Part of what I do in addition to dealing with technology is to keep one eye on the VC and money side of silicon valley. There’s much going on here and its hard to avoid watching where all the money comes from.

The more time I spend studying companies and company stock, the more I realize how fucked you are if you take a job with a company and they issue you RSUs instead of options or stock. They’re usually handed out to people who show up too late in that particular startup’s lifecycle to matter. The new employees aren’t founders, they’re not startup people, they’re just workers. Unlike the first 20 employees, they are taking little risk as the company is already established, and they will see little reward in the end.

Google and Facebook have been doing this for years. In reality, the prevalance of RSUs is a direct response to much of the legislation issued after the .com bust. It’s easier to stall on the IPO and continue to accumulate capital than to deal with the IPO itself. Remember that the stock market was originally designed to allow individuals to pump capital into companies, a job now largely taken over by VCs.

With those companies, their growth is so good that you might get a nice upside working for them, but nothing like you would with options. Worse yet, you get few rights if you have RSUs. No voting rights, nothing. No common stock. If you hold them for ten years and your company doesn’t IPO, you get nothing (average IPO time these days is 9+ years and the market is slow) when they expire. The SEC will even grant special privileges to your company (easily upon request) so they can avoid the registration requirements for stock, which is around 500 stockholders and/or > $1M in assets.

Why is that important? Because around 500 registered stockholders, the company is forced into an IPO; The reporting requirements under Sarbanes-Oxley will cost as much as the IPO does, for the most part.

RSUs come with many restrictions. You can’t transfer them (to your spouse, or anyone), if you die, your successor is stuck with the same restrictions, and you can’t sell them. Guess what else? If your company gets bought, the acquiring company can just terminate RSUs during the acquisition. Whoops. You lose your stock.

At least if you get fired, you (might) get to keep your RSUs. If they manage to IPO, it’s going to be a good year or so before you can sell. It’s standard though, during the IPO, to convert RSUs directly to Common Stock during a Liquidity event, though.

If you’re taking a new job, take options or direct grants only, and make sure you read Know your Options. If you’re offered RSUs and you want serious upside stay away from companies that are issuing RSUs. You’re going to get fuck all in the end. Go find an early-stage startup instead. If you want a safe job, take the RSUs.

Here’s an example of what a company can do with the SEC. It’s Twitter asking for an exemption from Section 12 of the Exchange act and it contains some very interesting information about how the RSU program works.

http://www.sec.gov/divisions/corpfin/cf-noaction/2011/twitter091311-12gh-incoming.pdf

Here’s facebook’s for comparison (but they’re written by the same lawyer and even have a similar filename, so don’t expect too much difference.)

http://www.sec.gov/divisions/corpfin/cf-noaction/2008/facebook101308-12gh-incoming.pdf

For more information, have a look at the Bloomberg article, here:

http://www.bloomberg.com/news/2011-09-15/twitter-gets-leeway-from-sec-in-issuing-restricted-stock-units.html