Since it was pretty tangential to the other discussion, I figured why not start a new thread. I may have posted inaccurate information in the other thread, but I don’t think so. This is the place to clear it all up. I’ll start it off with a personal example.
In our son’s most recent unofficial offer letter (thus all the legalese wasn’t included), he was offered a dollar sum of RSUs that vest semi-annually over 4 years. The recruiter wrote that he would be given that total dollar amount divided by eight, in shares, every 6 months. I don’t want to share the dollar amount here, but we’ll use a nice round low number to illustrate…$10,000 at signing would translate to $2500 semi-annually. With the exception of the numbers, that’s exactly how it was written. He didn’t specify whether that dollar amount would be translated to a set number shares at the time the offer is signed or that they’d just buy that many dollars worth of shares at each vesting period. The way it’s written, he intimated the latter.
My understanding is that either way, they essentially don’t exist until they vest. At that time, the share value taxes as income and three things can occur. He can either sell all of them immediately, diversify, and essentially negate the impact of capital gains. He can sell some of them, typically enough to cover the tax, but any fractional number of the shares could be sold. Lastly, he could hold all of them and pay the tax himself.
Do I have that right?
He also has to figure out what to do with vested, but unexercised ISOs. The company is private, so there’s risk. As I understand it, they don’t tax until they are sold, but they can trigger AMT so he’d be at risk for the strike price and the tax even if the company dissolves and the shares become worthless.
I’d love more insight on that, plus anything else anyone wants to discuss that’s germane.
I think you meant to write $20K divided by 8 is $2500 semi-annually? I’m not sure what you mean by “negate the impact of capital gains” but my experience is that unless they really need the money, in a rising market most people sell to cover (ie pay the tax) and then let the rest ride to get long term capital gains treatment on further increases after a year. In a falling market it’s harder to decide what to do: you are already over indexed on the company in a downturn so you could lose your savings and be laid off.
The ISO is going to be tricky unless you truly understand the capital structure. Employees usually sit behind VCs with a liquidation preference, so if the company is sold without going public they are often guaranteed to double their money before employees and founders get anything. A lot of private companies may now be unable to go public and if they are burning cash will need to raise on very unfavorable terms. The latest trend is apparently the URINO (up round in name only), where the preference gives protection to the new investor and screws the employees (this is paywalled but the first couple of paragraphs give you the idea: https://www.theinformation.com/articles/startups-avoid-valuation-cuts-with-up-rounds-in-name-only ). So you need to know both the preference stack and the current cash position/burn rate/funding need to make sense of the valuation.
Ha! I meant 12.5, but the math work the same. Oops! Now off to actually read the rest. Thanks!
As for the capital gains, if you sell it all immediately, there’s minimal gain or loss versus the strike price. Thus, there’s really nothing but income tax to think about.
I suspect an acquisition, if anything. Given the layers of investment, it probably doesn’t make sense to buy more shares.
Form 6251 line 2i is where the bargain element of exercised and held ISO shares is reported, as described in the instructions. Note that line 2k is also relevant for the future, as noted in the instructions.
Just to add complications, after paying AMT, it is possible to recover some of the AMT paid in future years when AMT is lower than regular tax through form 8801.
But this is privately held company right? If so most now use a double trigger on RSUs where you have to be both vested and have a liquidity event (IPO or acquisition) in order to be able sell the RSUs.
ISOs are exceedingly complex. Some strategies try to make sure the amount exercised keeps you just below the AMT triggering limit - a multi year plan, that changes each year as your salary and composition changes.
His current company is private. That’s where he has some exercised ISOs, but many more vested and unexercised. The company with an offer on the table has an RSU package and a discounted employee stock purchase program (another acronym…ESPP).
NOTE: for anyone else who wants to chime in, feel free to use other examples or ask other related questions. My intent was a free flowing thread on a subject that many of our kids might encounter that most of us never did. Special thanks to those of you with first hand experience!
I have nothing to add but am following along, hoping that I will learn something on behalf of my son. He received ‘a stock option to purchase xxxx shares of common stock of the Company for a price per share equal to the fair market value of the common stock on the date of grant as determined by the Board.’
He has only worked there a few months, so nothing he can do yet. Quarterly vesting over four years with one year cliff, which I believe is somewhat common for start-ups. Hopefully he will have a better idea of the company’s prospects and his medium range plans by the time he needs to take action.
At this time, I don’t even know what I don’t know! Thanks for starting this side thread.
At the time RSUs are granted, the price is set and that determines how many shares total you’ll receive. Let’s say 10k buys you 1000 shares on the day of the grant, you then get distributions of those 1000 shares over the vesting period regardless of the market price of the stock on the day of the vesting.
There’s some tax weirdness with the difference in price if the stock has gone up vs the grant price. You cost basis is the grant price, but I think you owe taxes on the price difference or some such thing. My company automatically sells a portion of the RSUs at each vesting period to cover income taxes - (the amount sold ends up in my paycheck, I think). Maybe you get taxed on the whole vested stock value then add it to your basis price, I forget how it all works.
Other than that you’re correct, you own the stock at that point and can sell or hold. I plan to just let it sit and ignore the whole thing until they’re all in the long-term gains bucket and I can just sell everything at once so I don’t have to re-educate myself on the tax implications every time.
I guess he’ll know soon enough when he gets the official offer letter. They’re just ironing out details. In the unofficial correspondence, they very specifically refer to it by the dollar amount, literally saying every 6 months you’ll get $X.
Probably because most parent posters here were/are neither executive-level employees at large companies, nor employees at west coast startup electronics and computer companies where offering them to non-executive-level employees first became common. But the kids graduating in CS (or otherwise entering jobs in the computing industry) today may be more likely to encounter them.
My husband works in tech and RSUs have been a good part of his compensation. He is granted a set number of shares. The value changes with the price of the company’s share, but his company is public.
ESPP is a no-brainer. It is a guaranteed 15% return.
We’ve been selling both RSUs and ESPPs as soon as they vest and with the stock down a lot, I really don’t regret selling at the all-time highs!
If the RSU award is specified in $$ instead of number of units, the number of units you get could be determined by some formula specified in the stock plan documents (for example, the dollar amount divided by the average daily stock price over 30 days preceding the day of vesting). The tax basis is determined by the stock price on the day of vesting.
Problems with ESPP… yes, it is 15% off, but the employees can’t dump the shares at will. Because… insider trading. Can sell only when allowed to, during which time when the stock price can be much lower than the purchase price.
Note that if he has ISOs in a private company and the company is sold, triggering exercise, these will be treated as ordinary income. In fact his company may just process they through payroll. This taxes them like a bonus, essentially.
If he thinks there is a reasonable chance of a transaction making those ISOs valuable, he may want to exercise.
My understanding is that an exercised ISO isn’t taxed until the shares are sold, unless you trigger AMT. Is it taxed at the negotiated price if the company is sold? What if the company folds? I’ve read about people getting big tax bills. Anything to that?
The big tax bills for exercised and held ISO shares are often due to AMT.
In an acquisition later, whether a tax event occurs depends on what happens to the shares (cashed out, swapped for stock in the acquiring company, etc.).
You can suggest to your kid that they ask their boss for the name of an accountant who has worked with employees of this company… just to make sure that they have full transparency on the pluses and minuses of various issues ahead of time.
A good CPA who works in this arena won’t charge an arm and a leg to conduct an info session (by phone) to review the offer letter and any supporting documentation.
I have one kid whose employer went public. Getting expert advice (and not by Googling) was money well spent. There are a lot of nuances here, and although there are some “do-overs” (someone sells shares prematurely just for liquidity, then realizes they should have waited… but there are still more options to exercise so lesson learned) there are other mistakes that are more costly. This is not time for H&R Block or the family’s tax preparer… worth it to discuss the particulars with an experienced pro.
Now off to actually read the rest. Thanks!
Complete with the forms mentioned above.