April 5, 2022
The best equity plans for workers, contractors, and advisors.
I often joke, "Founders don’t let founders choose company stock options."
Many people don’t realize how many types of equity there are to choose from, and stock options carry such significant downsides that I had to start a company to make better stock units that are widely and readily available.
The most successful companies: Tesla, Google, Amazon, Meta (previously known as Facebook), and more startups are no longer using company stock options.
Instead, more and more companies are skipping stock options and going straight to double-trigger restricted stock units (RSUs). In fact, at least 75% of top tech companies are RSU-centric.
Restricted stock units (RSUs) represent a contractual promise, from a company to a worker, to offer company stock if and when the company reaches a liquidity event or a specific time or performance milestone. RSUs, in general, have vesting requirements known as triggers. An RSU grant can have a single- or double-trigger vesting model.
For single-trigger RSU, the vesting requirement can either be a time or performance goal. Single-trigger RSU grants are typically issued to employees of publicly held companies.
For private firms or startups, they don't offer single-trigger RSUs very often. If they did, the workers would have to pay the tax when they vest but may not be able to afford the tax due as they can't sell some shares to cover the tax liability.
As for double trigger or “pre-IPO” RSUs, they are more beneficial and attractive to company owners of private businesses. Double-trigger RSUs as employee compensation can only be exercised by a recipient when the RSU grants fully vest.
For double-trigger RSUs of private companies, the first trigger is usually time-based. The worker receives a pre-agreed number of RSUs that vest either monthly, quarterly, or yearly, depending on the schedule for vesting. The second trigger is typically a liquidity event, such as an acquisition or IPO. Only when both triggers of the RSUs are met will the shares be issued to the worker and have an impact on the company’s cap table.
What makes double-trigger or pre-IPO RSUs stand out is that workers do not have to pay tax when they are “promised.” They fully vest when a time/performance goal has been met and the company reaches a landmark event, which can be any of the following:
Only when there is cash to pay the income tax are the RSUs converted into actual stock.
There are many reasons why more startups and private ventures are choosing to grant RSUs, particularly double-trigger RSU, over other forms of equity compensation.
Some valuations of equity grants as employee compensation are tricky. With double-trigger RSUs, you can use the simplest calculation. Multiply the total number of granted RSUs by the fair market value for the stock. Here’s the formula: Current Value of Awarded RSUs = Restricted Stock Units x Stock Price
Single-trigger restricted stock units have no value until the vesting requirement is met. For double-trigger RSUs, the vesting schedule and performance milestones are to be achieved before they are assigned their value.
Given these factors, these kinds of restricted shares are definitely an attractive component of compensation packages from the perspective of the company. Additionally, unlike stock options used to reward employees, workers are not obligated to shell out their own money upfront in order to purchase shares at a future date.
There’s a reason that the letter ‘R’ in RSUs means ‘restricted.’ Whenever double-trigger RSUs are awarded to an employee, they are restricted and come with vesting schedules. This means the employee must meet the specific criteria for the restrictions or limitations to be lifted. The value of the shares can be claimed upon meeting the set criteria or graded vesting schedule.
When the double-trigger RSUs are exercised, this is considered as a taxable event and the tax treatment is more favorable. Recipients will owe federal income tax based on the total value of the shares on the vesting date. Tax is similar to ordinary income taxes instead of an employee having to pay capital gains tax when shares vest.
This means the RSUs are subject to Social Security and Medicare wages (just like any typical income). Withholding taxes may also be done by the company or employer and the remaining vested RSUs may be paid by the cash equivalent.
There are not too many downsides to receiving double-trigger RSUs but depending on your goals, here are some items to consider:
Double trigger RSUs typically don’t provide voting rights to recipients. This means until the company shares vest, recipients have no say with respect to small or large changes to corporate policy which are to take place. This is usually a benefit for most company owners because it costs less to administer and comes with less risk. This could be important for some workers although in most situations workers are mostly concerned with receiving their fair share if the upside.
Restricted shares don’t have any real value if they haven’t vested yet. As such, generally no dividends are paid in relation to the company shares.
Still, there are some companies that do provide employees with a right to dividend equivalents and often can do this by using escrow accounts. The dividend equivalents can later be utilized in offsetting tax liabilities. This is something that can be negotiated between the employer and the employee.
Double-trigger RSUs are most suitable for early- to late-stage privately owned companies as a way to incentivize employees, especially in today’s ultra-competitive job market. Companies such as Facebook (now called Meta) used double-trigger RSUs before they went public.
SIngle-trigger RSUs, on the other hand, are more beneficial to publicly held companies, most especially in comparison to stock options, which can go “underwater” like what happened with Google stock options in the 4th quarter of 2008.
That being said, here are some interesting facts about these successful publicly traded companies and their equity grant in the form of RSUs:
Before going public, Facebook (Meta) offered employees RSUs with double trigger vesting. This is mainly to address their recruitment and retention concerns, as well as the financial reporting issues presented by regulations of the Securities and Exchange Commission (SEC). Facebook also used double-trigger RSUs as they don’t acquire a tax liability until specific vesting requirements are met.
Reuters reports that Facebook offers executives up to 100,000 restricted shares. The graded vesting schedule for company employees vary.
In an SEC filing last February of 2022, it showed the single-trigger RSU vesting schedule of one of Meta's key employees is 1/12th of the total RSUs granted in the 1st quarter, followed with 1/16th of total shares vesting quarterly and the final vesting of 2/48ths of the shares (subject to continued service with each grant).
Tesla uses single-trigger RSUs as part of its equity compensation program. Offering RSUs is the company’s way of providing long-term incentives to its employees and help them meet their financial goals, particularly Tesla’s executive officers. Instead of cash payment, Tesla RSUs are paid out through actual shares of Tesla’s common stock upon the completion of the RSUs’ vesting schedule and/or performance milestones.
As it’s a public company, Tesla granted single-trigger RSUs to named executive officers, which vest over a period of several years or upon the achievement of specified performance milestones.
The RSUs are subject to the condition of continued employment in Tesla. The company believes that RSUs as equity awards closely aligns its interests of executive officers with the company stockholders.
The company's headcount has grown by 40 percent during 2021. Starting from 70,757 employees in Q4 of 2020 to more than 99,000 in the fourth quarter of 2021. Based on a report from the official website of Tesla, every employee is presented with the option to obtain RSUs.
At Tesla, there are some RSU awards which are subject to a 4-year vesting schedule. The initial grant of 25% vests during the first year while the remaining vests in equal portions in the succeeding years (25% annually or 6.25% quarterly).
Another well-known company that uses single-trigger RSUs is Google. The company also used double-trigger RSUs before going public. They have generous equity compensation packages to bring in-demand employees on board.
Googlers (Google employees) like calling Google RSUs awarded to them as GSUs. GSUs are Google RSUs granted as an incentive for building company value.
GSUs consist of certificates that entitle recipients to a share of the common stock of Alphabet Inc. once they vest. One Google RSU equals a single share of Google’s stock.
The value of one GSU is equal to the value of a single share of the value of Google stock. Google RSUs are released in chunks over a predetermined schedule for vesting during the course of a Googler’s employment.
Google RSUs or GSUs vest according to the vesting schedule that’s set forth in “GSU Details” in the RSU agreement. In general, GSUs offered to employees start vesting one year after they’re granted. They usually vest once each year for a total of 4 years (employees receive a quarter of the grant each year until all RSUs have fully vested).
Amazon RSUs are granted to Amazon employees as part of their compensation package. Like most RSUs, instead of receiving the shares or units all at once, Amazon RSUs vest over time.
In 2022, the majority of the company’s employees were qualified for RSU awards. However, there were specific exceptions. Those who work less than thirty hours every week, for instance, are considered ineligible to receive RSU grants. Other employees at certain job levels were also not deemed eligible for Amazon RSUs. Amazon extends the benefit for those who don’t fall into the aforementioned categories.
Amazon RSUs’ vesting schedule is backend-loaded and has a 1-year cliff. After 1 year, 5% of the RSU grants are received by employees, and another 15% vests by the end of the 2nd year. The remaining will vest 20% every 6 months for 2 years.
The number of Amazon RSUs granted per employee varies. The number, however, is often based on a target compensation level for each employee’s level and position.
This is partially because of the desire of Amazon to align key employees’ interests with the interests of the entire company. From letting workers own a portion of the corporation (without any voting rights), Amazon hopes to motivate them in prioritizing its success.
Stock options used to be a popular form of employee equity compensation. However, it is only valuable if the current company stock price is much higher than the grant price. There’s also capital gains tax unlike how restricted stock units work; RSUs only incur income tax when the shares vest. This is why stock option is no longer the preferred form of employee equity.
Instead, everyone's made the shift to single-trigger RSUs (in the case of public companies) and double-trigger or pre-IPO restricted stock unit for privately owned companies.
This is what Bill Gates had to say about using RSU at Microsoft:
When you win [with RSUs], you win the lottery. And when you don’t win, you still want it. The fact is that the variation in the value of an option is just too significant. I can imagine an employee going home at night and considering two wildly different possibilities with his compensation program. Either he can buy six summer homes or no summer homes. Either he can send his kids to college 50 times or no times. The variation is enormous; much more significant than most employees have an appetite for. And so as soon as they saw that options at the grant date could go both ways, we proposed an economic equivalent. So what we do now is give the company’s shares, not options.- Bill Gates
Upstock can help your company make the transition to double-trigger RSUs. Pre-IPO grants are taking off, and the most competitive private companies are using them!
Learn more about double-trigger “pre-IPO” RSUs.
Upstock combines RSUs, performance equity, and a visual dashboard to make teams more aligned. With UpStock’s dashboards, you can easily visualize how your equity grows in real-time and know that your efforts count.
There are no initial legal costs for the business owner or team members, and you are given a full set of legal documents created by the best legal minds in the world. To learn more, visit upstock.io or contact our team!
Disclaimer: Note that Upstock does not provide tax advice and assumes no liability if you rely on it. Upstock recommends that you seek your independent tax or financial advisor for more information about how double-trigger RSUs as a stock plan will affect your tax liability and tax return reporting.