[theflork]

Are there any companies you know that use RSU's or stock grants instead of options? I've been interviewing at some startups and they only seem to offer options with their byzantine rules. Can people negotiate offers from options to RSUs/grants?

[sulam]

RSUs are typical at a certain size -- generally around 500 employees I think these days. There's a forcing function called the Exchange Act, section 12(g) of which says there's a cap on the number of shareholders you can have without reporting financials effectively as if you're a public company. That number was increased from 500 shareholders to 2000 in 2012. The reason for the lower number where RSUs start to be considered than where strictly required has a couple motivations:

1) Generally by 200 employees your stock is starting to be expensive, so exercising is no longer a trivial amount of money. This is especially important if an employee wants to 83(b) exercise (which is pre-buying their shares as soon as they're granted, to move the long term capital gains clock up to a year ahead of where it would otherwise kick in).

2) Getting to 500 employees generally implies some attrition, and of course your investors are also on your cap table, so it's fairly easy to be approaching 2000 shareholders with a smaller number of employees depending on how fast you've grown and how many party rounds you've done.

3) RSUs are trivial for the company to control. Shares that you own can, without special restrictions which are only starting to become standard in the last few years, can be traded on secondary markets even if you can't trade them on a public exchange. RSUs are simply a promise, and while you could write a contract that dictates what you'll do at the time of RSU conversion, that doesn't affect the company because by definition they're already public by then.

Selling your vested options to another party is much harder on the company, since as shareholders this third party has an explicit relationship with the company and, depending on where they are incorporated, rights to examine the company's finances.

Oh, and rereading I just realized I didn't connect the dots from the 12(g) threshold forcing people to use RSUs. RSUs are not considered stock. For tax purposes they are ordinary compensation awarded at the time of conversion, and only then do you count as a shareholder in the company. A company like Uber (could easily have been over 2000 shareholders by now I'm sure) has been using RSUs for probably multiple years now.

[linkregister]

Thanks for this. This is a good analysis of how RSUs are advantageous to both employees and employers.

[dsugarman]

You need to pay taxes on your stock. With options you only pay when you exercise so you can wait until liquidity to make sure you can afford the taxes. If you are getting straight stock you need to pay taxes that year

[st3v3r]

But if you're getting straight stock, odds are the price is so low to where it shouldn't be much. At least, nowhere near the tax bill one would get if they tried to exercise options in a company that's taken off (but not gone public yet).

[morgante]

If you're joining a company very early (first 10 employees) you should probably be getting stock (not options). It's possible to do that and is a sign of an employee-friendly founder. Plus, at an early stage you can do an 83(b) on the stock itself and have a much more favorable tax situation.

I have successfully negotiated for founder stock instead of options in the past, so it's something you can definitely do.