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Evaluating Equity Comp: Are Stock Options or RSUs Better?

03.14.2023 by admin // Leave a Comment

Considering a career change or have multiple offers in hand? How do you compare equity compensation? Equity compensation can be a catalyst to growing your net worth. Putting a true dollar value on equity compensation is tough when you’re looking at a private company. When the company is publicly traded though, you can look at the latest stock price and know how much the equity grant is currently worth. However, it’s tough to know how much the equity comp will be worth when it vests. When evaluating different equity compensation at publicly traded companies, which is better stock options or RSUs? In this blog post, we’ll explore the pros and cons of stock options and RSUs to help you determine which is the best choice for you.

What are Stock Options?

Stock options are the right to buy a specific number of shares of company stock at a pre-set price following a vesting period. If your pre-set price is $10 and the stock is currently at $50 you pay $10/ share. This is known as the exercise or strike price. When you hit the first vesting period you can exercise your stock options. After you hit that vesting period, you have the right to purchase company stock at that predetermined price whenever you want. It can be that same day, it can be 2 years later – the choice is yours.

To motivate employees to work hard and drive the stock price up a company might grant a large number of options that are significantly below the current market price. Combined with your flexibility to sell any time after they vest, you may have the ability to purchase shares significantly below the current market value. Conversely, if the stock price does not go up significantly, you may not be able to benefit from the equity compensation at up. The stock price could even decline to the point where your equity compensation ends up worthless.

What are Restricted Stock Options (RSUs)?

Restricted Stock Units, or RSUs, are a form of compensation offered by employers to employees. They are company shares that are restricted, meaning that you can’t sell them right away. Instead, you will be given shares that vest over time. When you accept RSUs, they will come with a vesting schedule. Often, you’ll see vesting schedules that span 3 or 4 years. This schedule will show how many shares will vest on which dates. Typically, there will be one day per year and each of those days will be a year apart. On that date you are given those shares at the price of the stock that day. They have no tangible value until the vesting date. If you leave the company before the vesting date that means you walk away from this future compensation.

How Are Stock Options and RSUs Different?

Stock Options and RSUs Redemption

Stock options and RSUs can both have similar vesting schedules. The vesting schedule will depend on what the company offers. Usually, equity compensation is a way to encourage employees to stay at the company. As a result, you’ll often see vesting schedules that span a few years. You may get 1/3 of the equity grant at the end of year 1, 1/3 at the end of year 2 and the last 1/3 at the end of year 3. If you leave the company before your RSUs or stock options vest, you will forfeit the unvested shares.

While they both have vesting schedules, what happens upon vesting is different. When your options vest, nothing happens unless you decide to exercise your option to buy. If you exercise your option to buy, you can initiate an exercise-and-hold transaction (cash for stock), initiate an exercise-and-sell-to-cover transaction or initiate an exercise-and-sell transaction (cashless) depending on your personal situation and goals.

When your RSUs vest, you now have shares of the company you can sell at any time. You are given the shares, and taxed through your paycheck if you sell to cover or have to pay taxes on this additional income at tax time.

Stock Options and RSUs Selling Times

While they both have vesting schedules, stock options and RSUs differ in flexibility to sell. When stock options vest, nothing happens until you decide to exercise your options. You can decide to sell your options that day, or years later. However, your vested options are still tied to your employment with the company. If you decide to leave the company you will likely need to exercise your vested options within 90 days.

With RSUs, when they vest, you have shares of the company you can sell at any time. If you sell within a year it will be taxed as short term gains/ losses. If you sell after a year, the RSUs will be taxed as long term gains / losses.

How Stock Options and RSUs are Taxed Differently

Both stock options and RSUs will not be taxed when you first receive them. But, they will be taxed upon vesting. And, how they are taxed upon vesting is different.

How Stock Options Are Taxed

With stock options, how you are taxed depends on what type of stock options you have. There are two main types of employee stock options – non-qualified stock options (NSOs) and incentive stock options (ISOs). If you have NSOs, you are taxed as ordinary income when you initially exercise the stock for the difference between the current stock price and the price you bought it at. With ISOs, you get taxed when you sell the shares. If you sell the shares after holding less than a year you’ll be subject to short term gains taxes and if you sell the shares after holding longer than a year you’ll be subject to long term capital gains taxes.

How RSUs are Taxed

RSUs are given to you at $0 and they converted to the value of the company stock when they vest. When RSUs vest, that is a taxable event whether you choose to sell that day or not. Therefore, you will be taxed on the full amount at the total fair market value of your stock grant on the vesting date. When you sell your RSUs your taxes will be calculated based on the strike price. The strike price is the price of the shares when they become vested. If the shares were originally $100/ share when you got your RSU grant, but the shares are worth $50/share the day they vest you will be taxed on the $50/share price. Upon vesting, this is when you get to decide if you want to keep the shares or sell them. Whether you decide to keep or sell the shares, it’s recommended to sell enough to cover the ordinary income tax for the shares.

Are RSUs Better than Stock Options?

Ultimately, whether RSUs or stock options are best depend on your personal goals and how much you think the package you were offered will be ultimately worth.

Employee Stock Options: A Complete Guide to Understanding Your Benefits

02.21.2023 by admin // Leave a Comment

Employee stock options are a popular form of equity compensation that is often offered by companies as a way to attract and retain top talent. It allows employees to purchase company stock at a discounted price, known as the grant price, and to sell it at a later date for a profit. In this guide, we will provide an overview of employee stock options equity compensation, including how it works, the tax implications, and the risks and rewards associated with this type of investment. We will also discuss the different types of options plans, such as incentive stock options (ISOs) and non-qualified stock options (NSOs), and how they differ. If you are an employee considering participating in a stock options equity compensation plan, this guide will provide you with the information you need to make informed decisions.

What are Employee Stock Options?

Employee stock options give you the right to buy a specific number of shares of company stock at a pre-set price following a vesting period. If your pre-set price is $10 and the stock is currently at $50 you pay $10/ share. This is known as the exercise or strike price. When you hit the first vesting period you can exercise your stock options. After you hit that vesting period, you have the right to purchase company stock at that predetermined price whenever you want. It can be that same day, it can be 2 years later – the choice is yours.

Different Types of Employee Stock Options: NSOs and ISOs

There are two types of employee stock options: Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs). ISOs and NSOs employee stock options have distinct tax implications.

ISOs are eligible for special tax treatment. When an ISO is exercised, the employee does not have to pay ordinary income tax on the difference between the grant price and the fair market value of the stock at the time of exercise. Instead, the employee may be eligible for long-term capital gains tax treatment if they hold the stock for at least one year from the date of exercise and two years from the date of grant.
NSOs are not eligible for special tax treatment. When an NSO is exercised, the employee has to pay ordinary income tax on the difference between the grant price and the fair market value of the stock at the time of exercise. The employer may also be subject to payroll taxes on the income recognized by the employee.
ISOs are also subject to more stringent rules regarding eligibility, exercise price and holding periods. For example, ISOs are only available to employees, and the exercise price must be at least equal to the fair market value of the stock at the time of grant.
NSOs are more flexible, they are available to employees, as well as non-employee directors and consultants. They also have fewer restrictions on the exercise price and holding periods, which means they may be less expensive for the company to grant.

In summary, ISOs offer certain tax advantages but are subject to more restrictive rules. NSOs do not have the same tax benefits but are more flexible in terms of eligibility and exercise price.

Exercising Employee Stock Options

When your options vest, nothing happens unless you decide to exercise your option to buy. If you exercise your option to buy, you can initiate an exercise-and-hold transaction (cash for stock), initiate an exercise-and-sell-to-cover transaction or initiate an exercise-and-sell transaction (cashless) depending on your personal situation and goals.

Employee Stock Options Selling

With employee stock options, nothing happens until you decide to exercise your options. You can decide to sell your options that day, or years later. However, your vested options are still tied to your employment with the company. If you decide to leave the company you will likely need to exercise your vested options within 90 days.

Employee Stock Options Tax Treatment

With employee stock options, how you are taxed depends on what type of stock options you have. There are two main types of employee stock options – non-qualified stock options (NSOs) and incentive stock options (ISOs). If you have NSOs, you are taxed as ordinary income when you initially exercise the stock for the difference between the current stock price and the price you bought it at. With ISOs, you get taxed when you sell the shares. If you sell the shares after holding less than a year you’ll be subject to short term gains taxes. If you sell the shares after holding longer than a year you’ll be subject to long term capital gains taxes.

Employee Stock Options Summary

In summary, employee stock options can be an attractive form of compensation, as they provide the potential for financial gain through ownership in the company. However, it is important to have a clear understanding of the terms and conditions of the stock options, including vesting periods, exercise prices and taxes.

Breaking the Glass Ceiling: Tips for Achieving Fair Pay in the Tech Industry as a Woman

02.14.2023 by admin // Leave a Comment

gender pay gap in the tech industry, wage gap in tech

The tech industry is often seen as a field with limitless potential for growth and advancement, but for many women, the reality is far different. Despite progress in some areas, the gender pay gap remains a persistent issue in the tech industry, with women often earning less than their male counterparts for the same work. A Dice report found in 2020 that women in technology jobs earn on average $16,000 less per year than men in equivalent roles. Additionally, women hold only 25% of all computing jobs, and they are underrepresented in leadership positions in the tech industry. This disparity can have a significant impact on a woman’s financial stability and long-term financial health.

The wage gap for women in technology compared to men is a significant issue. As a woman in tech, it’s important to know your worth and have the skills and confidence to negotiate fair pay. In this article, we’ll provide tips and strategies for breaking the glass ceiling and achieving fair pay in the tech industry.

How to Overcome Unconscious Bias

Part of the wage gap is attributed to unconscious bias that can affect hiring, promotion, and compensation decisions, leading to a lack of representation for women and minorities in leadership positions. So, how do you overcome unconscious bias?

Be aware of the wage gap and understand the factors that contribute to it. This will help you to identify any potential biases or discrimination that may be affecting your earnings.
Research the typical salary range for your role in the tech industry and use that information to negotiate your salary. Several states, such as Colorado and California, recently passed laws that require salary ranges on all job postings. By looking for similar roles posted in those states, you can get a general idea for the salary range. Many other sites such as Glassdoor, ChatGPT and Google Search can also be used to get a salary range for your role. Use this data when you go into negotiate a raise or promotion.
Build a network of other women in the tech industry. They can provide support and guidance, as well as serve as advocates for you in the workplace. Great places to meet other women in the industry include tech conferences and women’s conferences.
Seek out mentors and sponsors who can help you advance in your career and advocate for you when opportunities arise.

Structural Changes Are Also Necessary To Close the Wage Gap

It’s important to note that closing the wage gap also must include structural changes in the industry and the society. Efforts to close the wage gap include increasing representation of women and minorities in technology, promoting diversity and inclusion in the workplace, and advocating for fair pay policies. How can you be a part of these structural changes to reduce the wage gap?

Keep learning and developing new skills, like coding, or consider going into tech sales. Software development and tech sales are both high paying career paths. Learning the skills required for the higher paying jobs at your company will help you increase your pay.
Don’t be afraid to ask to shadow someone who has the job you want. If you already work for the company, it is much easier to move into a role that initially seems like a stretch. But, it’s important to learn on the job and start building the right network. This will help overcome not getting the first interview because you don’t have the right qualifications. Asking for a job referral will also help increase the chance of a first interview.
Seek out companies and organizations that prioritize diversity and have a history of closing the wage gap. For example, at large corporations do they have employee resource groups? A VP or SVP of Diversity and Inclusion? Have they made public the % of their current workforce that are women and what % of their leadership positions are held by women?
Be aware of your rights, and if you face discrimination or unequal pay, do not hesitate to report it and seek legal assistance if necessary.

Laws to Help Drive Change

It’s important to note that the wage gap is not solely caused by discrimination, it’s a complex phenomenon that is influenced by a variety of factors such as differences in occupation, education, experience and hours worked, among other things. However, studies have shown that discrimination in the workplace is one of the factors that contribute to the wage gap. Efforts to close the wage gap have been made with laws like the Equal Pay Act of 1963 and the Lilly Ledbetter Fair Pay Act of 2009, but there’s still work to be done to achieve equal pay for equal work. Though there is still plenty of work to be done, you have the power to help drive change for other women and there are steps you can take to help close a wage gap you’re personally experiencing.

Tips for Achieving Fair Pay in the Tech Industry as a Woman Summary

In conclusion, achieving fair pay in the tech industry as a woman can be a challenge, but it’s important to remember that you have the power to advocate for yourself and negotiate the salary you deserve. Whether you’re just starting your career in tech or are looking to advance in your current role, by understanding your worth, building your negotiation skills, and having the confidence to ask for what you deserve, you can break through the glass ceiling and achieve the financial stability you deserve. Remember, your work and contributions are valuable, and you deserve to be fairly compensated for them.