At a public company, equity comp is a stock grant. This has a greater likelihood of being valuable than equity in a private company, though of course the value could still go down.
Equity is public company is as good as cash. You should absolutely count it as part of base compensation. Vesting is every 4 months and risk is minimal. If you want you can even fully deriskify by buying put options (or come up with something synthetic that mirror put options while not breaking your employment agreement).
On the other hand Equity is startup is completely different thing and should be heavily discounted.
That's not the way Amazon vests your stock, unless things have drastically changed recently. They vest in single lump sums for the year, and they have a slowly ramping up vesting schedule.
First year, nothing (but they give you straight money bonus)
Second year, barely anything, but they give you some cash to "offset".
Third year, good bunch of the stock, but still less than half.
Fourth year, all the rest of the stock vests.
Within each year you should get some stock offering, on the same ramping up basis so the idea is after the fourth year, you have consistent RSUs vesting, and they'll probably be split over the year based on whenever Amazon gave you the stock offering.
It's not as good as cash because the value can vary, especially the further out you look. It might go up, but it might go down. Cash is far more stable than that.
But it still should be modeled far above zero, and far closer to cash than pre-ipo options.
Consider the story that we're discussing. If you're hired by someone whose incentive is to fire you to meet a metric, then you're never going to get that equity payment. And they have every incentive to load your offer up with as much equity as they can.
And even if they don't, there are lots of ways to find yourself in a toxic workplace. If you're depending on that vesting schedule, your life can suck as you're trying to wait out an arbitrary deadline.
If you treat vesting as a nice optional bonus that you don't plan on, neither situation will feel bad to you.
Lots do monthly/quarterly vesting. But all have 1 year cliffs. With the idea that you get nothing if you don't last.
I had the wonderful experience of being hired at Google many years ago, and pulled into an SRE role. I was in the roughly half that they do that with that don't work out. And I didn't work out for exactly the reason that I initially expressed doubts about. (I don't task switch that fast - not a problem in a SWE but a major problem for an SRE.) I was let go 5 days before my 1 year cliff.
That is one of the reasons why I, personally, discount equity compensation.
At Amazon in particular they pay you the cash value of your stock for the first two years until it vests and you can start actually cashing it out. They have to since they have a maximum wage of ~$170K (varies a little depending on city).
I don't think so, because I think the most common tenure is just over 2 years. I know a lot of people who leave right after their second year cliff (the vesting isn't even and most of it comes at the end).
That's not true. It makes sense to discount pre-ipo equity at 100%, but post-ipo equity is much more predictable.
I personally discount equity at 40%. So you can offer me $300,000 cash or you can offer me $150,000 cash and $250,000 RSUs and I'd consider those equal offers.
For public companies you should value stock grants above their face value, because of the optionality: If the price goes down you can quit and get another job, if it goes up you get a raise. And stocks tend to go up, so 4-year grants have raises baked in, and most companies don't consider these raises (IIRC Amazon and Stripe do), so they still give regular raises and refresher grants.
The discount is to account for risk. Imagine an offer that is 100% stock. If they stock goes down, your comp goes down with it. That is what is being accounted for.
> And stocks tend to go up
Only lately. Stock compensation sucked around 2001 and 2008.
Risk (well, "variance") increases the value of optionality.
Assume that there is a job market with lots of jobs. Each will hire you for your market-rate total compensation, no stock cliffs, no job-seeking costs. Spherical cow. Say also that you can tell the variance on stock compensation, but you can't guess at future performance.
One strategy might be to go to an all-cash job and make your market rate forever. That's a lower-bound on the best expected future earnings. But a better strategy is,
- Join a high-variance company,
- If/when your pay drops below the market, find another high-variance company.
With this strategy your expected earnings are higher than your market rate, even if the expected earnings at every job is the same. And the outperformance scales up with the variance.
Yes, mathematically in a perfect spherical cow world, you are correct.
But I live in the real world. And in the real world, you can't switch jobs instantaneously back and forth, like you can trade stocks. In the real world there may not be a job available at the market rate. In the real world it takes months to find a new job even if there is one, and then it's even harder to actually get market rate.
So in the real world it make more sense to discount stock compensation compared to cash compensation to account for all of these things and the risk you take on by accepting stock based compensation.
A 40% discount on RSUs at a public company is perfectly reasonable: you will have to sell to cover the taxes as soon as they vest, meaning for every 10 shares in your grant, 3-4 will be liquidated before you even see them just to cover the taxes on the vesting. Add a modest discount for the fact that you might leave prior to the next vesting date, and 40% might even be a bit optimistic.
I meant increases in offered/negotiated salary. A marginal dollar of salary gets taxed the same way as a marginal dollar of vesting shares, so discounting one in the offer because of taxes makes sense if you discount the other in the same way.
You shouldn't trade away a dollar's worth of shares for 60 cents more salary just because of taxes.
Why not, assuming the company is public? If you can convert to cash as soon as your shares vest (which occurs monthly in most instances) it's as good as cash (with some discounting factor for the uncertainty of the first year pre-vesting).
i'm surprised to run across so many purported tech professionals who still don't know the difference between options and RSUs, and how the latter are as good as cash
I'm not. Our industry is filled with people who have bought hook, line and sinker into the "I'm passionate about what I do and that's all I need" cult, especially in the Bay Area/startup world. They assume they're well compensated (a few are--maybe a higher fraction than in other industries, even--but most of them aren't) and don't pay attention to that sort of thing much.
You are wrong. Companies like Facebook and Google allow you to vest shares almost immediately (I think they vest quarterly). Unless you think their shares are going to drop precipitously, it’s absolutely okay to count equity these days.
RSUs (even facebook-style) are definitely taxable. With options, you're in control of when to take the tax hit. With facebook-style RSUs, the tax hit comes when the stock gets distributed (taxed as ordinary income) -- usually in the form of withholding some amount of shares.
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Important to remember with RSUs in pre-IPO companies: even though you might get shares distributed at IPO, you're usually subject to a lock up. This is unfortunate because if you receive stock at IPO, you have to pay taxes at them -- so if your company IPOs at $50, then drops to $20 when the lockup expires, you have to pay taxes on the shares you received at $50 value even though you couldn't sell shares at that value.
My understanding is they're taxable, but only after they're liquid which makes it easier for the employee. I think most companies doing FB style do something fancy to avoid the distribution tax lockout issue (witholding some to cover tax or direct listing to avoid lockout).
The situation where you have a huge tax bill and no cash to pay it (or worse a huge tax bill and your illiquid stocks have crashed to $0) shouldn't happen, though I guess there's still a chance in the pathological case you describe? Not sure if that's avoidable.
The other thing I forgot to mention is that if you do risk all this cash on option exercise/taxes and your company does go to $0 you do get to take a $3000 AMT tax credit each year until you die (but maybe only if you don’t have kids or something, can’t remember) - it’s not great.
Actually, underwithholding can still happen. Employers may withhold at a flat 22% federal rate, which can be significantly lower than a highly paid employee's actual marginal tax rate. So the employee may still need to increase the withholdings on their regular pay, or make an estimated tax payment for each quarter of RSU income.
not that it necessarily changes your argument, but the signup bonuses that uber / lyft offer are significantly higher than $5 (closer to $1k), and are structured in such a way to ensure you're not dual-apping.
"A different model of what they are doing is using their massive revenue growth (not profit) to raise money to fund a search for real pricing power with food delivery, shared bikes, and Uber freight."
Though they are really offering higher driver pay for a limited time on signup. To compete I'd just offer that higher driver pay all the time by taking less fees than Uber. Not correcting you or anything, just embroidering.
Over 10 years or so, this devolves into the taxi business, which without medallions is very low margin. [1]
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spoken like someone who hasn't used the product. snapchat's ads fit the format amazingly well, and now that snapchat is also paying for content directly everyone's incentives are aligned to make a deeply engaging product that monetizes well without alienating users.
I have. I'm saying that especially when public, there is no such thing as enough profitability. There's no number of ads that will satisfy shareholder demands. They'll have to squeeze more and more and the only possible signal that "more" has become "too much" is necessarily when users start walking away from the service.
It's not necessarily just ads. There's content. Aston Kutcher in a recent podcast talked about "vertical video" meaning people develop content specifically aimed at mobile users watching on a portrait phone. Snapchat is primed to deliver that content. Saying that there are not enough ads is like saying YouTube was a terrible buy for Google.
you're betting that a facebook group is a scalable solution?
arcade city is a great example of unintended consequences -- instead of safer rides, austin's regulations led to consumers choosing a much riskier ridesharing option (no GPS tracking, no recourse when something goes wrong, no background checks at all, etc)
