Author Topic: Options vs RSUs  (Read 7013 times)

uwp

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Options vs RSUs
« on: December 08, 2016, 12:52:24 PM »
Hi all, I was looking for some advice on ways to think about choosing between stock options and restricted stock units(RSU), in the context of planning a mustachian lifestyle.  By which I mean, we won't be working there for a decade.

I know for the most part the answer may depend on a lot of specific factors, ie. how close we are to FI, if the company is stable, etc.  But I was mostly looking for something of a sounding board if others have thought through these same questions, and what led them to the choices they made.

The current company is publicly traded, and gives you the option to choose between taking 1x RSUs or 3x options (or a combination).  Both vest over a period of years and are non-qualified.

I understand that choosing RSUs is probably the safest bet, you'll at least get something each vesting period, while options have the high risk/high reward aspect.

Right now I lean toward just splitting the difference.  We don't NEED the money, so we think of it as a bonus that we can let ride with options, but the company has also had a pretty good run the last year or two, so I would be kicking myself if we went all options and end up vesting under the grant price and worthless.  What always gets me questioning my choice is the knowledge that if we roll the dice on the options and the stock doubles, we might be set to retire much earlier than planned.

Interest Compound

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Re: Options vs RSUs
« Reply #1 on: December 08, 2016, 01:06:22 PM »
The company is literally offering you two choices:
  • We can give you a raise.
  • We can give you a raise, but you must use that raise to gamble on the future stock price of this company.
Would you gamble on the future stock price of this company otherwise? Would you gamble on the future stock price of any company otherwise? Have you already determined stock options (which can be bought anytime, against any public company) don't have a place in your portfolio? Can you state the reasons you're an index investor (you ARE an index investor right??)?

RSUs all the way.

tonysemail

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Re: Options vs RSUs
« Reply #2 on: December 08, 2016, 02:01:19 PM »
yes, it's a gamble.  i think you just choose the one that feels right to you.

some minor differences to note-
- options can have an expiration date, whereas RSUs do not.
As you said, you won't be there for a decade ;)

- RSUs get taxed when they vest and you can't control the timing.
if your income is volatile, then options can be used to smooth that out.

uwp

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Re: Options vs RSUs
« Reply #3 on: December 08, 2016, 03:02:43 PM »
The company is literally offering you two choices:
  • We can give you a raise.
  • We can give you a raise, but you must use that raise to gamble on the future stock price of this company.
Would you gamble on the future stock price of this company otherwise? Would you gamble on the future stock price of any company otherwise? Have you already determined stock options (which can be bought anytime, against any public company) don't have a place in your portfolio? Can you state the reasons you're an index investor (you ARE an index investor right??)?

RSUs all the way.

I have also looked at the current market for options, while it isn't a perfect comparison (public options expire in 2 years, while the ones from work expire much later), the market seems to value the option at around 20% of the current stock price, which also points toward RSUs.

bacchi

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Re: Options vs RSUs
« Reply #4 on: December 08, 2016, 03:12:22 PM »
I have also looked at the current market for options, while it isn't a perfect comparison (public options expire in 2 years, while the ones from work expire much later), the market seems to value the option at around 20% of the current stock price, which also points toward RSUs.

Work options may have a limited lifespan if you quit or get laid off. I.e., you have 3 months after terminating employment to exercise your options. RSUs are yours when they vest.

Options do have one advantage, and that's tax treatment. You could file an 83(b) to start the clock on long term gains even before the options vest.

MrSpendy

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Re: Options vs RSUs
« Reply #5 on: December 08, 2016, 03:16:43 PM »
can you go into further detail on the terms of the RSU's and options?





FINate

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Re: Options vs RSUs
« Reply #6 on: December 08, 2016, 03:19:02 PM »
IMO the magnitude of the risk/reward tradeoff depends on the lifecycle stage of the company and the segment it occupies. If we're talking about a rapidly growing company in a market segment that is also newish and growing, and you think the company has a reasonably good chance of grabbing a larger slice of a growing pie then I would go with the options. You don't need the money, so I think it's worth the risk in this case. On the other hand, if it's a more mature company and/or in a mature segment unlikely to grow much relative to current size then I would go with RSUs.

Interest Compound

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Re: Options vs RSUs
« Reply #7 on: December 08, 2016, 04:48:05 PM »
I don't understand why this is even a consideration. If your boss walked in and handed you a bonus of $10,000 cash, right now, would you ever under any circumstances use that money to gamble against the future stock price of any company?

Go on, imagine the boss taking one of these off the stack, and handing it to you.



I've never once heard someone say "Yes!" to this question.

Yet when presented with an option between $10,000 in RSUs (the equivalent of a $10,000 cash bonus), vs. stock options, people actually have to think about this?

[rant]
I've read the studies. I understand the psychology. If you know how to frame the presentation, it's easy to push people towards making decisions they wouldn't otherwise make...I'm just shocked that more people don't see through these type of BS schemes that seem tailor-made to allow companies to avoid actually paying out employee bonuses (the vast majority of stock options expire worthless).
[/rant]
« Last Edit: December 08, 2016, 04:54:20 PM by Interest Compound »

uwp

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Re: Options vs RSUs
« Reply #8 on: December 08, 2016, 05:00:29 PM »
I don't understand why this is even a consideration. If your boss walked in and handed you a bonus of $10,000 cash, right now, would you ever under any circumstances use that money to gamble against the future stock price of any company?

I've never once heard someone say "Yes!" to this question.

Yet when presented with an option between $10,000 in RSUs (the equivalent of a $10,000 cash bonus), vs. stock options, people actually have to think about this?

[rant]
I've read the studies. I understand the psychology. If you know how to frame the presentation, it's easy to push people towards making decisions they wouldn't otherwise make...I'm just shocked that more people don't see through these type of BS schemes that seem tailor-made to allow companies to avoid actually paying out employee bonuses (the vast majority of stock options expire worthless).
[/rant]

And what if your boss said, "I will give you a $1,000 bonus at the end of the year, or, you can choose to bet on the company and if we have a great year, I will give you $10,000, and 0 if it is a bad year."

The reason it's appealing is that you get more options than RSUs.


Interest Compound

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Re: Options vs RSUs
« Reply #9 on: December 08, 2016, 05:03:11 PM »
I don't understand why this is even a consideration. If your boss walked in and handed you a bonus of $10,000 cash, right now, would you ever under any circumstances use that money to gamble against the future stock price of any company?

I've never once heard someone say "Yes!" to this question.

Yet when presented with an option between $10,000 in RSUs (the equivalent of a $10,000 cash bonus), vs. stock options, people actually have to think about this?

[rant]
I've read the studies. I understand the psychology. If you know how to frame the presentation, it's easy to push people towards making decisions they wouldn't otherwise make...I'm just shocked that more people don't see through these type of BS schemes that seem tailor-made to allow companies to avoid actually paying out employee bonuses (the vast majority of stock options expire worthless).
[/rant]

And what if your boss said, "I will give you a $1,000 bonus at the end of the year, or, you can choose to bet on the company and if we have a great year, I will give you $10,000, and 0 if it is a bad year."

The reason it's appealing is that you get more options than RSUs.

Just like every other stock option against every other company, that's bought/sold millions of times a day...Yet they choose not to participate. Is it that people think they're being offered something special? Are people just uninformed?

FINate

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Re: Options vs RSUs
« Reply #10 on: December 08, 2016, 06:32:00 PM »
You can purchase options on the open market but AFAIK you can't buy options that expire in 10 years. Also, an RSU is essentially the same as holding stock, which you can also purchase on the open market.

I've never had the option of choosing between the two, but I can say that I'm largely FIRE today because of my employee stock option grants whereas the RSUs were just a bit of gravy on top. Here in the Silicon Valley it's not the case that "vast majority of stock options expire worthless" - they are what most people want because of the potential upside, even post-IPO. Options amplify the upside but of course they are riskier because they may expire worthless, though this is unlikely given the lengthy expiry.

If you're joining General Mills of Ford or GE or $OLD_STODGY_CORP then of course go with the RSUs. If on the other hand you're joining high growth company with lots of up side potential why not take the extra risk?

I guess if you want to get very technical about it you could try to compare the value of the options (how to value 10 year options?) to the value of the RSUs.

chasesfish

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Re: Options vs RSUs
« Reply #11 on: December 08, 2016, 07:56:29 PM »
RSUs...

I joined a boring bank in 2003.  My retention bonus was "Options".   Lots and lots of shares.

People after me got RSUs, 1/3 of the number of options that I got.  They realized those were a better retention tool than options on a stock that doesn't appreciate

I cashed out $2,000 after 10 years, people around me who came after were enjoying their new car.    I now get RSUs from the same company.

Interest Compound

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Re: Options vs RSUs
« Reply #12 on: December 08, 2016, 11:23:04 PM »
You can purchase options on the open market but AFAIK you can't buy options that expire in 10 years. Also, an RSU is essentially the same as holding stock, which you can also purchase on the open market.

Yes. It's free stock. Stock that can be immediately exchanged for it's equivalent value in cash. The equivalent of a cash bonus. Even better, you can invest that cash with the rest of your portfolio, and capture market growth + dividends during the time you'd otherwise have money stuck in the option, hoping it will be worth something someday.

Here in the Silicon Valley it's not the case that "vast majority of stock options expire worthless"

Source? Everything I've ever read everywhere says the vast majority of startups fail.



Do you have a source that states to the contrary? A source that specifically states that not only do the vast majority (I'd settle for a simple majority) of startups do not fail, but that a majority actually have such explosive growth that their stock options aren't worthless for the employee?

Note, in order for you to make money from an employee stock option you need:
  • The company to still be around.
  • The company to perform well enough for the option to be worth something.
  • The terms need to be favorable to you - you don't lose them all if you leave the company while the options are worthless, but before they've expired (typically 10 years).
And this is before doing any calculation regarding how well the company needs to perform, for the option to be worth something. The math typically looks something like this (NQSO is the stock option, he can choose between 4x options, or 1x RSUs):



Source: https://www.bogleheads.org/forum/viewtopic.php?t=141126#p2092359

In this example, with conditions more favorable than uwp is calculating here, even if the company grows 11.85% a year, he is still better off with the RSUs.

FINate

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Re: Options vs RSUs
« Reply #13 on: December 09, 2016, 01:09:12 AM »
Here in the Silicon Valley it's not the case that "vast majority of stock options expire worthless"

Source? Everything I've ever read everywhere says the vast majority of startups fail.

Yep, most startups fail. I assume that's common knowledge, no infographic needed. But who said anything about startups? You do realize there are many companies in SV that are not startups, right?

Since you brought up the topic, startups are an entirely different ballgame. Extremely high risk, high reward. You don't jump to a startup, usually with a salary cut and much less job security, with the hope of someday achieving an average return. No, you make the jump because you believe in the company and its potential success so if given the choice you take the slightly larger risk (options) for much higher potential upside if things do work out. If you don't believe in a startup enough to risk options over RSUs then you should get outta there ASAP.

Quote
In this example, with conditions more favorable than uwp is calculating here, even if the company grows 11.85% a year, he is still better off with the RSUs.

Which is why I say it really depends on the company and sector. A growing company in an expanding sector can easily exceed 11.85%/year. It all comes down to what uwp thinks the potential upside is, especially since this is money that he doesn't really need and can therefore afford a bit more risk. As most companies/sectors don't fit this profile most people will be better off with RSUs. Yet there are exceptions to this so I'm uncomfortable with blanket statements like "RSUs all the way."
« Last Edit: December 09, 2016, 01:16:53 AM by FINate »

cerat0n1a

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Re: Options vs RSUs
« Reply #14 on: December 09, 2016, 03:32:05 AM »
Would you gamble on the future stock price of this company otherwise? Would you gamble on the future stock price of any company otherwise? Have you already determined stock options (which can be bought anytime, against any public company) don't have a place in your portfolio? Can you state the reasons you're an index investor (you ARE an index investor right??)?

RSUs all the way.

I joined a tech start up as a junior engineer in the late nineties. I'd be around US$5 million better off if I'd taken the options and kept them until this year. I always took the view that I'd never spend my own money on buying them, but with the benefit of hindsight...

I know many people at *large* tech companies who've made big money from their options, not just start-ups. It really depends on the deal being offered and your view on the future stock price of the company.

MrSpendy

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Re: Options vs RSUs
« Reply #15 on: December 09, 2016, 05:40:06 AM »
Are the terms of all RSU's and options generally the same across companies?

If not, how can we make a decision without more details such as duration of options, moneyness, dividend on the stock, vesting schedules, etc?

Interest Compound

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Re: Options vs RSUs
« Reply #16 on: December 09, 2016, 08:11:59 AM »
Here in the Silicon Valley it's not the case that "vast majority of stock options expire worthless"

Source?

Interest Compound

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Re: Options vs RSUs
« Reply #17 on: December 09, 2016, 08:33:43 AM »
Would you gamble on the future stock price of this company otherwise? Would you gamble on the future stock price of any company otherwise? Have you already determined stock options (which can be bought anytime, against any public company) don't have a place in your portfolio? Can you state the reasons you're an index investor (you ARE an index investor right??)?

RSUs all the way.

I joined a tech start up as a junior engineer in the late nineties. I'd be around US$5 million better off if I'd taken the options and kept them until this year. I always took the view that I'd never spend my own money on buying them, but with the benefit of hindsight...

I know many people at *large* tech companies who've made big money from their options, not just start-ups. It really depends on the deal being offered and your view on the future stock price of the company.

Yes. If you both kept them til this year (didn't exercise early), and didn't lose them from leaving the company while they were still underwater...etc. I'd guess lots of people exercised those options when they were worth "only" $100,000 or so.

But if we have the benefit of hindsight, that $5 million is small potatoes. You left $1 billion on the table when you skipped on buying Tesla stock options a few years ago!

Scandium

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Re: Options vs RSUs
« Reply #18 on: December 09, 2016, 08:40:12 AM »
If we're talking about a rapidly growing company in a market segment that is also newish and growing, and you think the company has a reasonably good chance of grabbing a larger slice of a growing pie then I would go with the options.

You make it sound so easy.. How in the world would anyone have a chance of predicting any of this??

You'd have to correctly:
- identify this industry growing above the market in the future
- growth won't fizzle in a few years
- other industry/technology won't supplant it
- your employer won't be overtaken
- regulation/policy don't suddenly kill the market
etcetc

I'd say the odds of getting this right are practically zero. You can gamble on it sure, but pretending it's based on any sort of rational analysis is delusional.

FINate

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Re: Options vs RSUs
« Reply #19 on: December 09, 2016, 09:14:44 AM »
Here in the Silicon Valley it's not the case that "vast majority of stock options expire worthless"

Source?

You made the original claim. What's your source that "the vast majority of stock options expire worthless" - and I'll note that we're talking specifically about employee stock options here.

FINate

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Re: Options vs RSUs
« Reply #20 on: December 09, 2016, 09:27:55 AM »
If we're talking about a rapidly growing company in a market segment that is also newish and growing, and you think the company has a reasonably good chance of grabbing a larger slice of a growing pie then I would go with the options.

You make it sound so easy.. How in the world would anyone have a chance of predicting any of this??

You'd have to correctly:
- identify this industry growing above the market in the future
- growth won't fizzle in a few years
- other industry/technology won't supplant it
- your employer won't be overtaken
- regulation/policy don't suddenly kill the market
etcetc

I'd say the odds of getting this right are practically zero. You can gamble on it sure, but pretending it's based on any sort of rational analysis is delusional.

It's absolutely a gamble, I never claimed otherwise, hence the talk about risks and rewards. But that doesn't mean you can't make reasonable judgments. Let's take Cisco Systems as an example. Great company, pays well, know many people who work(ed) there. But its now a large company and its business is largely commoditized. I would take RSUs at Cisco, hands down. On the other hand, I know of several late-stage startups in my area (business is well defined, they have stable revenue and customer base, several rounds of funding, 50 or so employees, etc.) - for any of these I would go for options. Yes, they could end up being worth nothing, but the potential upside IMO outweighs the risk.

Scandium

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Re: Options vs RSUs
« Reply #21 on: December 09, 2016, 10:11:11 AM »
the potential upside IMO outweighs the risk.

In the same way putting $1,000 on red 17 on the roulette wheel is worth the risk? Potential upside outweigh the risk right? Guess we just have different opinions in which gambles are worth it.

Felicity

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Re: Options vs RSUs
« Reply #22 on: December 09, 2016, 11:57:25 AM »
Way back when, my husband was presented with this choice, though there was an addition of a third choice - 1/2 stock options and 1/2 RSUs. We mistakenly thought the redemption price on the stock options was the price when he started working, not the current price. At the time, the face value of the stock options and RSUs were the same, using this false redemption price. We ended up doing 1/2 and 1/2 and regretting it! He works for a tech giant and the choice is very clear for us - RSUs all the way.

Are the terms of all RSU's and options generally the same across companies?

If not, how can we make a decision without more details such as duration of options, moneyness, dividend on the stock, vesting schedules, etc?

I would be willing to bet not - definitely agree more information is needed for a more clear cut choice. How long until FIRE (if applicable) being a big one, in addition to the financial details.

This is a case where the vast majority of time, RSUs are the right choice - Just like it's almost always a good idea to put money into your 401k. Sometimes, though, the terms of the 401k are so awful that it makes more sense to not max out the 401k and stick with mostly taxable accounts.

the potential upside IMO outweighs the risk.

In the same way putting $1,000 on red 17 on the roulette wheel is worth the risk? Potential upside outweigh the risk right? Guess we just have different opinions in which gambles are worth it.

Without knowing details, you can't draw a direct gambling comparison. Plus, the house always wins at a casino, which is not really equivalent to the stock market.

In an incredibly hypothetical example: Say the value of the RSUs would be $1,000, and the stock option choice has the following outcomes:
1% chance of making $1,000,000
99% chance of not making anything (essentially losing $1,000)

Is it a gamble? Yes. Is it a gamble you should take? According to the math, yes. The expected value is $1,000,000 * 0.01 + $0 * 0.99 = $10,000 vs. $1,000 for the RSUs

This is obviously an incredibly simplified and hypothetical example. Plus, you would never know in real life the actual outcomes and probabilities. You could guestimate probabilities based on outcomes from other, similar companies, but we all know past success does not equate to future gains. Thus, yes, still a gamble, 100%, but unlike roulette, the expected value is not going to be inherently biased against you.

In some cases, the actual probabilities might be more like
25% chance of making $2000
25% chance of making $1000
25% chance of making $500
25% chance of not making anything

Where the expected value would be $875 vs. the $1000 RSUs -- this is worse than roulette, by the way.

FINate

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Re: Options vs RSUs
« Reply #23 on: December 09, 2016, 12:46:10 PM »
the potential upside IMO outweighs the risk.

In the same way putting $1,000 on red 17 on the roulette wheel is worth the risk? Potential upside outweigh the risk right? Guess we just have different opinions in which gambles are worth it.

The expected payout on roulette is always < 0 because of the green '0' and '00' positions - long run average is somewhere around $0.95 on the dollar so over time you're slowly losing 5 cents at a time (most casino games are somewhere in this range). Silicon Valley, however, is filled with those who've made their fortunes in tech -  it's a positive expected payoff which is why people invest in tech in the first place. That's not to say luck isn't involved as there are no sure bets, there is a lot of uncertainty.

A high risk, high reward career is not for everyone. Those concerned with certainty of outcome should stick with big established corps - this is not meant as a slight, there's absolutely nothing wrong with the approach of going for the sure thing and aggressively saving. But if you're taking the risk of working for a startup then I don't see the point in hedging away your potential upside. There's a spectrum of risk in employers, from very early stage startups to big established players. If the idea of risking years of work with less pay for options that may not pay off is too much then you can reduce the risk by looking for later stage startups (less risk, less reward). Still too much risk, then look for a company that recently IPO'd.

Know yourself, know your company, and know your industry. Make the decision between RSUs and options based on terms given and the game you're playing.
« Last Edit: December 09, 2016, 12:58:52 PM by FINate »

Interest Compound

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Re: Options vs RSUs
« Reply #24 on: December 09, 2016, 04:37:59 PM »
Here in the Silicon Valley it's not the case that "vast majority of stock options expire worthless"

Source?

You made the original claim. What's your source that "the vast majority of stock options expire worthless" - and I'll note that we're talking specifically about employee stock options here.

I've asked twice already, and got no response. So before I continue, I'd like to confirm. You have no source for this claim?
« Last Edit: December 09, 2016, 04:40:48 PM by Interest Compound »

FINate

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Re: Options vs RSUs
« Reply #25 on: December 09, 2016, 06:08:33 PM »
Here in the Silicon Valley it's not the case that "vast majority of stock options expire worthless"

Source?

You made the original claim. What's your source that "the vast majority of stock options expire worthless" - and I'll note that we're talking specifically about employee stock options here.

I've asked twice already, and got no response. So before I continue, I'd like to confirm. You have no source for this claim?

The National Center for Employee Ownership estimates that employees covered by broad-based stock option plans receive an amount equal to between 12 and 20% of their salaries from the "spread" between what they pay for their option stock and what they sell it for.

Source: http://money.cnn.com/pf/money-essentials-employee-stock-options/

The vast majority of employee stock options aren't expiring worthless if the average employee receives a boost of 12 and 20%.

So now I've asked you twice: What's your source that the vast majority of employee stock options expire worthless? No source for your claim?

bacchi

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Re: Options vs RSUs
« Reply #26 on: December 09, 2016, 08:53:32 PM »
There's also the tax treatment, which is not negligible.

RSUs -- get $50k and you pay marginal tax on all $50k (and any short-term gains).

Options -- 83(b) and the immediate tax is $0. Wait a year, vest, and pay only LTCG.

The downside to this strategy is that you have to buy the options before they vest and can be sold*. In an early startup, that's a trivial cost (pennies to a few dollars/share). In a later stage startup or public company, the price of the shares is known, so that exercising could make total sense (pay $5 for shares worth $20).


* A relevant question: Can the RSUs and exercised options be sold immediately? Or only after you quit or wait 1/2/5 years?

The answer depends on a LOT of factors, as has been discussed. Namely, the company, industry, current economy, current salary, option price, number of shares, etc.

uwp

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Re: Options vs RSUs
« Reply #27 on: December 12, 2016, 03:29:40 PM »
Hi folks.  Sorry to be away this weekend.

I appreciate the discussion.  I knew when I started the thread that there wasn't a "right" answer.  That's why I was mostly interested in the way people were thinking about the question. 

Interest Compound

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Re: Options vs RSUs
« Reply #28 on: December 12, 2016, 05:10:55 PM »
The National Center for Employee Ownership estimates that employees covered by broad-based stock option plans receive an amount equal to between 12 and 20% of their salaries from the "spread" between what they pay for their option stock and what they sell it for.

Source: http://money.cnn.com/pf/money-essentials-employee-stock-options/

The vast majority of employee stock options aren't expiring worthless if the average employee receives a boost of 12 and 20%.

So now I've asked you twice: What's your source that the vast majority of employee stock options expire worthless? No source for your claim?

Correct no source. I asked for yours, as from what I can tell, no one keeps track of this data. All they can do is estimate based on the information we know about the type of companies that issue options. The National Center for Employee Ownership's own estimate seems off, as it only seems to account for employees who sell their options, and they'd only sell if they are profitable. Are they ignoring all the options that weren't sold?

I'd love to see some actual stats on this, but I'm afraid employers have no incentive to track and publish this information, as it will only serve to push their employees away from options, and they'll be forced to actually pay out their bonuses! Much better to instead coerce them into throwing their money at a low-probability bet, then they get to keep more ownership of their company :-P

For anyone still considering options despite the debate so far in this thread, how about this perspective. Consider you're an employer, your stock is currently sitting at $10, and you're considering your benefits for next year. What would you rather do?
  • Give your employees $1,000,000 in cash (RSUs) immediately.
  • Give your employees stock options, where if the your stock increases to $40 within 10 years (average of 15% growth a year), you give them $10,000,000 in cash. Otherwise they get nothing. If they leave the company before 10 years are up, and price is still below $40, they get nothing. If price increases to $40, and they forget (or don't know) to exercise, they get nothing. If price increases to $40, then drops back down before they exercise, they get nothing.
If, as the employer, I can get people to choose #2, I get to keep my money invested in the company. I dramatically decrease the chance I'll ever have to pay anything out, so I get to own more of my own company than I would otherwise. I give people a huge incentive to never leave. I give people an incentive to push the stock higher. And if the unlikely thing happens, and price actually hits $40, I'll be in great shape to actually make those payouts.

Long story short, don't expect the employer to give you favorable terms. They are doing the math just like you are, and they have more information than you regarding their current growth trajectory. You'd better believe they are pricing the strike price of options higher than they expect to reach. If they're offering Options vs RSUs, their number crunchers are stacking the odds against you.

And this is what you should expect. They are a business afterall...

Interest Compound

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Re: Options vs RSUs
« Reply #29 on: December 12, 2016, 05:44:48 PM »
There's also the tax treatment, which is not negligible.

RSUs -- get $50k and you pay marginal tax on all $50k (and any short-term gains).

Options -- 83(b) and the immediate tax is $0. Wait a year, vest, and pay only LTCG.

The downside to this strategy is that you have to buy the options before they vest and can be sold*. In an early startup, that's a trivial cost (pennies to a few dollars/share). In a later stage startup or public company, the price of the shares is known, so that exercising could make total sense (pay $5 for shares worth $20).


* A relevant question: Can the RSUs and exercised options be sold immediately? Or only after you quit or wait 1/2/5 years?

The answer depends on a LOT of factors, as has been discussed. Namely, the company, industry, current economy, current salary, option price, number of shares, etc.

RSUs -- get $50k and you pay marginal tax on all $50k. The same as if the company decided to give you a $50k raise.

Options -- 83(b) and the immediate tax is $0. Because your option isn't worth anything yet. Wait up to 10 years for your option to be worth something. Then front your own money to actually buy the stock, wait a year, hope price didn't crash, and pay long-term capital gains if any profit is left (cost basis is the options strike price).

$50k raise -- Pay marginal tax on all $50k. Buy a stock option against any company you wish. Set your own strike price (don't have to accept the unfavorable terms from HR). When that option increases in value, sell it. That might be tomorrow, that might be 3 years from now, that might be 5 minutes from now. Don't wait a year to receive your cash (get it immediately). Section 1256 - 60% of your gains are long-term and 40% of the gains are short-term.

$50k raise -- Pay marginal tax on all $50k. Invest in index funds with the rest of your portfolio.

Interest Compound

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Re: Options vs RSUs
« Reply #30 on: December 12, 2016, 06:09:57 PM »
Hi folks.  Sorry to be away this weekend.

I appreciate the discussion.  I knew when I started the thread that there wasn't a "right" answer.  That's why I was mostly interested in the way people were thinking about the question.

Ah, but there is a "right" answer. The same way there's a "right" answer on market timing, day trading, buying individual stocks, and yes, stock options.

An employer-sponsored "wrong" answer, is still "wrong".

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Re: Options vs RSUs
« Reply #31 on: December 13, 2016, 09:21:12 AM »
Correct no source. I asked for yours, as from what I can tell, no one keeps track of this data. All they can do is estimate based on the information we know about the type of companies that issue options. The National Center for Employee Ownership's own estimate seems off, as it only seems to account for employees who sell their options, and they'd only sell if they are profitable. Are they ignoring all the options that weren't sold?

I'd love to see some actual stats on this, but I'm afraid employers have no incentive to track and publish this information, as it will only serve to push their employees away from options, and they'll be forced to actually pay out their bonuses! Much better to instead coerce them into throwing their money at a low-probability bet, then they get to keep more ownership of their company :-P

For anyone still considering options despite the debate so far in this thread, how about this perspective. Consider you're an employer, your stock is currently sitting at $10, and you're considering your benefits for next year. What would you rather do?
  • Give your employees $1,000,000 in cash (RSUs) immediately.
  • Give your employees stock options, where if the your stock increases to $40 within 10 years (average of 15% growth a year), you give them $10,000,000 in cash. Otherwise they get nothing. If they leave the company before 10 years are up, and price is still below $40, they get nothing. If price increases to $40, and they forget (or don't know) to exercise, they get nothing. If price increases to $40, then drops back down before they exercise, they get nothing.
If, as the employer, I can get people to choose #2, I get to keep my money invested in the company. I dramatically decrease the chance I'll ever have to pay anything out, so I get to own more of my own company than I would otherwise. I give people a huge incentive to never leave. I give people an incentive to push the stock higher. And if the unlikely thing happens, and price actually hits $40, I'll be in great shape to actually make those payouts.

I provided a source for my claim which was contrary to your original claim, but in your omniscient opinion my source "seems off" yet you still have no data to back up your original claim. Instead, you support your claim with a hypothetical example (and a bad one at that, more below) that proves nothing, especially since 15% annual growth is not what one would expect from a rapidly growing company and your example does not take into account the ratio of options to RSUs on offer (employers typically offer 3-4x more options).

Redo your example for a company that doubles every year (it happens) where one can get 4x as many options as RSUs and you'll see why there is no absolute "right" answer for this question. It very much depends on the context.

Also "where if the your stock increases to $40 within 10 years (average of 15% growth a year), you give them $10,000,000 in cash. Otherwise they get nothing." <-- this is not how options typically work. The strike price is typically set at the price of the stock (or valuation if pre-IPO) at the time of grant, so any increase in the stock price, even if modest, puts the employee in the money. I've never heard of options where the stock must increase 15%/year to cross a cliff to receive a payoff - that's a terrible comp package for many reasons, which is probably why I've never seen anything like this in the wild. In short, why are you giving people opinions on things you clearly don't understand?

Long story short, don't expect the employer to give you favorable terms. They are doing the math just like you are, and they have more information than you regarding their current growth trajectory. You'd better believe they are pricing the strike price of options higher than they expect to reach. If they're offering Options vs RSUs, their number crunchers are stacking the odds against you.

And this is what you should expect. They are a business afterall...

I worked at a company that initially offered only options. The company was growing rapidly and so everyone was happy with this arrangement. As one would expect, as the company aged it stopped growing as rapidly, and the options became less lucrative and less reliable as compensation. We started losing good people to competitors, so the company stopped issuing new options and started granting RSUs instead, because these ended up being more lucrative for employees which helped with retention.

I share this story as a counterexample to your position that the employer is always out to screw you. Yes, many are and you always need to do your own math on these matters.  But there are often cases where your interests are in alignment with your employer's interests.
« Last Edit: December 13, 2016, 10:20:36 AM by FINate »

tonysemail

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Re: Options vs RSUs
« Reply #32 on: December 13, 2016, 11:51:07 AM »
Here's a good article that talks about why companies switch from options to RSUs.
From what I remember, companies preferred stock options because of accounting advantages.
When GAAP rules required that options be expensed at their true market value, then they suddenly lost favor.

My company switched away from options to RSUs around 8 years ago too.
Interestingly, director level and above are awarded both options and RSUs, whereas low level grunts are only awarded RSUs.
The options are seemingly more valuable.

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Re: Options vs RSUs
« Reply #33 on: December 13, 2016, 01:10:12 PM »
Here's a good article that talks about why companies switch from options to RSUs.
From what I remember, companies preferred stock options because of accounting advantages.
When GAAP rules required that options be expensed at their true market value, then they suddenly lost favor.

My company switched away from options to RSUs around 8 years ago too.
Interestingly, director level and above are awarded both options and RSUs, whereas low level grunts are only awarded RSUs.
The options are seemingly more valuable.

Do you know the kind of distribution they were given? Like, 50% options, 50% RSUs (just curious)? I'm wondering if it's more because the higher-ups could be seen as more directly responsible for stock increases/more motivated by stock options, whereas RSUs are more reliable compensation for lower-levels.

When my husband was given the choice of RSUs or options at work (he's not director-level, btw), the # of RSUs were 1/4 the # of options (e.g. you can have X options or X/4 RSUs). Basically, the "worth" of the RSUs relative to stock options are often taken into account, it seems.


tonysemail

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Re: Options vs RSUs
« Reply #34 on: December 13, 2016, 01:34:43 PM »
No, i don't know.  And I'll never make it to director to find out ;)
My understanding of my company comp structure is that RSUs are awarded to the tune of 10-20% of base salary.

IMO, the company benefits by giving RSUs because they deliver a target bonus with fewer shares.
The options serve as better incentives (although that's a double edged sword).

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Re: Options vs RSUs
« Reply #35 on: December 13, 2016, 04:06:05 PM »
Our company switched 3 years ago from only options to the choice between options or RSUs.  So it doesn't seem like HR is trying to "trick" us here.

Interest Compound

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Re: Options vs RSUs
« Reply #36 on: December 13, 2016, 08:49:20 PM »
Our company switched 3 years ago from only options to the choice between options or RSUs.  So it doesn't seem like HR is trying to "trick" us here.

Great news! Perhaps enough people complained about the worthless options (pun intended) :-P

gimp

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Re: Options vs RSUs
« Reply #37 on: December 14, 2016, 09:59:31 PM »
Unless the options are ridiculously under the value of the price, and you have good reasons to be certain that will continue to be the case - take the stock grant.

I mean, 99.95% of the time, take the stock grant.

Now, if you work for Blue Chip Company and as part of your executive compensation they're offering you 100x $10 options on $100 stock or 10x $100 stock grants, sure, take the options. But if you're an executive and you're working for a blue chip company, hire an accountant to figure it out for you.