Understanding Your Equity: RSUs and Making the Right Decision During a Startup Acquisition

RSUs (Restricted Stock Units) are essential for employees, especially when facing a startup acquisition. RSUs offer true ownership and substantial financial potential. Unlike stock options, RSUs guarantee actual shares of stock tied directly to the company’s value, amplifying the benefits of exponential growth. Notable success stories, like WhatsApp and Facebook, underscore the transformative power of RSUs, showcasing their ability to yield life-changing capital. This article dives into RSUs, providing insights into their mechanics, acquisition-related payouts, tax considerations, and effective negotiation strategies. 

The Truth About RSUs (Restricted Stock Units)

RSUs, or restricted stock units, are commonly issued to employees of startups as an alternative to stock options. RSUs represent actual shares of stock that will be distributed to employees, typically over a vesting schedule. While RSUs are often characterized as a “golden handcuffs” tool for employee retention, they represent meaningful ownership and significant potential financial upside.

Stock Options vs. RSUs

Unlike stock options which provide the right to purchase shares at a set price, RSUs guarantee employees actual shares of stock, often at no cost. The value of these shares is directly tied to the company’s valuation, so if the company’s value grows substantially over time, so does the value of employees’ RSUs. This means RSUs can translate into very significant payouts, especially in the event of an acquisition.

Whatsapp and Facebook RSUs

For example, early employees of WhatsApp received RSUs that were nearly worthless at the time of issuance but ultimately earned them over $3 billion when Facebook acquired WhatsApp for $22 billion. Early Facebook employees also made millions from their RSUs after Facebook’s IPO. While outcomes of this scale are rare, they illustrate the massive potential that RSUs represent for startup employees.

Benefits of RSU Payouts

Even for smaller startups, RSUs often provide meaningful financial upside. According to estimates from private stock options marketplace SharesPost, the median payout for an employee with a typical RSU package at a $500 million startup acquisition is nearly $500,000. For larger startups, payouts can easily reach into the millions per employee.

While RSUs provide employee retention incentives, their potential payouts represent real ownership and value. With the right combination of company growth, timing, and luck, they can translate into life-changing money. But even for more modest startups, RSUs often provide significant financial upside and the opportunity to share in a company’s success.

Why Acquisitions Mean Big Payouts for RSU Holders

Acquisitions frequently trigger accelerated vesting or payout of RSUs, allowing employees to realize significant gains. This happens through two mechanisms: single-trigger and double-trigger acceleration.

Single-trigger Acceleration

With single-trigger acceleration, RSUs immediately vest upon an acquisition. This is common in startups where employees take on substantial risk, and acquisitions represent a liquidation event. For example, when Facebook acquired WhatsApp for $22 billion, early employees made over $3 billion from single-trigger acceleration of their RSUs.

Double-trigger Acceleration

Double-trigger acceleration means RSUs don’t automatically vest upon acquisition; they require another event like termination of employment. The rationale is that if an employee stays on with the acquirer, their risk hasn’t fundamentally changed. However, if the employee is let go as part of the deal, their RSUs may vest. For example, when Microsoft acquired LinkedIn for $26 billion, impacted employees received double-trigger acceleration of their RSUs upon layoff.

Single-trigger vs. Double-trigger

The type of acceleration—single-trigger versus double-trigger—is negotiated for each acquisition deal. As an employee, it’s important to understand the specifics of your company’s agreement to know what will happen to your RSUs. In some cases, you may be able to negotiate with the acquirer for more favorable terms, especially if you have relationships with key leaders or a group of employees band together.

Acquisition payouts for RSUs can be very lucrative, especially at startups. While less likely, RSUs also have the potential for massive payouts if a company goes public. RSUs represent ownership in a company, and that ownership has significant value during liquidity events. For startup employees taking on risk, RSUs can pay off handsomely in the long run. The key is finding companies with the potential for huge exits, then maximizing the value of your RSUs through financial planning and negotiation.

The Tax Bill You Never Saw Coming

While RSU payouts in acquisitions can be very lucrative, the tax implications are complex. RSUs and acquisition payouts are taxed at ordinary income tax rates, not capital gains rates. This means that RSU income can push you into a higher tax bracket and result in a sizable tax bill, even if a large portion of the payout goes toward paying off the tax.

Phantom Income 

Employees should understand the concept of “phantom income”—income that is taxed but not distributed in cash. Phantom income often applies to RSUs, as they are taxed at vesting, even if the shares are not sold. If an acquisition accelerates the vesting of an employee’s RSUs, the total value of those shares at the acquisition price is considered taxable income for that year. This can result in an unexpectedly high tax bill if many RSUs vest simultaneously.

Net Exercising Stock Options

Some strategies to mitigate the tax impact include net exercising stock options, where you exercise options to buy shares and simultaneously sell enough shares to cover the costs. This allows you to pay the exercise price and taxes with the proceeds from the sale and retain the remaining shares. However, with RSUs, you are taxed upon vesting, and there are no shares to sell to cover costs. Other strategies include planning far in advance, reserving cash to pay taxes, and negotiating with your company for a tax reimbursement as part of your acquisition deal.

The bottom line is that while RSUs provide significant financial opportunity, the tax implications of major liquidity events like acquisitions are complex. Employees should understand how RSUs and acquisitions are taxed, model their potential tax bill under different scenarios, and plan strategies to maximize the value of their equity while mitigating unwelcome tax surprises. Employees can make the most of their RSUs and any acquisition payouts with diligent planning and management.

Negotiating Your RSU Payout: Do’s and Don’ts

When your company is acquired, don’t assume the initial RSU payout offer is the best or only deal available. Employees often have more leverage to negotiate a favorable RSU package than they realize. However, it requires strategic planning and preparation.

Determine a Fair Market Value for Your Shares

Review recent funding rounds, company financials, and metrics to estimate the current valuation. This can help you counter if the initial offer seems too low, especially if the acquisition price exceeds the valuations.

Build Alliances with Other RSU Holders

There is power in numbers, so work with other employees to determine a fair deal for all parties. Be prepared to negotiate as a group if needed. However, be careful not to make emotional threats, which can damage goodwill.

Single vs. Double Trigger Vesting

Do consider single vs. double trigger vesting. Single trigger means RSUs immediately vest upon an acquisition. Double trigger means RSUs vest only if you’re terminated within a certain period after the deal. Double trigger provides more security, but single trigger results in quicker payouts. See which structure is more favorable for your priorities.

Evaluate the Acquirer’s Motivations

Determine why the acquirer wants your company and how much they stand to benefit. Their motivations can reveal how much they may be willing to pay. For example, if key talent or intellectual property are important to the deal, they may offer bigger packages to retain employees.

Don’t Accept the First Offer

The initial offer is often not the best an acquirer can do. Counter with a higher, well-supported figure. Be prepared for a multi-round negotiation process. However, avoid making threats or unrealistic demands, which can turn the acquirer against you.

Don’t Rely on Company Deal Terms

While your company’s acquisition deal will set specific parameters around RSUs, there is often room for individual negotiation. Don’t assume you have no power or flexibility because executives and lawyers have “finalized” the terms. Do your due diligence to build a case for why you deserve more.

With preparation and strategy, employees can negotiate RSU payouts that match their shares’ true value and potential. However, without understanding their position of power at the table, they may leave millions on the table.

The Biggest RSU Payouts in History

Some of the largest RSU payouts in startup acquisition history show how valuable these equity grants can be. For example, when Facebook acquired WhatsApp in 2014 for $22 billion, WhatsApp’s early employees made over $3 billion from their RSUs. Jan Koum, WhatsApp’s co-founder and CEO, made over $6.8 billion from the deal.

Microsoft

Similarly, many early Microsoft employees became millionaires or billionaires when Microsoft went public in 1986, and their RSUs were vested and converted to shares of stock. Microsoft was valued at $520 million at the IPO, making millionaires out of many of the company’s first ten employees. Today, Microsoft is worth over $1 trillion, so those early RSU grants would be worth billions.

List of Notable RSU Payouts

Other notable RSU payouts include:

• The AOL -Time Warner merger in 2000 resulted in over $1 billion in payouts to early AOL employees from RSUs.
• eBay’s acquisition of PayPal in 2002 for $1.5 billion. PayPal’s early employees made hundreds of millions from RSUs, with co-founders Peter Thiel and Elon Musk pocketing over $50 million each.
• Google’s IPO in 2004 resulted in over $1 billion in payouts to early Googlers. While Google offered RSUs instead of options, many employees could buy shares at a discount before the IPO, resulting in a 10x return.
• The 2006 acquisition of YouTube by Google for $1.65 billion. YouTube co-founders Steve Chen and Chad Hurley made over $300 million, while other early employees made tens or hundreds of millions from RSUs.
• When Salesforce acquired Tableau in 2019 for $15.7 billion, Tableau’s early employees received payouts of up to $200 million from RSUs. Co-founders Chris Stolte and Christian Chabot made over $1 billion each.

These massive payouts illustrate how valuable RSUs can become, especially when companies experience huge exits or IPOs. While the odds of a billion-dollar payout are slim, RSUs represent the possibility of life-changing money that isn’t possible with a regular salary. For those willing to take the risk, the rewards can be enormous. With luck and smart financial planning, any employee’s RSUs can become valuable.

How to Maximize the Value of Your RSUs

RSUs offer the potential for significant financial upside, but maximizing their value requires diligent planning and management. Here are some strategies to maximize your RSU value:

Negotiate Accelerated Vesting Upon Termination

One of the most significant risks with RSUs is losing them if you leave your company before they vest. Negotiate for provisions allowing you to keep vesting RSUs even after leaving, such as accelerated vesting of all or part of your RSUs if you are terminated without cause. This reduces the risk of losing your RSUs through no fault of your own.

Diversify Across Multiple Startups

Don’t put all your eggs in one basket. If you work for multiple startups over your career, aim to receive RSUs from each company. That way, you increase your chances of benefiting from an acquisition payout. Even if some startups don’t exit favorably, others still might.

Exercise Shares Early to Start Capital Gains Clock

For RSUs that provide stock options, consider exercising your shares as soon as possible. This starts the clock for long-term capital gains treatment with a lower tax rate. Paying taxes on the spread between the exercise and grant price can save you money later.

Monitor Company Metrics to Understand the Valuation

Keep a close eye on your company’s key performance metrics, financials, and milestones to understand how its valuation may change over time. This helps you know if your RSUs are becoming more valuable and can inform your decision-making around exercising shares or negotiating in an acquisition.

Maximizing RSU value is challenging and often outside of your control. However, with proactive financial planning, diversification of risk, and close monitoring of your companies, you can make the most of your RSU compensation and potentially reap significant rewards from an acquisition. The key is balancing patience for the long game with agility when opportunities arise.

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