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Comment by Retric | Hacker News Reader

Time value of money means it’s better to be paid money today than in 5 years, but taxes mean it can be beneficial to get RSUs on a vesting schedule rather than cash.

For ease of calculation: 50% income tax and 20% capital gains, stock doubles in value.

Get paid 10M, pay 5M in tax. Buy 5M in stock which is worth 2x as much in 5 years when you sell it. Pay 5M * 20% = 1M in capital gains. Keep 9M at the end of the day.

Get paid 10M in RSUs. Sell when they vest at 2x the value in 5 years. 20M pay 50% in capital gains and keep 10M.

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Nope that’s not how it works.

Get paid 10M in RSUs, when they vest at 2x: pay regular income tax on 20M.

There’s no difference between an RSU vest and getting cash then immediately buying shares. Sometimes there is with options but not RSUs.

Add dates and it clarifies what’s going on.

In 2022 you get 10 million in A) RSU’s that vest in 5 years or B) cash in 2022 C) cash in 2027.

Of course no company actually pays people before they do work, but this does explain why Amazon’s RSU’s don’t vest 25%, 25%, 25, 25% instead the last 2 years are 40% and 40%. And people get issues new RSU’s before the old ones finished vesting.

No need for adding dates. RSU grants are cash, ordinary income, given as shares at vesting.

If some company handed out RSU’s on Jan 15 2023, that vested on January 16 2023 then it’s effectively just cash, but that’s not how they are used.

A single RSU grant normally results in multiple different taxable events across several years those dates are a major factor in what RSUs are. Both in the uncertainty around actual value and when you actually pay taxes.

But, it’s better to understand them as part of a contract. A hypothetical CEO negotiates RSU and a golden parachute that’s equivalent what they would lose in RSU grant when leaving, why? What advantages does that contract have over pure cash both from the CEO’s perspective and the companies?

The advantage is simple, it allows the amount of cash given to move with the stock price. In the ceo case the board wants to align incentives (between the ceo and the share holders).

In theory yes, but reality is more complicated.

Steve Jobs is rather famous for renegotiating his contract after the stock price fell, but this is fairly common. The compensation package as a whole must be sufficiently attractive, and of course when you look into things like golden parachutes any one element of a compensation package never tells the whole story.

<<Get paid 10M in RSUs. Sell when they vest at 2x the value in 5 years. 20M pay 50% in capital gains and keep 10M.>> You probably meant to write 20M pay 50% in income tax.

I still do not get your point. This situation is tax advantageous only if the stock appreciates. if the stock is flat there is no tax advantage. If the stock declines this situation becomes a tax dis-advantage. Motivating executives to increase stock price over a medium time horizon (these RSUs vest over 4 years) to have this tax advantage is not a bad incentive...

Executives generally renegotiate their contracts if the stock noticeably decline before RSUs vest assuming they don’t get fired or just leave.

That’s the thing executives are negotiating the kind of compensation they want and the risks they are willing to live with. The point is to get paid in a tax advantaged fashion without the risks associated with stock options.

> Get paid 10M, pay 5M in tax. Buy 5M in stock which is worth 2x as much in 5 years when you sell it. Pay 5M * 20% = 1M in capital gains. Keep 9M at the end of the day.

So 10M comp package + 0 starting capitol vs 0 comp package + 5M starting capitol? The latter isn't a comp package.

Nobody is going to pay you before you do the work, but “Time value of money means it’s better to be paid money today than in 5 years”

Thus, 10M in RSU that vest in 5 years > 10M in cash today (not a real option) > 10M in cash in 5 years.

However, this also helps explain 5%,15%, 40%, 40% vesting schedules they are somewhat better than 25%,25%,25%,25% for the company because it better incentivizes staying and for the employee due to tax advantages.

But there are no tax benefits. If you get 10M in RSU that vest in 5 years and in 5 years when they vest they are now worth 20M, you get taxed for 20M of income and not 10M income + 10M cap gains.

This gets more into the weeds, RSUs rarely vest evenly across time. A 10,10,40,40 has tax advantages over a 25,25,25,25 vesting schedule. Further, RSUs are only one aspect of a compensation package.

If someone can negotiate both RSUs and a golden parachute then they are simply better off than taking that exact same salary in cash. The nuances of every contract are different, but it’s not difficult to construct something more advantageous than cash.

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