Upstock: A Game-Changer in Liquidity Challenges

Casey Fenton


As companies look for ways to incentivize and retain top talent, equity compensation has become an increasingly popular tool. However, traditional equity compensation, such as stock options and restricted stock awards (RSAs), presents significant liquidity issues for employees. 

Upstock's RSU (restricted stock unit) is a game-changer in addressing these liquidity problems. In this article, we'll explore what RSUs are, the liquidity setbacks encountered with stock options and RSAs, and how RSUs solve these issues in equity compensation. We'll also look at SEC guidelines for dealing with RSU liquidity events, the role of monetary policy in these events, and how the stock market impacts liquidity outcomes.

What are RSUs?

A restricted stock unit (RSU) is a form of equity compensation in which an employee receives a unit that represents a share of company stock. Unlike stock options or RSAs, RSUs do not provide the employee with ownership of the underlying stock until the unit has been vested. Vesting is typically tied to a specific time or performance criteria. Once the unit has vested, the employee can receive the underlying stock, sell it, or continue to hold it.

Liquidity Issues with Stock Options and RSAs

Stock options and RSAs have been popular forms of equity compensation for many years. However, they present significant concerns for employees. 

Stock options give employees the right to purchase company stock at a set price, known as the strike price. Still, employees must exercise their options and pay the strike price before they can sell the underlying stock. This can be a significant financial burden for employees, particularly if the strike price is high or if they are unable to sell the underlying stock for a higher price than the strike price.

RSA awards, on the other hand, provide employees with actual stock ownership. However, these awards typically come with restrictions on the employee's ability to sell the stock. This means that employees may not have access to the value of their equity compensation until the restrictions expire or the stock price reaches a certain level.

Regulatory changes and market disruptions can also impact the liquidity of stock options and RSAs. For example, changes in tax laws or accounting regulations can make it more expensive or difficult for firms to issue equity compensation, leading to fewer grants and potentially lower fluidity for existing awards. 

In addition, market disruptions such as recessions or stock market crashes can lead to declines in stock prices, making it more difficult for employees to realize the value of their equity compensation. The COVID-19 crisis, for instance, has brought about unprecedented market volatility, with the stock market experiencing historic drops and recoveries. This has created significant uncertainty and risk for employees holding stock options or RSAs, as they may be hesitant to exercise or sell their awards in such a turbulent market.

Furthermore, changes in market conditions or company performance can impact the value of equity compensation awards, which can in turn affect fluidity. For instance, if a company's stock price drops significantly, the value of employees' equity compensation awards may also decrease, making it less attractive for them to exercise or sell. This can create a negative cycle, as lower fluidity can further depress the stock price, leading to even lower values for equity compensation awards. On the other hand, if a company performs well and its stock price rises, employees may have a greater incentive to exercise or sell their awards, which can increase fluidity.

Indeed, regulatory changes and market disruptions can have a significant impact on the fluidity of stock options and RSAs, highlighting the importance of understanding the risks and taking steps to mitigate them. 

Upstock and Liquidity Challenges in Equity Compensation

RSUs are a game-changer in addressing liquidity concerns in equity compensation by offering greater flexibility and fluidity than other forms of equity compensation.

With RSUs, the employee does not have to pay for the underlying stock or be subject to restrictions on selling the stock, making it easier to access the value of the equity compensation. This can be particularly valuable for employees who may not have the funds available to exercise their stock options or purchase the underlying stock for their RSAs.

To summarize how RSUs respond to liquidity issues common in other types of equity compensation, here’s a list of ways they do it:

1. No exercise price

With RSUs, there is no exercise price that the employee must pay to purchase the underlying shares, as is the case with stock options. This means that employees are not required to have cash on hand to exercise their RSUs, which can be challenging for employees who may not have the financial means to do so.

2. No forfeiture risk

RSUs have no forfeiture risk, unlike RSAs, where the shares may be forfeited if certain conditions are not met. This means that employees can be confident that they will receive the value of their equity compensation once the RSUs have vested.

3. Cash settlement

RSUs typically settle in cash, rather than in shares of stock. This means that employees receive the full value of their equity compensation in cash, which can be helpful for employees who may not want to hold onto company stock for various reasons, such as risk or diversification.

4. Greater liquidity

Compared to stock options and RSAs, RSUs may provide employees with greater liquidity, as they typically vest over a shorter period of time and can be sold on the private market through platforms such as Upstock. This can be especially valuable for employees who may need cash for personal reasons or who want to diversify their portfolios.

Securities and Exchange Commission Guidelines for RSU Liquidity Events

The Securities and Exchange Commission (SEC) is a government agency responsible for regulating securities, including futures, stocks, bonds, and other financial instruments. It provides guidelines for firms and employees on dealing with liquidity events related to RSUs. 

One of the most important guidelines is that organizations must provide employees with timely and accurate information about the vesting and settlement of RSUs. This includes information about the number of units that have vested, the fair market value of the underlying stock, and any tax implications of the event.

The SEC plays a crucial role in ensuring that firms and employees comply with securities laws and regulations. It oversees the stock market and other financial markets to ensure that they are operating fairly and transparently. The SEC also plays a role in responding to market disruptions, such as the pandemic, which can impact the liquidity of stocks and other securities.

Firms that offer RSUs as part of their equity compensation packages must comply with SEC regulations and guidelines to ensure that their employees can receive accurate and timely information about the vesting and settlement of RSUs. Failure to comply with SEC regulations results in penalties and legal consequences for firms.

Overall, the SEC plays a vital role in regulating securities and financial markets, including the stock market. It provides guidelines for companies and employees on dealing with liquidity events related to RSUs and ensures that businesses comply with securities laws and regulations to protect investors and promote transparency in financial markets.

Moreover, the Securities and Exchange Commission (SEC) also requires firms to provide regular updates on the status of the RSUs and any changes to the terms of the RSUs.

The Role of Monetary Policy 

Monetary policies can also play a role in liquidity events related to RSUs. The Federal Reserve, or Fed, can influence fluidity by adjusting interest rates and the money supply. Lower interest rates and increased money supply can make it easier for firms to issue equity and for investors to purchase shares, increasing fluidity in the market. However, too much of it can lead to inflation, while too little can lead to a recession.

In addition to the Securities and Exchange Commission (SEC) guidelines, there are also monetary policies in place to address the liquidity of RSUs. When a large number of RSUs are delivered at once, it can put pressure on the market and impact the stock's price and instability. To address this, firms and investors may implement strategies to improve fluidity, such as buying or selling additional shares, offering buybacks, or using other financial instruments such as futures, options, or bonds. The Fed Reserve may also adjust its monetary policies to address fluidity issues in the market.

How the Stock Market Impacts Liquidity Outcomes

The stock market can have a significant impact on liquidity outcomes for employers and their employees who hold equity compensation, including RSUs. Here are some ways in which the stock market can affect outcomes:

1. Market volatility

Market volatility or instability refers to the degree of fluctuation in stock prices over a given period of time. High instability can be caused by a variety of factors, including economic events, political uncertainty, and changes in investor sentiment. Instability can be a challenge for employees with RSUs, as it can make it difficult to predict the value of their shares. High instability can also make it more difficult for firms to attract investors, as they may be seen as riskier investments. Firms may implement policies to reduce instability, such as diversifying their portfolio, hedging against risk, or adjusting their business model.

2. Stock price

The stock price of a company is determined by the market demand for its shares. A high stock price can be a positive indicator of company performance and may increase demand for shares, leading to higher fluidity. Conversely, a low stock price may indicate poor company performance or a lack of investor confidence, leading to lower fluidity. Companies may implement measures to improve their stock price, such as investing in research and development, expanding into new markets, or improving their marketing strategy.

3. Market conditions

It’s a fact that the overall market conditions can have a significant impact on fluidity outcomes for RSUs. In a bull market, where stock prices are generally rising, there may be more demand for shares, leading to higher fluidity. Conversely, in a bear market, where stock prices are generally falling, there may be less demand for shares. Other economic factors, such as interest rates and inflation, can also impact market conditions and liquidity outcomes.

4. Trading volume

Trading volume, which refers to the number of shares of a particular company that are being bought and sold on the stock market, is a critical factor in determining market liquidity. High trading volume is often seen as a positive indicator of market liquidity, as it suggests that there are many traders actively participating in the market, and there is a higher likelihood of buying and selling at a fair price. On the other hand, low trading volume can make it more difficult for investors, including traders, to buy and sell shares, leading to lower fluidity.

In light of this, firms may implement rules to increase trading volume, such as announcing new product releases, increasing dividend payouts, or improving their financial reporting. These can help attract traders to the market, which can in turn increase trading volume and enhance market liquidity. Additionally, traders themselves can play a crucial role in providing liquidity to the market by continuously buying and selling shares, which creates a more active and fluid market environment.

However, it is important to note that excessive trading volume, often driven by speculative trading activity, can also lead to market volatility and disrupt market liquidity. As a result, traders and regulators alike must work together to ensure that trading volume is maintained at a healthy and sustainable level, promoting liquidity and stability in the stock market.

5. Company performance

The performance of a company can have a significant impact on liquidity outcomes for RSUs. If a company is performing well and is seen as a good investment, there may be more demand for shares, leading to higher fluidity. Conversely, if a company is performing poorly and is seen as a risky investment, there may be less demand for shares, leading to lower fluidity. Startups and firms may implement measures to improve their performance, such as hiring top talent, improving their supply chain, or developing new product lines.

In addition, the performance of individual firms and the broader economy can impact liquidity outcomes. Startups and firms that perform well are more likely to have a higher stock price, which can provide greater fluidity for employees with RSUs. On the other hand, firms that are struggling may have a lower stock price, reducing fluidity for employees with RSUs. Economic conditions, such as recessions or periods of low growth, can also impact fluidity by reducing investor demand for stocks.

The pandemic has highlighted the importance of fluidity in equity compensation, as many employees have not been able to exercise their stock options or sell their RSAs due to market volatility and uncertainty. This has made RSUs and other forms of equity compensation that provide greater fluidity and flexibility more attractive to employees and firms alike.

The Future of Equity Compensation: Upstock's RSU

Upstock's RSU is a significant step forward in addressing fluidity concerns in equity compensation. By providing employees with greater fluidity and eliminating the need to pay for the underlying stock or be subject to restrictions on selling the stock, RSUs offer a more flexible and attractive form of equity compensation. As more organizations adopt RSUs as a form of equity compensation, it is likely that other firms will follow suit, creating a shift in the overall equity compensation landscape.

In addition, the continued development of technology and the expansion of online trading platforms have made it easier for employees to access the stock market and sell their RSUs. This increased accessibility and capacity to trade can further improve liquidity outcomes for employees with RSUs.

Choose the Flexible and Simplified RSU Plans 

Upstock's RSU is a game-changer in addressing fluidity concerns in equity compensation. By offering greater flexibility and fluidity than traditional forms of equities, RSUs provide employees with a more attractive and accessible form of compensation. 

Meanwhile, the Securities and Exchange Commission (SEC) guidelines and monetary policies play important roles in liquidity events related to these RSUs, while the stock market and broader economic conditions can impact liquidity outcomes. As RSUs become more widely adopted, the future of equity compensation is likely to shift towards greater fluidity and flexibility.

That said, it’s easy to see why RSUs have become a popular alternative for employees who don’t wish to deal with the complex liquidity challenges of stock options and RSAs. So if you find this article useful and are now looking for an equity compensation instrument that's less risky and more liquid, Upstock’s RSUs may be the way to go. And don't worry, our platform is simplified and secured, and we won't ask you to download any cookies!

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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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