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RSUs vs Options.

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

This entry was posted on Friday, September 16th, 2011 at 1:51 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

 

6 Responses to “RSUs vs Options.”

  1. 1 GlennKelman

    Yes, agree on all points except the strike price on options can be quite for companies that are growing, in which case RSUs might be preferable?

  2. 2 Anonymous

    They are never preferable.

  3. 3 GlennKelman

    Regardless of the option strike price?

  4. 4 Anonymous

    Regardless of the option strike price, because given the current climate, if the company never goes public and decides to merge with someone else, what happens is that in the options situation, they have to take care of your options and pay you out. In the RSU situation, they can choose to negate your options entirely.

    Maybe, just maybe, you get lucky and they cut you some RSUs at a low strike price and said company actually increases in value (i.e. Google) — Then you’re ok. But if the gods that be give you a choice, take the fucking options.

    Also be wary of options agreements which contain ‘claw back’ provisions, like the bullshit Mark Pincus decided to pull with Zynga employees. They’re just as shitty.

  5. 5 HalibetLector

    Another thing you have to watch out for when your company gets bought is the company converting your stock options to SARs (Stock Appreciation Rights). It’s still better than RSUs, but it’s not real stock when it vests. You don’t get dividends, but you do get to sell it for whatever the stock is worth.

  6. 6 Joseph McCarron

    You mentioned no common stock. That isn’t true of all RSUs. Some are for Common Stock, and also are granted upon sale or IPO so you don’t have to worry about being acquired. Also, while they do have an expiration if sale or IPO is not completed, some extend that expiration for years beyond your potential end of service at the company.

    Not all RSUs are as predatory as you make them out to be, though some certainly are as you have illustrated. All that said I would still prefer early options any day, personally.

 

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