grant and compare how it may change the total payout for the employee based on if they were granted options or RSUs (it does not account for taxes).<br \/><br \/><\/p>\r\n<figure><img loading=\"lazy\" class=\"aligncenter wp-image-3128\" src=\"https:\/\/www-staging.carta.com\/sg\/wp-content\/uploads\/sites\/9\/2018\/11\/Group-7-1.png\" alt=\"\" width=\"400\" height=\"304\" title=\"\"><\/figure>\r\n<h3 style=\"text-align: center\">Download the calculator<\/h3>\r\n<p>[marketo-form form_id=&#8221;6784&#8243;]<\/p>\r\n\r\n\r\n\r\n<p><br \/>If you want to dive deeper, here are some aspects to consider before making the decision to move from options to RSUs:<\/p>\r\n\r\n\r\n\r\n<h2>What to consider before switching to RSUs<\/h2>\r\n\r\n\r\n\r\n<h3>Tax<\/h3>\r\n\r\n\r\n\r\n<p>Most late-stage company RSUs have performance-based triggers, so you don\u2019t receive them (or get taxed) until there\u2019s some possibility of liquidity. Most public companies already have RSU programs, and their stock is already liquid to some degree, so employees are taxed upon vesting.\u00a0<\/p>\r\n\r\n\r\n\r\n<p>Here\u2019s how RSUs and options compare in terms of taxes:<\/p>\r\n\r\n\r\n\r\n<div id=\"footable_parent_7047\"\n         class=\" footable_parent ninja_table_wrapper loading_ninja_table wp_table_data_press_parent semantic_ui \">\n                <table data-ninja_table_instance=\"ninja_table_instance_1\" data-footable_id=\"7047\" data-filter-delay=\"1000\" aria-label=\"rsu-tax.csv\"            id=\"footable_7047\"\n           data-unique_identifier=\"ninja_table_unique_id_2043771340_7047\"\n           class=\" foo-table ninja_footable foo_table_7047 ninja_table_unique_id_2043771340_7047 ui table  nt_type_legacy_table selectable striped vertical_centered  footable-paging-right ninja_table_search_disabled ninja_table_pro\">\n                <colgroup>\n                            <col class=\"ninja_column_0 \">\n                            <col class=\"ninja_column_1 \">\n                            <col class=\"ninja_column_2 \">\n                            <col class=\"ninja_column_3 \">\n                    <\/colgroup>\n        <thead>\n<tr class=\"footable-header\">\n                                                                        <th scope=\"col\"  class=\"ninja_column_0 ninja_clmn_nm_securitytype \">Security type<\/th><th scope=\"col\"  class=\"ninja_column_1 ninja_clmn_nm_whenaresecurityholderstaxed \">When are security holders taxed?<\/th><th scope=\"col\"  class=\"ninja_column_2 ninja_clmn_nm_whattypeoftax \">What type of tax?<\/th><th scope=\"col\"  class=\"ninja_column_3 ninja_clmn_nm_implications \">Implications<\/th><\/tr>\n<\/thead>\n<tbody>\n\n        <tr data-row_id=\"220\" class=\"ninja_table_row_0 nt_row_id_220\">\n            <td><b>RSUs with performance trigger<\/b><\/td><td>At vest<\/td><td>Ordinary income tax<\/td><td>Higher tax rates, no choice on taxable event<\/td>        <\/tr>\n            <tr data-row_id=\"221\" class=\"ninja_table_row_1 nt_row_id_221\">\n            <td><b>Options<\/b><\/td><td>At exercise or sale (depends if options are ISO or NSO)<\/td><td>Ordinary income tax but with potential for capital gains and AMT<\/td><td>Potential for lower tax rates, choice on when to exercise<\/td>        <\/tr>\n    <\/tbody><!--ninja_tobody_rendering_done-->\n    <\/table>\n                    <style type=\"text\/css\" id='ninja_table_custom_css_7046'>\n                        #footable_7046  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                                <style type=\"text\/css\" id='ninja_table_custom_css_7047'>\n                        #footable_7047  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                \n    \n    \n<\/div>\n\r\n\r\n\r\n\r\n<div class=\"wp-block-spacer\" style=\"height: 43px\" aria-hidden=\"true\">\u00a0<\/div>\r\n\r\n\r\n\r\n<h3>Liquidity<\/h3>\r\n\r\n\r\n\r\n<p>Because most private companies have that RSU performance trigger (sale or IPO of the company), the ability to have private market liquidity is difficult. While companies can remove the performance-trigger, they need to be ready to cover tax obligations of time-vested RSUs. Currently, there is no easy platform that enables companies to do this. Thus, private liquidity with RSUs is a real challenge.<\/p>\r\n\r\n\r\n\r\n<p>If you plan to stay private for the majority of the lifetime of the awards you are issuing, think twice about switching. Moving to RSUs too early can be costly and can trap companies, like what occurred with Airbnb. Since switching, Airbnb has likely not run any tender offers for employees that have RSUs. <a href=\"https:\/\/www.nytimes.com\/2019\/09\/20\/technology\/airbnb-employees-ipo-payouts.html\" target=\"_blank\" rel=\"noopener\">Employees have reportedly been unhappy<\/a> with this and in addition, Airbnb is coming up against the IRS limit of how long an RSU can be in place before vesting.\u00a0<\/p>\r\n\r\n\r\n\r\n<p>You have to think about your company\u2019s future here. If you\u2019re considering a direct listing and currently issue RSUs, a good portion of your stock plan will not be liquid as a private company (the portion issued as RSUs). This makes it tough to get the transaction volume needed to price the initial offering. If you stick with options you will have more choices offering private liquidity and increasing transaction volume on the private side and better price discovery as a result.\u00a0<\/p>\r\n\r\n\r\n\r\n<div id=\"footable_parent_7048\"\n         class=\" footable_parent ninja_table_wrapper loading_ninja_table wp_table_data_press_parent semantic_ui \">\n                <table data-ninja_table_instance=\"ninja_table_instance_2\" data-footable_id=\"7048\" data-filter-delay=\"1000\" aria-label=\"rsu-liquidity.csv\"            id=\"footable_7048\"\n           data-unique_identifier=\"ninja_table_unique_id_361369525_7048\"\n           class=\" foo-table ninja_footable foo_table_7048 ninja_table_unique_id_361369525_7048 ui table  nt_type_legacy_table selectable striped vertical_centered  footable-paging-right ninja_table_search_disabled ninja_table_pro\">\n                <colgroup>\n                            <col class=\"ninja_column_0 \">\n                            <col class=\"ninja_column_1 \">\n                            <col class=\"ninja_column_2 \">\n                    <\/colgroup>\n        <thead>\n<tr class=\"footable-header\">\n                                                        <th scope=\"col\"  class=\"ninja_column_0 ninja_clmn_nm_securitytype \">Security type<\/th><th scope=\"col\"  class=\"ninja_column_1 ninja_clmn_nm_liquidityoptions \">Liquidity options<\/th><th scope=\"col\"  class=\"ninja_column_2 ninja_clmn_nm_limitations \">Limitations<\/th><\/tr>\n<\/thead>\n<tbody>\n\n        <tr data-row_id=\"222\" class=\"ninja_table_row_0 nt_row_id_222\">\n            <td><b>RSUs with performance condition<\/b><\/td><td>IPO\/acquisition <\/td><td>Can\u2019t easily run private liquidity events. At the point of IPO or acquisition, all accrued RSUs would be taxed, regardless if employees want to sell the vested shares or not.<\/td>        <\/tr>\n            <tr data-row_id=\"223\" class=\"ninja_table_row_1 nt_row_id_223\">\n            <td><b>Options<\/b><\/td><td>Private secondary transaction, IPO, direct listing, acquisition<\/td><td>The only limits here are how often you and your company\u2019s board want to run liquidity events. At Carta, we\u2019ve historically done them <a href=\"http:\/\/www-staging.carta.com\/sg\/blog\/work-at-carta-get-liquidity\/\">every 12 to 18 months<\/a>.<\/td>        <\/tr>\n    <\/tbody><!--ninja_tobody_rendering_done-->\n    <\/table>\n                    <style type=\"text\/css\" id='ninja_table_custom_css_7046'>\n                        #footable_7046  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                                <style type=\"text\/css\" id='ninja_table_custom_css_7047'>\n                        #footable_7047  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                                <style type=\"text\/css\" id='ninja_table_custom_css_7048'>\n                        #footable_7048  {\n        font-family: inherit;\n        font-size: 14px;\n    }\n\n                <\/style>\n                \n    \n    \n<\/div>\n\r\n\r\n\r\n\r\n<div class=\"wp-block-spacer\" style=\"height: 30px\" aria-hidden=\"true\">\u00a0<\/div>\r\n\r\n\r\n\r\n<h3>Other considerations:<\/h3>\r\n\r\n\r\n\r\n<p>Before moving to RSUs, you need to forecast your accounting ahead of a potential IPO as you\u2019ll see a larger expense recognition when shares become liquid. For example, <a href=\"https:\/\/www.cnbc.com\/2018\/02\/06\/snap-recorded-stock-based-compensation-of-2-point-6-billion-in-2017.html\" target=\"_blank\" rel=\"noreferrer noopener\">Snapchat had to pay more than $2 billion<\/a> in a stock compensation expense charge. While option expense is spread out over the life of the award, double trigger RSUs are expensed at vest. This means finance teams should plan for a potential large expense number following their listing. This type of expense is non-cash and is simply an accounting entry that impacts your reported GAAP numbers, which can make the company look less profitable (or having lower net income).<\/p>\r\n\r\n\r\n\r\n<p>RSUs also require more <a href=\"https:\/\/www-staging.carta.com\/sg\/blog\/category\/employee-resource-center\/\">employee equity education<\/a>, as they are different from stock options. RSUs add a new layer of complexity for finance, HR, and stock administration teams.<\/p>\r\n\r\n\r\n\r\n<h2>What happens if you switch too soon<\/h2>\r\n\r\n\r\n\r\n<p>At Carta, we hear about lots of companies who are considering switching to RSUs. While there is a point where it may make sense, more often than not, we see companies switch too soon. Here\u2019s how switching to RSUs too soon can box a company in:<\/p>\r\n\r\n\r\n\r\n<ul>\r\n<li>Can\u2019t change existing RSU grants to options<\/li>\r\n<li>Can\u2019t easily offer private liquidity<\/li>\r\n<li>Big employee tax bill at vest (if planning to go public)<\/li>\r\n<li>Switching while there is still room for a lot of growth limits employee upside<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n<p>If you switch and realize RSUs aren\u2019t a fit for your company, you can change back to issuing options, but existing RSU grants can\u2019t be changed. This is why you need to think critically about this moment and what it means for your business.<\/p>\r\n\r\n\r\n\r\n<h2>Get help with this big decision<\/h2>\r\n\r\n\r\n\r\n<p>Talk to your outside counsel about each of these items regardless of your company structure. They\u2019ll have advice on what might be best for your business. They\u2019ll be able to help you plan ahead for unique cases such as international RSUs, liquidity events, and more. Moving to RSUs is a huge decision for any company and it needs to be done carefully.\u00a0<\/p>\r\n\r\n\r\n\r\n<p>If you have any questions about this switch, reach out to your Carta customer success manager.\u00a0<\/p>\r\n\r\n\r\n\r\n\r\n\r\n<p class=\"has-small-font-size\"><em>Thank you to Aaron Jacobs, Mischa Vaughn, Grace Erickson, Charly Kevers, Gerald Lou, and Alex Farman-Farmaian for helping with this post and calculator.\u00a0<\/em><\/p>\r\n\r\n\r\n\r\n<p class=\"has-small-font-size\">* Customer data that Carta does not have a right to use in anonymized and aggregated studies is excluded from this analysis.<\/p>\r\n\r\n\r\n\r\n<p class=\"has-small-font-size\">DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (\u201cCarta\u201d) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.\u00a0 This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.\u00a0 Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.\u00a0 This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.\u00a0<\/p>\r\n\r\n\r\n\r\n<p class=\"has-small-font-size\">This post contains links to articles or other information that may be contained on third-party websites.\u00a0 The inclusion of any hyperlink is not and does not imply any endorsement, approval, investigation, or verification by Carta, and Carta does not endorse or accept responsibility for the content, or the use, of such third-party websites. Carta assumes no liability for any inaccuracies, errors or omissions in or from any data or other information provided on such third-party websites.<\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>A guide (and calculator) to help founders and CFOs know what to consider when switching from options to RSUs.<\/p>\n","protected":false},"author":18,"featured_media":3137,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[42,19],"tags":[349,36,99,85],"acf":[],"_links":{"self":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/6570"}],"collection":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/comments?post=6570"}],"version-history":[{"count":0,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/6570\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media\/3137"}],"wp:attachment":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media?parent=6570"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/categories?post=6570"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/tags?post=6570"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}