RSU and Stock Options

April 27th, 2009 omo

I had to make a choice over the two. Basically as an hiring incentive I was given X amount of Restricted Stock Units. RSUs are the new stock options for employees. If you would recall, stock options are the ability to purchase a company’s stock at a predetermined, fixed price. I think most notorious case (I guess in a good way) is AOL. People who worked it in the early 90s were given stock options to the company and the company’s value rose like rocket to Jupiter. Once it matures, your $100 per share stock could be had for $5. So 50000 shares of it would net you close to 4 mil even after Uncle Sam’s share. So that was 1999, anyways. I think most employees had closer to 10000 shares or so, if you were there in the earlier days? Just trying to recall from memory.

Stock options, as you can see, promise huge gains. But at the same time so can RSU. It’s just that in general you get much fewer RSU than actual stock options, as options require you to do something to buy in and sell. Anyways, I have the opportunity to convert my RSU to 2.2 times more in stock options, because they realized at the time of the offer, the stock prices were rock bottom. They still sort of are.

RSU is similar to options in that after a vesting period, it becomes some kind of stock-like instrument. In this case RSU becomes actual stock, and you end up owning it (after your employer holds some shares for tax purposes). There’s no price associated with RSU because you…get stock. The math lies in the number of RSU you are promised.

In the choice between the two, there are three numbers to figure out besides any material contractual terms, and the vesting time/schedule: X – number of RSU, Y – number of stock options, S – strike price, and Z – the breakeven point.

Presuming both the options and RSU vest completely over the same period of time A, S times Y is the amount you pay to convert your options into stocks, and if we sell immediately, the profit (or loss) is the price per stock sold times Y, minus S times Y. If the breakeven point is the price of stock at the time we sell, Z, that equates the RSU choice with the options choice (ignoring tax consequences), then ZY – SY = ZX. With a bit of algebra, we get Z(Y-X)=S, or Z = S/(Y-X). Naturally, the assumption made here is that you won’t cash in options at a loss, and if you get the same number of RSU as stock options, RSU would automatically get you more money because it assumes the price of the stock (SX).

RSUs are better than stock options in a few ways–first off, they are guaranteed to have value (unless your company explodes, or you leave the job before it vests). Stock options may not have value if the strike price is higher than the going price at the time of vesting. Second, you get the stock automatically; lazy people like me would prefer that stock roll into my brokerage account (set up by the employer) automagically rather than have to learn and track the stock market for a good time to buy in and sell. Plus, if it vests over time rather than all at once, it gives employees company ownership, with all that goodness about employee-owned companies has to do with morale and whatever.

The funny thing is, at this point RSUs do less to motivate me than options, because the company’s stock are trading at an all-time low. In fact it’s as low as it has been since IPO, and this tech company survived the .com bust. Pretty dire times, right? Great time to get some stock options!

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