One of the most powerful benefits of working at a startup is the ability to build wealth through restricted stock units. Because most startups can’t afford to pay employees market rates, they have to find other ways to incentivize those employees to stick around. One way is by issuing the employees RSUs, or restricted stock units.
What is a Restricted Stock Unit?
A restricted stock unit is a way for an employer to grant shares in the company to its employees as additional compensation or incentives for performance.
The company doesn’t have to be a startup. For example, in large, publicly-traded companies, it is customary for employees who have reached a certain level, for example, Director, to be issued RSUs as additional compensation.
Is an RSU the same as an option?
Restricted Stock Units are typically granted to employees. Meaning, the employee does not have to pay for the shares.
When an employee is granted options they have the…option…to decide whether or not they will purchase the number of shares they have been granted.
For example, if you are granted 100 RSUs of your company’s stock and each share is valued at $10 then, at the current valuation, you were granted $1,000 in shares.
With options you might be granted the option to buy 100 shares. The employee then has to decide if they want to purchase the shares at the strike price, which is a price that is set based on the value of the shares at the time they are granted. Sometimes that grant comes at a discount. WIth an option the employee usually has a set amount of time to decide if they will exercise the option. If they don’t, no money trades hands. If they do, generally when the value of the shares has grown and the shares are worth more than the cost of their strike price, the transaction is executed.
The pros of RSUs
Many an early-stage startup employee has become a millionaire off of RSUs that they were granted for joining a startup in its early days.
Companies such as Microsoft, PayPal, and others are known for “minting” thousands of new millionaires when they went public and their employees that had RSUs sold their shares.
Restricted Stock Units also work well for companies as a way to incentivize employees to stick around. Some companies issue RSUs every year. So, the longer an employee sticks around the more shares they earn.
The cons of RSUs
They are called Restricted Stock Units for a reason. RSUs generally have restrictions put on them. For example, the shares may need to vest over time. Meaning, the employee may be granted them but may not truly own the shares until they have been around for a certain period of time. This is how company’s use RSUs to get employees to stick around.
Those restrictions could also include rules about when an employee can sell their shares and when they cannot. For example, an employee may not be able to share their shares until a year after an IPO.
The key to RSUs is understanding their value and the restrictions associated with them.
Many a startup has failed, leaving employees holding worthless RSUs that they had hoped would help them build wealth or at least offset taking a reduced salary.
If you are offered RSUs be sure to ask for the legal agreement to review. It could even make sense to have an experienced attorney read the agreement so that you understand the restrictions you are agreeing to.
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