Restricted Stock Units – Equity Compensation at Private Firms

Private companies often find it difficult to attract and retain key employees. Part of the issue is large, multinational corporations offering more attractive compensation packages which often include various forms of equity compensation such as stock options. While equity in a private company can’t be traded on a public exchange, there are several methods private companies can implement to provide equity compensation to employees. We have created blog series examining the most popular forms of equity compensation – First up we’ll talk about Restricted Stock Units (RSUs) and then we’ll move on to:

Let’s first look at Restricted Stock Units (RSUs)

Let’s consider Jill, who becomes an employee of XYZ Company in June 2018 and is awarded 1,000 RSUs, which are put on a 5-year vesting schedule with yearly cliffs. Jill isn’t required to pay any money to acquire the RSUs.

On her one-year work anniversary, 200 of Jill’s RSUs vest. Jill exchanges the 200 RSUs for 200 actual shares of stock. On her two-year work anniversary, another 200 RSUs vest, which Jill exchanges for 200 actual shares of stock. Another 200 RSUs will vest in years 3, 4 and 5 and exchanged for stock until all 1,000 RSUs are converted to 1,000 shares of stock.

How RSUs are taxed:

Let’s assume XYZ Company’s stock is valued at $30 per share when Jill’s first 200 RSUs vest in June 2019. The total value of Jill’s 200 shares of stock is therefore $6,000 ($30 per share x 200 shares). This $6,000 is added to Jill’s Form W-2 as wages, which is subject to income, Social Security and Medicare taxes.

Let’s see what Jill’s tax calculation looks during the 5-year vesting period, assuming that the price per share increases $5 each year:

2019: 200 shares @ $30 = $6,000 included in Jill’s Form W-2

2020: 200 shares @ $35 = $7,000 included in Jill’s Form W-2

2021: 200 shares @ $40 = $8,000 included in Jill’s Form W-2

2022: 200 shares @ $45 = $9,000 included in Jill’s Form W-2

2023: 200 shares @ $50 = $10,000 included in Jill’s Form W-2

Total vested shares: 1,000

Total income included in Jill’s Form W-2 over 5 years: $40,000

Sale of RSU Stock:

Continuing our example, once the RSUs are converted to stock, Jill can either sell the stock right away or hold the stock and sell it at a later date. Here are Jill’s choices for selling her stock:

Jill immediately sells her stock immediately after vesting – i.e. Jill receives stock for $30 a share and sells it for $30 a share. No gain or loss is recognized.
Jill sells her stock within one year after vesting. Jill will report any gains as ordinary income and any loss as a short-term capital loss.
Jill sells her stock more than one year after vesting. Jill will report any gains as a long-term capital gain and any loss as a long-term capital loss.

Talk to your employees

Employees are accustomed to paying taxes on traditional cash income, but may be unaware of tax implications of RSUs. It’s important for employees to understand their total compensation package so there are no surprises.

Next: Restricted Stock Awards (RSAs)

Tags:

CFO

Post by Curt Mastio
Jul 17, 2020 8:45:46 AM

Curt Mastio started Founder’s CPA in 2017 and currently serves as the Managing Partner of the firm. After obtaining both his Bachelor’s and Master’s degrees in accounting from the University of Illinois in Urbana-Champaign Curt started his career in Big Four public accounting. Shortly thereafter Curt served as the Chief Financial Officer of Storage Squad began his stint as an Adjunct Instructor at Northwestern University’s Farley Center for Entrepreneurship and has been teaching Accounting & Finance to undergraduate students for 6+ years. In his current role Curt oversees strategy, operations, and business development at Founder’s CPA. Further, Curt has experience working directly with 200+ startups and small businesses providing accounting, tax, and outsourced CFO services. His industry expertise lies in the SaaS, Blockchain, Marketplace, and Fintech industries. He has served as a key advisor working directly with startups that range from pre-revenue to companies generating over $30 million dollars a year in revenue. Lastly, he serves a key role working directly with the firm’s clients that have collectively raised over $200 million in venture capital funding to date. Curt is also an active advisor, mentor, and investor in the startup ecosystem. He has facilitated numerous workshops, webinars, and presentations to incubators and other startup-centric organizations. He is also an active mentor for Techstars in both Chicago and Iowa. Outside of his daily professional duties Curt is actively involved with Beat the Streets Chicago and was a founding member of its Young Professionals Board. His efforts in both leadership and community involvement were recognized when he was awarded the Illinois CPA Society’s Outstanding Young Professional Leadership Award in 2020. He was also a panelist at their annual conference in 2022 where he spoke about his experiences starting and operating a public accounting firm. He maintains an active Certified Public Accountant designation that he obtained in 2014. Outside of work, Curt can be found spending time with his friends & family including his dog Rufus. His hobbies include golf, boating, cooking, reading, and attending sporting events & concerts.