RSU Failures: Lessons to Learn‍

Casey Fenton

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December 7, 2023

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In 2019, WeWork made headlines, but not for the reasons any company would desire. Once a unicorn startup with a valuation of nearly $47 billion, WeWork's value plummeted to a fraction of that amount, as it faced a botched IPO and a slew of leadership controversies. While most of the limelight focused on the company's eccentric CEO and poor governance, an often-overlooked chapter of the WeWork saga is its mismanagement of employee equity, including Restricted Stock Units (RSUs). Employees who had counted on their RSUs for future financial stability found themselves holding near-worthless assets, adding another layer of tragedy to the corporate downfall.

This debacle at WeWork serves as a cautionary tale that should resonate with every startup founder, business leader, and decision-maker. Missteps in designing, issuing, and managing RSUs can not only jeopardize your employees' financial well-being but also have severe implications for your company's health and reputation. In this article, you’ll learn the common failures surrounding RSUs—examining what can go wrong, why it happens, and most importantly, how you can prevent these mistakes from occurring in your own enterprise.

Common Causes of Failures in RSU Design

Getting the design of your Restricted Stock Units (RSU) plan right is foundational. The architecture of your RSU program sets the stage for everything that follows—from how it’s received by your employees to how it drives performance within your organization. But even before the first RSU vests, problems in design can set you on a trajectory toward headaches, inefficiencies, and even legal woes. Here are some of these pitfalls:

1. Lack of Alignment with Business Goals

RSUs are more than just an employee perk; they're a strategic instrument. Make sure your RSU plan aligns with your broader business objectives. Are you aiming for quick growth or stable, long-term development? The design of your RSU plan should reflect these ambitions.

2. Over-reliance on Industry Norms

It's easy to look at what other companies in your industry are doing and think, "That'll work for us too." But remember, every company is unique. Blindly adopting industry norms can lead to an RSU plan that's a poor fit for your specific needs and challenges.

3. Inadequate Consideration of Company Culture

Company culture plays a big role in how employees view RSUs. If your company values transparency and equality, an RSU plan that heavily favors upper management can send conflicting messages, causing dissatisfaction and decreased productivity among your workforce.

4. Not Accounting for Liquidity Events

What happens to RSUs in case of an IPO, acquisition, or even bankruptcy? Failing to plan for these liquidity events can result in both legal and financial messes that could have been avoided with a well-thought-out RSU design.

5. One-Size-Fits-All Approach

While simplicity has its merits, an RSU plan shouldn't be so simplistic that it fails to consider the diverse roles and contributions of your employees. For instance, should a senior engineer with critical skills have the same vesting schedule as someone in a role that's easier to fill? This requires careful thought.

Mistakes in Issuing RSUs to Workers

The design of your RSU plan may be flawless, but errors in the issuance process can cause just as much damage. Issuing RSUs is a multi-step procedure that involves both internal coordination and external compliance. At this critical junction, mistakes can cost you not only financially but also in terms of employee trust and regulatory goodwill. Let's discuss some of the most common mistakes made during RSU issuance.

1. Lack of Proper Documentation

Documentation is the backbone of any legal process, and issuing RSUs is no exception. The absence of appropriate agreements or even clerical errors in paperwork can lead to disputes and complications down the line. Always double-check and consult legal experts when finalizing documentation.

2. Poor Timing of Issuance

The timing of when you issue RSUs can have significant implications. Issuing RSUs just before a predictable positive event (like a funding round or product launch) can lead to accusations of unfair advantage or even insider trading. Carefully plan the timing in consultation with your legal and financial advisors.

3. Ignoring Eligibility Criteria

RSUs should not be distributed like holiday bonuses. It's essential to define strict eligibility criteria, which could range from tenure and job role to performance metrics. Issuing RSUs without a structured eligibility plan can result in dissatisfaction among team members and can devalue the equity offering.

4. Omission of Vesting Schedules in Communication

The vesting schedule—an essential component of an RSU plan—should be clearly communicated at the time of issuance. Any ambiguity or omission here can lead to misunderstandings and employee dissatisfaction later on.

5. Failure to Comply with Regulatory Requirements

Compliance is non-negotiable. Whether it's federal regulations or state-specific labor laws, failure to adhere to these can result in heavy fines and legal consequences. Make sure you consult legal professionals familiar with stock option laws to ensure full compliance.

6. Lack of a Plan for Future Issuances

While your immediate focus might be on the first issuance, don't ignore future issuances. Will there be dilution? How will you handle new hires or promotions? Failure to plan for these scenarios can result in inconsistencies and inefficiencies in future RSU issuances.

Pitfalls in Managing RSU Compensation

Once your RSU plan is designed and the shares are issued, you might think the hard part is over. However, this is when the ongoing responsibilities of managing your RSU program come into play. Mismanagement at this stage can erode employee trust, spark legal complications, and even undermine your company's financial health. Here's what to watch out for when managing RSU compensation.

1. Inconsistent Record-Keeping

In a dynamic environment where employees may come and go, and where the company itself might go through significant events like funding rounds, acquisitions, or even going public, keeping track of all RSUs is essential. Inconsistent or erroneous record-keeping can lead to miscalculations that cause disputes and can be legally damaging.

2. Inadequate Communication with Employees

An RSU program will only be effective if employees understand it. Confusion about vesting schedules, selling procedures, or taxation can lead to frustration and poor financial planning on the part of your employees. Regular, clear, and transparent communication is crucial.

3. Failure to Coordinate with Finance and Legal Teams

Managing RSUs is a cross-departmental effort. Your HR team should work in tandem with finance to ensure that the accounting is in order, and with the legal team to make sure that all compliance measures are met. Silos are your enemy when managing complex equity plans.

4. Ignoring Tax Obligations

Both the company and the employees have tax obligations that stem from RSUs. Employees need to know when and how they will be taxed upon vesting, and companies need to manage their reporting and withholding requirements. Failure to do so can lead to serious penalties from tax authorities.

5. Lack of Robust Equity Management Software

In today's tech-driven world, manual methods of tracking and managing RSUs are a recipe for disaster. A robust equity management software can provide real-time data, automate compliance checks, and offer employees a self-service portal to monitor their holdings.

6. No Contingency Plan for Corporate Events

Whether it's a merger, acquisition, or significant internal reorganization, corporate events can affect your RSU plan dramatically. The lack of a contingency plan can lead to hurried, poorly thought-out decisions that may hurt both the company and its employees.

Tips to Avoid RSU Failures

While there's no one-size-fits-all answer, the following tips offer a roadmap to mitigate the risks and improve the effectiveness of your RSU program.

✔ Align RSUs with Business Objectives

To counter the lack of alignment with business goals, ensure that your RSU design is a mirror reflection of your corporate strategy. Involve key stakeholders from various departments, including finance, strategy, and HR, to make sure the RSU plan complements the company's long-term objectives.

✔ Personalize Your RSU Program

Rather than over-relying on industry norms, conduct an internal assessment to determine what type of RSU program fits your company best. Customizing your RSU plan according to your company's unique requirements will make it more effective and engaging for your employees.

✔ Prioritize Transparency and Communication

Inadequate communication can create misunderstandings and dissatisfaction. Combat this by holding informational sessions and providing detailed literature about how the RSU program works, its benefits, and its potential drawbacks. Make use of user-friendly equity management software that employees can access to keep track of their RSUs.

✔ Involve Legal and Financial Advisors from Day One

To avoid mistakes in documentation and to ensure compliance with regulations, involve legal and financial advisors from the outset. These experts can guide you through the complexities of RSU issuance, including timing, documentation, and regulatory compliance.

✔ Implement Robust Record-Keeping Systems and Utilize Technology

Address inconsistent record-keeping by implementing robust equity management software that can track vesting schedules, employee departures, and corporate events. Beyond mere record-keeping, modern equity management platforms offer a multitude of features to make your life easier. 

These platforms can automate much of the laborious work involved in managing RSUs, from regulatory compliance to real-time reporting. They also often offer a self-service portal for employees, empowering them to monitor their equity stake without having to go through HR or finance departments. Leveraging compensation software ensures a central source of truth that is accessible to both management and employees, streamlining the entire RSU management process.

✔ Plan for All Scenarios

Prepare for liquidity events or other corporate happenings by having contingency plans in place. These plans should detail how RSUs will be managed and adjusted in various scenarios like mergers, acquisitions, or public offerings. Keep these updated and ensure they are communicated to employees to minimize confusion during these critical times.

✔ Educate Employees on Tax Implications

To make sure both the company and employees fulfill their tax obligations, provide tax education sessions and bring in external tax advisors if necessary. Offering a comprehensive guide on the tax implications of RSUs will help employees make more informed financial decisions.

Solutions to RSU Failures Inspired by High-Profile Companies

Learning from others' mistakes is wise, but learning from their successes can be equally enlightening. Several high-profile companies have effectively managed RSU programs, incorporating unique solutions to the challenges that many companies face. Let's explore some of these innovative approaches to give you inspiration for your RSU program.

Apple's Employee Education Programs

Apple, known for its robust equity grants, offers comprehensive employee education around RSUs. The company has created internal platforms where employees can learn about the financial and tax implications of their grants, thus mitigating the common issue of inadequate communication and misunderstandings around tax obligations.

Google's Flexible Vesting Schedules

To tackle the one-size-fits-all vesting schedule problem, Google offers flexible vesting schedules that are aligned with both the company's and the individual's performance metrics. This dynamic approach minimizes the chances of employees feeling shortchanged and promotes a culture of meritocracy.

Amazon’s Periodic Re-Evaluation

Amazon periodically reviews its RSU program to ensure alignment with the company's fast-paced growth and market conditions. This is an excellent practice to adapt to external changes and internal shifts in strategy, offering a solution to the problem of static, outdated RSU plans.

Salesforce’s Transparent Equity Dashboard

Salesforce uses a state-of-the-art equity management platform that allows employees to see their vested and unvested RSUs, their value in real time, and projections for the future. This level of transparency addresses the common pitfalls related to poor record-keeping and communication.

Microsoft's Integration of Legal and Financial Teams

Microsoft adopts an integrated approach involving cross-functional teams from legal, finance, and HR departments. This ensures a seamless flow of information and collaboration, thus avoiding silos that could potentially harm the RSU management process.

Taking a page from these companies' books helps you think outside the box and adapt successful strategies to your organization's specific needs. Whether it's employee education, flexible vesting schedules, regular re-evaluations, use of advanced technology, or inter-departmental collaboration, these high-profile solutions offer a blueprint for successfully managing your RSU program.

Corporate Best Practices to Minimize Mistakes in RSUs

While it's tempting to rely on creativity and innovation when dealing with RSUs, some best practices have stood the test of time and should be considered non-negotiable. Here's a closer look at corporate best practices that can guide you through the minefield of RSU management.

1. Regular Internal Audits

An audit isn't just something you do to satisfy regulators. By performing regular internal audits, you can identify any gaps or inconsistencies in your RSU program. This is especially crucial for avoiding legal complications and ensuring that all issued RSUs are accounted for correctly.

2. Clarity in Legal Documentation

Always ensure that all RSU-related agreements and paperwork are crystal clear. Ambiguities can lead to misunderstandings and legal disputes. Review these documents regularly, especially during significant corporate events like mergers, acquisitions, or IPOs, to ensure they are up-to-date.

3. Offer Multiple Training Resources

Whether it's webinars, workshops, or written guides, offer your employees multiple ways to learn about their RSUs. Different people have different learning styles, and offering varied educational resources ensures that your employees thoroughly understand their equity compensation.

4. Implement a Feedback Loop

Engage in regular conversations with employees to gauge their understanding and satisfaction with the RSU program. Use anonymous surveys or suggestion boxes to collect honest feedback and make continuous improvements.

5. Involve Employees in Equity Discussions

Rather than keeping equity conversations at the executive level, involve employees in discussions about RSU designs or program changes. This level of engagement fosters a culture of ownership and alignment with company goals.

6. Hire or Consult with Experts

When in doubt, consult with legal and financial experts who specialize in equity compensation. Their insights can help you avoid pitfalls and maximize the benefits of your RSU program.

7. Utilize Specialized Software for Equity Management

In the digital age, relying on spreadsheets and manual calculations can be a grave mistake. Specialized equity management software allows for precise record-keeping, and automatic compliance checks, and gives employees an interface to manage and understand their equity holdings better. 

For instance, Upstock’s RSU management platform not only ensures streamlined onboarding but also inspires employees through its motivational dashboard that goes well with its dynamic equity visuals.

8. Continuously Update Policies

Corporate governance around RSUs shouldn't be static. Regularly update your policies to align with legislative changes, market conditions, and company objectives.

Adhering to these best practices, you'll not only minimize the risk of making mistakes but also maximize the effectiveness of your RSU program. Take these principles to heart; they serve as a safety net that can catch you when the innovative strategies you employ come with unexpected complications.

Avoid Costly and Damaging Equity Mistakes

Issuing RSUs is not just a matter of throwing around a few shares here and there. It's a comprehensive, nuanced strategy that involves multiple departments and layers of complexity. As you design, issue, and manage your RSU plans, remember that the devil is often in the details. Be vigilant, be informed, and most importantly, be proactive in avoiding the common pitfalls that have led others to failure. By learning from the mistakes and successes of others, you can set the stage for a robust, effective RSU strategy that rewards your team and fuels your company's growth.

If you wish to bypass these pitfalls and create a more robust RSU compensation model that your employees truly deserve, book a demo with Upstock today and see the difference.

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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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