RSUs - Restricted Stock Units - EVALUATING A RSU OFFER AT A STARTUP

Originally published February 10, 2014. Updated March 27, 2017.

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Restricted Stock Units ("RSUs") are not stock. They are not restricted stock. They are not stock options. RSUs are a company's promise to give you shares of the company's stock or the cash value of the company's stock. These questions may help guide your evaluation of a RSU offer at a startup. There are a lot of variables with startups and RSUs, so you are welcome to contact Stock Option Counsel for professional guidance on your situation.

1. How many RSUs are in my grant? Will I be granted more RSUs yearly or after upcoming financings?

One RSU = the right to receive one share of the company's common stock at a later time, or the right to receive the cash value of one share of the company's common stock at a later time. The number of RSUs you are granted tells you how many shares of stock (or the number of shares of stock used to determine your cash payment) you will receive when they are "settled" (see #5 below).

You should also find out when and if you will receive more RSU grants. If you are evaluating a job offer, there is a big difference in the value of your offer between a company that grants you RSUs only at hire and a company that plans to make additional grants each year ("Annual Grants") or after more shares are issued in financings to make up in part for dilution ("Refresh Grants"). 

2. Of course there is no precise "value" for startup RSUs, but it makes sense to gather some relevant details to evaluate the offer. For example: What is the most recent VC price per share of preferred stock? What is the current number of fully diluted shares in the company or my percentage ownership in the company? Can you give me some guidance on the company's expected dilution, exit scenarios, exit timing and future valuation?

When evaluating the number of RSUs in your grant, consider using one of the following methods to value the grant:

A. Current Valuation Method (Fact-Based): For startup stock, you don't have access to a public market for the stock. Therefore, there is no precise method for finding today's value of your RSUs. Instead, use the price per share paid by venture capitalists for one share of preferred stock in the most recent financing. This is the closest number you can find for today's value. It tells you that X Venture Capitalist paid $Y for one share of the company's stock on Z date.

You can find this in one of three ways: (1) Ask your attorney (Stock Option Counsel = legal services available to individual employees to guide them on their negotiation and sale of startup stock) to order the certificate of incorporation from the State of Delaware and interpret it to tell you the most recent price per share paid for the company's preferred stock. (2) Ask the company the price per share paid by VCs in the most recent round of financing. (3) Ask the company for the most recent VC post-money valuation of the company and the number of shares of fully diluted capital at that round; VC post money valuation / fully diluted capital = price per share paid by VCs in the last financing. For more on this approach, see Venture Hacks' post on startup job offers.

B. Future Valuation Method (Guesstimate Based): To look forward and define a future payout for your RSUs, you have to do some guesswork. If you could guess the startup's value at exit and dilution prior to exit, you would know how much the stock will be worth when you receive it. You can make these guesses in one of three ways: (1) Ask the company to estimate different exit scenarios for you. (2) Make these guesses yourself (see John Greathouse's What the Heck Are My Startup Stock Options Worth for his guidance on how to estimate wisely). (3) Find online commentary on future value of your company, if it is close to IPO and discussed in the news. 

3. What is my vesting schedule? Will any portion of my RSUs be accelerated upon change of control?

You will most likely not earn the full number of RSUs simply by joining the company. They will "vest" over time, meaning that you will earn them over a set period of time (called the "Vesting Period"). If you leave the company before the end of the Vesting Period, you will not earn the full number of RSUs.

The most common vesting period = "Four Year Vesting With a One Year Cliff": (1) After one full year, 1/4 of the RSUs will vest. This is called a "One Year Cliff." (2) After one full year, 1/48 of the total grant of RSUs will vest each month. 

Some startups require more than simply time to fully vest your RSUs. After you have "earned" them by meeting the cliff and monthly vesting during the Vesting Period, you may also have to wait until the company has an exit before they officially "vest." 

"Acceleration Upon Change of Control" is an employee-favorable modification of standard vesting. A portion of your unvested RSUs would vest before the end of the Vesting Period if certain conditions are met. The most common acceleration language is "Double Trigger Acceleration," which provides that you vest a portion of your unvested shares if two conditions are met: (1) the company is acquired and (2) you lose your position within one year of the acquisition. If you have acceleration language, contact an attorney to help you negotiate the most favorable language. The devil is in the details. (Stock Option Counsel = legal services available to individual employees to guide them on their negotiation and sale of startup stock.)

4. Will I forfeit or otherwise lose my vested RSUs if I leave the company?

For stock and stock issued upon exercise of stock options, some companies keep the right to repurchase your stock when you leave the company even if it is already vested ("Repurchase Rights"). Some companies have similar restrictions on RSUs, so watch out. This greatly reduces the value of your grant because it is not really "yours" even after the vesting period if, for example, you are no longer at the company when it is acquired or goes public. For RSUs it may be called "Double Trigger Vesting," which should not be confused with the employee-friendly Double Trigger Acceleration (see #3 above).

5. When will the RSUs be settled? Will the RSUs be settled in cash or stock? When will I be taxed?

A company "settles" its RSUs when it gives you either cash or stock. Unlike stock options, you may not receive anything for the RSUs at the time they vest. In other words, the company may delay "settling" the RSUs. The company's Stock Plan will tell you whether you will receive the RSUs at vesting, at an IPO  or sale of the company, or some other deferred time. The deferral is usually in your best interests, as it prevents you from paying tax before a liquidity event. However, it can prevent you from selling your startup stock before your company goes public or is acquired.

The company's Stock Plan will also tell you whether the company plans to "settle" the RSUs with (aka "give you") company stock or the cash value of the company's stock.

Knowing when and how the company settles your RSUs will help you with your tax planning.

6. Questions? Contact Stock Option Counsel

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.