Author Topic: Stock Options/Restricted Stock grant  (Read 356 times)

The Bearded Bank Builder

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Stock Options/Restricted Stock grant
« on: October 09, 2018, 11:30:16 PM »
Hello!

I am looking for some advice from someone knowledgeable about stock options and restricted stocks. I have done a fair bit of research but am still not confident I am taking everything into account.

My boss is offering me the choice of taking stock options or restricted stock. He said that I will be offered the same percentage of either one (around 1% company ownership).

It seems to me that taking the restricted stock is a much better option, because it is both less risky if the stock price were to decrease in value, and I never have to pay the exercise price.

I realize I would need to pay taxes on the restricted stock when granted (if I use the 83b election, which I believe I would). But wouldn't this still be the much more valuable option? This seems like too simple of an answer, which is why I'm hoping someone can fact check me :)

Badass by 41

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Re: Stock Options/Restricted Stock grant
« Reply #1 on: October 10, 2018, 06:22:46 AM »
Having had both stock options and RSUs as part of my compensation for years, I don’t think you are missing anything. Restricted Stock Units are a much simpler equity vehicle than options. Your strike price is the price at vest, you can choose to defer taxes until your eventual sale, or you can pay taxes at 25% “Net of Sale” when they vest. The stock is yours outright at that point, and if you hold them for a year, you will pay long term capital gains on the sale.

Options on the other hand have a strike price set when they are granted to you, and while an 83b protects you from having to exercise them immediately, I believe you are still liable for taxes based on the initial strike price when you eventually exercise. At that point, if you hold them for a year, you will pay long term capital gains on the sale.

So for options, it works generally like this.

    (Vest Date Stock Value - Grant Date Strike Value) * Capital Gains Rate

For RSUs, it generally works like this.

    Vest Date Stock Value * Capital Gains Rate

FWIW, my experience is RSUs are “easier”.
« Last Edit: October 10, 2018, 06:25:36 AM by Badass by 41 »

COEE

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Re: Stock Options/Restricted Stock grant
« Reply #2 on: October 10, 2018, 06:43:19 AM »
Also consider your taxes - which would be key in this decision for me.

  • RSU's will be taxed as income when they vest at the current share price - you must pay taxes regardless if you sell any or not.
  • Options are not taxed until you exercise your options (share price - exercise price).  So you have more control over your tax bill.
  • In both cases you will pay tax on the [presumed] gains when you go to sell.  Short-term gains (<1 year) at your regular rate and long-term (>1 year) at a reduced rate.

I would also consider the size of the company.  But you have given us little to go on here.  Is it a small business?  A mega-corp where taking 1% in RSU's will generate a gigantic tax bill?  Will you have difficulty selling your stock if it is a privately held company?

It's important to remember that stock values can and do go to $0.00.  Even large companies.

Obviously, I'd consult a tax adviser before making any decisions.

COEE

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Re: Stock Options/Restricted Stock grant
« Reply #3 on: October 10, 2018, 06:53:02 AM »
[Re: RSU's] you can choose to defer taxes until your eventual sale, or you can pay taxes at 25% “Net of Sale” when they vest.

My understanding of 83b is that you can pay taxes when the RSU's restricted stocks are granted or when they are vested, but not defer them to when you sell.  Can you provide more information on deferring these taxes?  My understanding of 83b is also that if you pay taxes when they are granted then you also start you capital gains timeline when they are granted.  I'm not sure what happens then if you leave before all of the RSU's restricted stocks are vested.

OP - Again - consult a tax adviser.

[edit]
The 83b rule applies to 'restricted stock' not 'restricted stock units'

This is a decent description in the difference between RS's and RSU's:
https://blog.visor.com/equity/tax-guide-to-restricted-stock-and-restricted-stock-units-rsu/
[/edit]
« Last Edit: October 10, 2018, 06:39:26 PM by COEE »

Car Jack

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Re: Stock Options/Restricted Stock grant
« Reply #4 on: October 10, 2018, 11:28:57 AM »
If you leave the company with unvested RSUs or options, you lose them.


Badass by 41

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Re: Stock Options/Restricted Stock grant
« Reply #5 on: October 10, 2018, 12:15:02 PM »
Here's my understanding (not trying to be pedantic, just trying to be clear, educate other readers, and learn where my understanding might be wrong)...

Restricted Stock Units (RSU): Have a grant date of the equity approval by the board.  They vest on a schedule, typically a 1 year "cliff", then on a periodic basis thereafter (annually, quarterly, monthly, etc.) When an RSU grant vests, you are effectively "gifted/given the shares as compensation" in that year.  At the time the grant is released to you, you "may" have options related to tax handling.  In my case, I have 2 options, "none", and "net of sale".  "None", means that I am not paying taxes at the time of vest, but am taking personal responsibility for 100% of taxes owed in that year (often requiring/resulting in quarterly estimated tax payments). "Net of sale" tax handling means that at the time of vest, a portion of the shares will be sold immediate (25% in my case) as an estimated tax payment.  Regardless of initial tax handling, once the RSUs vest, the shares are yours and considered stock purchased at the current market price at vest.  This is now your basis for future sales, and can be treated as normal stock with regards to taxes and other asset handling.

Incentive Stock Options (ISO): Have a grant date, and a strike price of the equity approval by the board. They vest on a schedule, typically a 1 year "cliff", then on a periodic basis thereafter (annually, quarterly, monthly, etc.) When an Option grant vests, you are now given the chance to "exercise" your "option to buy shares". Your chance to exercise has an expiration date (10 years in my case) and is often not required to be immediate in the year of the vest. When exercising options, you must buy the shares at the Stike Price value, so you must have cash available to complete the transaction.  This triggers a taxable event in the year you exercise, and your liability will be based on the Market Price of your shares.  Filing an 83b changes your tax liability to be based on the Strike Price of your shares, usually a significantly lower price than market price at time of sale.

Here's an example for both types.

TL;DR
1200 Shares, $1 Strike, $10 Short Term Price, $15 Long Term Price

- RSU Same-Day-Sale is $9,000, taxed on $12,000 basis (Garanteed)
- RSU Long Term Sale is $13,275, taxed on $12,000 basis (Speculative)
- ISO Same-Day-Sale is $7,800, taxed on $12,000 basis (Garanteed)
- ISO Long Term Sale is $14,100, taxed on $18,000 basis (Speculative)
- 83b ISO Same-Day-Sale is $10,500, taxed on $1,200 basis (Garanteed)
- 83b ISO Long Term Sale is $17,880, taxed on $1,200 basis (Speculative)

DETAILS

Grant Information
Code: [Select]
01/01/2010 Grant Date
4,800 Grant Shares
4 years Grant Vest
1 year Vest Cliff
1 Month Vest Frequency
48 Vest Periods

Restricted Stock Units (RSU)
Initial Grant Vest (Cliff)
Code: [Select]
12 Vest Periods
1200 Shares at Vest
$     0.00 Cost
$    10.00 Price at Vest
$12,000.00 Value at Vest
$12,000.00 Basis (Value at Vest)
$ 3,000.00 Taxes on Vest (Basis * 25% = Taxes at Vest)
300 Shares for Taxes
900 Remaining Shares

Scenario #1: Same Day Sale at Vest (Short Term Capital Gains)
Code: [Select]
900 Shares at Sale
$    10.00 Price at Sale (Same as Price at Vest)
$ 9,000.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$ 9,000.00 Net Profit on Sale (Gross Profit - Taxes at Vest = Net Profit)

Scenario #2: Short Term Capital Gains (<12 months)
Code: [Select]
900 Shares at Sale
$    15.00 Price at Sale
$13,500.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$12,000.00 Basis at Sale (Same as Value at Vest)
$ 1,500.00 Taxed Gross Profit (Gross Profit - Basis = Taxed Gross Profit)
$   375.00 Taxes on Sale (Taxed Gross Profit * 25% = Taxes at Sale)
$13,125.00 Net Profit at Sale (Gross Profit - Taxes on Sale = Net Profit)
$ 3,375.00 Total Taxes Paid (Taxes at Vest + Taxes on Sale = Taxes Paid)

Scenario #3: Long Term Capital Gains (>12 months))
Code: [Select]
900 Shares at Sale
$    15.00 Price at Sale
$13,500.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$12,000.00 Basis at Sale (Same as Value at Vest)
$ 1,500.00 Taxed Gross Profit (Gross Profit - Basis = Taxed Gross Profit)
$   225.00 Taxes on Sale (Taxed Gross Profit * 15% = Taxes at Sale)
$13,275.00 Net Profit at Sale (Gross Profit - Taxes on Sale = Net Profit)
$ 3,225.00 Total Taxes Paid (Taxes at Vest + Taxes on Sale = Taxes Paid)


Incentive Stock Options (ISO)
Initial Grant Vest(Cliff)
Code: [Select]
12 Vest Periods
1200 Shares at Vest
$     1.00 Strike Price
$ 1,200.00 Value at Grant

WITHOUT 83b
Scenario #1: Same Day Sale at Vest (Short Term Capital Gains)
Code: [Select]
1200 Shares at Sale
$     1.00 Strike Price
$    10.00 Price at Sale (Same as Price at Vest)
$ 1,200.00 Cost of Shares (Shares at Sale * Strike Price) [b]<- This is a WASH and not Taxed[/b]
$10,800.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$12,000.00 Basis at Sale
$ 3,000.00 Taxes at Sale (Basis at Sale * 25% = Taxes at Sale)
$ 7,800.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)

Scenario #2: Short Term Capital Gains (<12 months)
Exercise
Code: [Select]
1200 Shares at Sale
$     1.00 Strike Price
$ 1,200.00 Cost of Shares (Shares at Sale * Strike Price)

Short Term Sale
Code: [Select]
$    15.00 Price at Sale (Same as Price at Vest)
$16,800.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$18,000.00 Basis at Sale
$ 4,500.00 Taxes at Sale (Basis at Sale * 25% = Taxes at Sale)
$12,300.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)

Scenario #3: Long Term Capital Gains (>12 months))
Exercise
Code: [Select]
1200 Shares at Sale
$     1.00 Strike Price
$ 1,200.00 Cost of Shares at Exercise (Shares at Sale * Strike Price)

Long Term Sale
Code: [Select]
$    15.00 Price at Sale (Same as Price at Vest)
$16,800.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$18,000.00 Basis at Sale
$ 2,700.00 Taxes at Sale (Basis at Sale * 15% = Taxes at Sale)
$14,100.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)

WITH 83b
Scenario #1: Same Day Sale at Vest (Short Term Capital Gains)
Code: [Select]
1200 Shares at Sale
$     1.00 Strike Price
$    10.00 Price at Sale (Same as Price at Vest)
$ 1,200.00 Cost of Shares (Shares at Sale * Strike Price) [b]<- This is a WASH and not Taxed[/b]
$10,800.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$ 1,200.00 Basis at Sale
$   300.00 Taxes at Sale (Basis at Sale * 25% = Taxes at Sale)
$10,500.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)

Scenario #2: Short Term Capital Gains (<12 months)
Exercise
Code: [Select]
1200 Shares at Sale
$     1.00 Strike Price
$ 1,200.00 Cost of Shares at Exercise (Shares at Sale * Strike Price)

Short Term Sale
Code: [Select]
$    15.00 Price at Sale (Same as Price at Vest)
$18,000.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$ 1,200.00 Basis at Sale
$   300.00 Taxes at Sale (Basis at Sale * 25% = Taxes at Sale)
$17,700.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)

Scenario #3: Long Term Capital Gains (>12 months))
Exercise
Code: [Select]
1200 Shares at Sale
$     1.00 Strike Price
$ 1,200.00 Cost of Shares (Shares at Sale * Strike Price)

Long Term Sale
Code: [Select]
$    15.00 Price at Sale (Same as Price at Vest)
$18,000.00 Gross Profit on Sale (Shares at Sale * Price at Sale = Gross Profit)
$ 1,200.00 Basis at Sale
$   180.00 Taxes at Sale (Basis at Sale * 15% = Taxes at Sale)
$17,880.00 Net Profit on Sale (Gross Profit - Taxes at Sale = Net Profit)
« Last Edit: October 10, 2018, 12:22:31 PM by Badass by 41 »

COEE

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Re: Stock Options/Restricted Stock grant
« Reply #6 on: October 11, 2018, 06:28:06 AM »
@Badass by 41  I think you may be missing the big picture in all of this.  I'm having a bit of difficulty following your examples.  I just wanted to give my perspective on the big picture.  Perhaps I have something wrong as well, and I welcome adult conversation to help iron it out if I'm wrong about something.

Disclaimer:  This is NOT tax advise.  I am not your tax adviser nor am I a tax adviser.  Consult a licensed tax adviser in your state(s) before putting any plans to action.

Ignoring 83b to start:
If your RSU's vest or you exercise your (already vested) options, you pay Uncle Sam the taxes on the entire net profit to you during that tax year at your marginal tax rate.  If the RSU's are $10k, then you pay tax on $10k.  Similarly, if your options are worth $10k, but you have to pay $1k then you are taxed on $9k.  You've already paid taxes on the $1k - since you got it from some other source, but the $9k is seen as new compensation, and you must pay taxes on it.  You do not get to defer taxes at any time.

If you have the option to have your company holdback 25% of your shares - they are essentially selling 25% of your shares and giving it to Uncle Sam as part of your tax bill so that you don't have to pay huge taxes on it come April 15th.  It's also important to make the distinction that you may be in a higher tax bracket than 25% and may actually owe more in taxes than your company held back.  Any gains made after paying your taxes on the original amount is then taxed at either your marginal tax rate or 15% (usually) depending on if you have held the stock shorter than or longer than 12 months, respectively. 

Example 1: You get $10k in RSU's and you elect to have your company hold back 25% of your shares.  They will then keep $2.5k and send it to Uncle Sam on your behalf.  You are in the 22% tax bracket though, so Uncle Sam gives you back $300 the following April.

Example 2: You exercised options that netted you $10k.  You are in a 32% tax bracket.  You will owe Uncle Sam an additional $3200 the following April.  You may need to pay quarterly estimates to avoid penalties.

Finally, if I understand 83b correctly, it allows you to pay the income taxes on unvested stock (regardless if you've received them as a stock grant or purchased stock options) prior to vesting so that when vested any growth is treated as capital gains and not income (hopefully resulting in a lower tax bill).

Example 3: You exercised options after starting a new job with a startup and declare is as 83b income.  They offered you $1k worth of options at the current market valuation (i.e. No discounts).  You therefore paid $1k at the time you started with the new company to exercise your options.  You owe $0 in taxes that year because you already had paid taxes on the $1k due to it coming from another source of income.  After 1 year your shares vest and you sell your shares which are now worth $11k.  You then only have to pay 15% of the $10k in LTCG taxes.  Your total tax bill is $1500.

Example 4: You start a new job with the same company in Example 3, but you decide not to exercise your options until they vest.  1 year later the options vest and the stock is worth $11k.  You buy your options for $1k, netting you an income of $10k.  You are in a 32% tax bracket so you are taxed $3200. You must wait 12 additional months before selling for a profit at the LTCG rate.
« Last Edit: October 11, 2018, 06:36:13 AM by COEE »

singpolyma

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Re: Stock Options/Restricted Stock grant
« Reply #7 on: October 11, 2018, 06:45:05 AM »
Important question I haven't seen asked yet: is this a public company? If so, then to really compare you'd need to know the option strike price, but as you say the RSUs hold some value even if the stock dips below the strike.

If a private company, always take options to avoid taxation on what will likely end up being worthless paper.

The Bearded Bank Builder

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Re: Stock Options/Restricted Stock grant
« Reply #8 on: October 11, 2018, 06:01:57 PM »
Thanks all for your responses. A couple of other notes/clarification:

1) The restricted stock would be a "Restricted Stock Award", and my purchase price would be $0. So these are not RSU's.

2) This is a private company, worth around $6mil.

3) This is a very fast growing company, and has grown by 50-100% each year in its first 5 years (obviously there's no guarantee that will continue, but working in the accounting department, all signs point to continued success.)

COEE

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Re: Stock Options/Restricted Stock grant
« Reply #9 on: October 12, 2018, 12:20:08 PM »
Thanks all for your responses. A couple of other notes/clarification:

1) The restricted stock would be a "Restricted Stock Award", and my purchase price would be $0. So these are not RSU's.

2) This is a private company, worth around $6mil.

3) This is a very fast growing company, and has grown by 50-100% each year in its first 5 years (obviously there's no guarantee that will continue, but working in the accounting department, all signs point to continued success.)

Honestly - for me, this decision would have little to do with finances.  This company is too young and too volatile to put any additional money into at this point.  You've already bet your career on it.  There are people on this forum and bogleheads with net worth's greater six million.  $6M can disappear in just a few short months at a business.

There is no way in hell I'd take the restricted stock of a private company and 83b it.  1% of $6M = $60k * 22% = $13,200 minimum in taxes on a stock that is incredibly risky to say the least.  The stock would also be incredibly difficult to sell if you wanted or needed to.  No thanks.

Story time:
I hired on with a small business with a similar growth rate.  Two years later numbers were not nearly as good, but still growing.  VC's were not satisfied, and decided to sell off the IP and assets.  Everyone lost their job in the process.  The one person that did exercise their options before SHTF reported to have received nothing in return because he didn't have preferred stock.  The moral of the story?  You have enough risk in your job AND you're at the mercy of other's decisions.  Why in the hell would you want to take on any additional risk at substantial cost to you?

I'd graciously take the stock options.  Chances are they won't be worth the paper they are printed on.  If the shares do end up being worth something and you can sell them, great!  You've got a little extra cash in your pocket and enough to pay your taxes at the same time!  WooHoo!  If not, you haven't spent a penny and your life moves on.

Another lesson learned:  I would also purchase some (~10%) of the options after they vested.  They are required (by the SEC?) to give more information to stock holders than employees.  This also shows a bit of good will towards the company and management as well.