054: RSU Strategies for Tech Professionals with Landon Loveall

00:00 - 01:53 | Christopher: The volume of stock that you're getting, but the vesting schedule and what you get over time is something people don't intuitively think about. And I know for myself, you know, 2010, 2012 and all these times that I was negotiating for it, I wasn't in front of me. I didn't think about it, but it is a critical aspect. I think today and as companies, you know, there have been around a layoffs, I think for great talent out there. I think there's always going to be competitive marketplace because more companies are going to start growing. out of this next phase. I always say it's about the return on time. You're trading your time and talent for equity, so you want to maximize how much you can get per year. Welcome to the podcast for financially focused technology employees. Are you working for equity? Do you have questions on how your career and money work together? Then welcome. Every week, we discuss strategies and tactics for how to grow your career, build wealth, and reach your financial and lifestyle goals. Welcome to Tech Careers and Money Talk. I'm your host, Christopher Nelson. I am excited to introduce everybody today to Landon Lovell. Landon is a certified financial planner with KB Financial Advisors. He has been helping young professionals with financial plans since 2009, which I think the interesting note is after 2008, he decided to get into financial planning. We'll touch on that in a moment. He specializes on helping technology employees especially with financial plans, and he regularly posts a blog on the KB Advisors financial website. I'm going to put that in the show notes because I personally have been reading this for over a year. I get a ton of value out of this as well. Fun fact is when he is not assisting clients, he enjoys kayaking down the Duck River and spending time with his wife, Melissa, and their three children in Columbia, Tennessee. Welcome Landon.
01:54 - 01:56 | Landon: Yeah. Thanks for having me, Christopher.

01:56 - 02:31 | Christopher: My pleasure. My pleasure. And so I want to dig right into this. I think today in today's market, we're seeing RSUs being used a lot more for equity compensation. And I want to spend some time educating people on a little bit on the history of RSUs. I know that RSUs, you know, started popping their head up in the early 2000s. And I think at some point Microsoft switched to RSUs and Many public companies started using those. Can you give us some more information and education on RSUs?

02:31 - 03:26 | Landon: Yeah. And one of the other big names that everybody knows who was, as far as I know, the first to go to RSUs prior to an IPO was Facebook. And then The first time that we started dealing with our issues in an IPO in a big way was Twitter. And so Twitter was part of that early wave that started moving from Silicon Valley into San Francisco. And so especially the start of 2014 and 2015, we had all these Twitter employees contacting us and saying, I just got a W-2 with a million dollars on it. I don't make a million dollars, you know, is this right? Did they make a mistake? And kind of freaking out, you know, over a tax situation that they had no idea was coming. Right.

03:26 - 04:00 | Christopher: And so breaking it down real quick for people is restricted stock units is a type of equity compensation where you get a grant that says over this particular vesting schedule, and we'll stick to the traditional four-year vesting schedule, you get this many shares that are going to be vested to you over time. And it is not a partial share vest. It means that when you vest that, you actually get ownership of those shares immediately.

04:00 - 05:20 | Landon: Did I get that right? Yeah, that's correct. So when we talk about restricted stock units and we compare them to stock options, one of, you know, kind of the key differences there is restricted stock units are a full value award. So there's no exercise price, you know, whatever you're granted in terms of a number of of shares, you're going to get all of that. And there usually is a time based vesting schedule. And VEST is when the shares effectively become yours. The other key event is release or settlement, which is the point at which the shares are transferred into your ownership. They show up in your account. And it's also the point at which the value of those shares become taxable to you. And the reason that I mentioned that is prior to IPO, we're usually dealing with double trigger RSUs, where you've got the time-based vesting schedule, which is the first trigger. And then you have the event-based second trigger, which is the point at which the RSUs actually become taxable. That's before IPO. After IPO, vest and settlement. they're effectively the same event.

05:20 - 06:04 | Christopher: Right. And RSUs at this point are the staple for public companies, companies that are already public, the way that they grant equity compensation to technology employees. And I want to try and separate this conversation out because I think the I do want to dig into the pre-IPO because I think that's becoming more prevalent. I think that's important. But I want to make sure that people are educated on the basics with the fact that when you're working for an already public company and you then go and negotiate and you have an RSU package, when you get to that particular vesting date, at that date, you're going to receive the full value of the share and then it will also be released to you as well.

06:04 - 06:55 | Landon: That's correct. And the other important thing to know there is, you know, restricted stock units for tax purposes are considered a supplemental wage. So they're like, you know, the annual bonus that you may have already been getting at SEP. Instead of coming to you in the form of cash, they come to you in the form of shares. But the reason that's important to know that they're a supplemental wage is there is mandatory withholding. So the most common, you know, scenario that we see for that mandatory withholding is a sale to cover where typically you're going to get, you know, about 60% of the shares that actually vest and the other 40% are going to be sold to cover federal and state income tax, as well as social security, Medicare, and some of those other smaller, um, benefit taxes.

06:55 - 07:20 | Christopher: There are three options when that day comes. There's the sell-to-cover, same-day sale, and there is cash transfer. I know for myself, I was a sell-to-cover guy. That was just the easiest, most automatic way. Do you ever see any use cases where a same-day sale or cash transfer is a valid use case?

07:21 - 09:00 | Landon: So sell to cover is the most common and it's often the default. So if you, you know, if you don't do anything, usually, you know, sell to cover is going to be done for you. Same day sale. Some companies will give you that option or, you know, um, they'll have kind of a, uh, boiler plate trading plan where you can opt into. a same day sale. And if that's available to you for a lot of the people that we work with, it's a really good, good option. Um, because then we don't have to worry about under withholding. And a lot of times after the IPO, our default strategy for those are issues is going to be to look to sell them as soon as possible. And then to work that into your larger investment plan. cash transfer. I don't think I've ever been involved in a cash transfer. I've worked with clients where that was available to them. But usually, when that's on the table, there's a good chance that you've got a tremendous amount of equity already. And so, you've probably contacted me because you're concerned about the amount of concentration that you're dealing with and wanting to diversify anyway. And so cash transfer is going to be the opposite of addressing that, you know, concentration issue. And so a lot of times we use, you know, sell to cover same day sale as a, just a kind of an easy first step before we deal with some of your prior equity to stop the concentration from growing, moving forward.

09:01 - 09:58 | Christopher: Right. Right. And those are those are key strategies. And so let me let me ask a couple of questions. I'm curious what you're seeing in the market today around public company RSU equity packages, because as I'm out there talking with friends and people in my network, I'm seeing some very interesting variances to these plans that that are I think important for just people to note, especially when they're in the negotiation phase. So I am seeing there are some plans now coming out, RSUs, that provide downside protection, meaning that if you're getting a $250,000 salary, and then you're also getting matched $250,000 a year in equity, if the equity value goes below that, they then give you extra shares to shore that up. Have you been seeing some, some different equity plans to give people downside protection?

09:58 - 11:30 | Landon: I have not seen that specifically. Now, I see companies do that effectively, even if they're not expressing that on the front end. And so going back to especially 2022 and then 2023, 2022, we had the layoffs. 2023, you know, we started to kind of come out of those layoffs and The people who are still with those companies, in some cases, the companies recognize our stock's not performing the way you expected it to when you were granted your RSUs. We're going to give you some larger than normal refresh grants to account for the fact that this original grant is way below the value you thought you were getting, even if it were just cash, that you've basically lost money on the fact that this grant was in the form of shared equity and not cash. Now, one thing that I am seeing is on new grants, some companies starting to give tech employees the choice, okay, we're giving you this value, $400,000 over four years. Would you like that all in RSUs, half in RSUs, half in cash or 75% in cash, 25% in RSUs. I am seeing that, you know, where prior to the last couple of years, I really never saw that.

11:31 - 13:06 | Christopher: I think that's an interesting development. One of the other things that I've seen, I think, is I've started to see, so I told you about the downside protection where that was actually written in up front where they would shore that up. Again, that was all RSUs. The other thing that I've seen now is I've seen some variants to the vesting schedule. So we're all familiar with, you know, straightforward split into four equal buckets and you have the one-year cliff. I have seen some people starting with immediate vesting. So you can start vesting in the first month. We've seen Google does that, I think, for directors and above. Then we've seen the back-end vesting that Amazon does to retain employees. The thing that I, in a recent trip to the Bay Area, as I was talking to some friends that were interviewing some different companies, is they're now starting some front-end vesting schedules. you know, especially as things are getting more competitive, especially around different AI talent, they're doing a 50-30-20. So you get 50% of equity in the first year, 30% than 20. And it turns out that grants aren't going to be as large. Let's maybe say they're 75%. And then You get to take 50% off in the first year, but they're also then evaluating to say, okay, for the following years, are we going to then refresh you at a higher rate? So it seems like they're moving forward with, okay, we're going to let you take more equity off the table up front, but then both of us get to decide, is this a good relationship that we can continue investing in over time?

13:07 - 15:05 | Landon: Yeah, the immediate vesting, that's definitely becoming a trend that I'm seeing more and more, and it's across the board regardless of company type or company size. the front-loaded vesting. I haven't seen that so much as a trend, but I have seen it as a tool that companies will use when they're in kind of a competitive negotiation. One of the things, and clients have kind of caught on, but in years past, I would really struggle to get clients to ask for more. Go back to them. Unless You're unhappy where you're at and you're looking at this new opportunity as your way out, or you're just so excited about the work that you're ready to go and you're not going to worry too much about the comp package. Just ask for more, because especially if you're talking about a public company, by the time they get to giving you an offer, they've invested a lot of time in you. They really want this to work. you know, by that point, you're probably the only person that they're talking to. If this falls apart, they got to start all over again. So this is your opportunity. Ask for more. And in some cases, when I would get clients to do that, that's what the companies would come back with. They would say, well, you're at the top end of the range that we've got for this position, but here's what we can do. Instead of getting your RSUs over four years, We're going to do kind of a standard grant over four years, but then we're going to take that and break it out into an additional grant that's going to be accelerated into that that first year to where you're going to get more of what we would have given you up front and you're not going to have to wait as long to get it. So that's the case where I've seen, you know, those front loaded grants.

15:05 - 16:06 | Christopher: I think it's so important that people are aware of when you're negotiating that there is the volume of stock that you're getting, but the vesting schedule and what you get over time is something people don't intuitively think about. And I know for myself, when I was negotiating equity in 2010, 2012, and all these times that I was negotiating for it, It wasn't in front of me, I didn't think about it, but it is a critical aspect, I think, today and as companies. There have been around a layoffs, I think, for great talent out there. I think it's always going to be a competitive marketplace, because more companies are going to start growing out of this next phase. You need to understand what are the different levers that you can pull to be able to get, I always say it's about the return on time. You're trading your time and talent for equity, so you want to maximize how much you can get per year

16:07 - 18:02 | Landon: every year. Yeah, absolutely. And then, you know, the big risk. So when we talk about equity for tech employees, that's what makes tech different, you know, than than really any other industry in terms of the employee experience and how compensation works. But The other thing about that equity is it's until it's yours, it's dependent upon you keeping that job. And so the big risk for any employee, whether equity is involved or not, is, you know, for the most part, the company can at any moment in time decide that you're not needed anymore. And then that equity, you know, goes away. And so that's the challenge I get really excited about, about kind of helping my clients navigate because located where I am in Tennessee, you know, we're right outside of Nashville, but there's still kind of that small town feel and function here where you've got these family businesses, family small businesses. And so you've got second and third generations that are benefiting from the work of their parents and their grandparents, and there's property and equity there. that is theirs, you know. There's no company that decides we don't need you anymore. But as a tech employee, you know, there's always kind of that risk that you could spend your entire career working and, you know, and, and come out of it with not a lot to show for it. And so the vesting schedules are important, understanding how the, the value of the equity and thinking about, you know, your career as a whole over the entire time that you're going to work and, uh, the amount of money that's involved, which really adds up, you know, the income levels that we see, whether we're just talking salary and before we even get into the equity piece.

18:04 - 19:12 | Christopher: Yeah. And that's why I think understanding and managing the equity is so important. And what my family and I did as a strategy, Landon, was we wanted to live within our salary. We leveraged our bonus for larger expenditures and family vacation. And then the equity was just that investment. That was to move on to the side to create something. We're going to get to that and talk a little bit more in the second half of the show about how that then became our business that's going to propel our family forward. As we're still talking about RSUs, let's talk about this trend now that you saw with Facebook. Because I think Facebook started when they were early stage, they did have ISOs and incentive stock options. But at some point, when they were private for a long period of time, they converted to RSUs. I know, I know Stripe did the same thing. Obviously Twitter did. So there is a trend. What do people need to understand are the differences between ISOs and RSUs when they're getting, you know, private company stock?

19:12 - 21:49 | Landon: And it's a definite trend. And then you mentioned Stripe and Stripe's an interesting one because the, these companies are now waiting so long. to go through an IPO. That last year, Stripe had to raise money just to pay taxes on RSUs because they were facing the possibility that current and former employees were going to have their RSUs expire because They did not want to go through an IPO in that market. And then with Instacart and their IPO last fall, working with folks there, one of my clients told me, they've told us that there's only like 180 of us still working here who have incentive stock options. So it's really early on, you know, especially when you start getting past that billion dollar valuation that we see these companies making the switch from using stock options to using restricted stock units. And when we talk about incentive stock options, you know, the stock option piece first, you've got an exercise price. So you have an out of pocket cost to buy the shares that those options represent. Whereas with restricted stock units, you don't have any out-of-pocket cost. The taxes are different. So incentive stock options, the exercise of incentive stock options is not a taxable event for the regular income tax. Then we've got this whole other alternative minimum tax that we have to navigate. And I do my best. I feel like I'm pretty good at making it simple. But usually when I explain it to someone for the first time, you know, they just look at me and go like, who who thinks of this? I go, this is this is how our tax code works. You know, when you get a bunch of people and legislative process involved, you know, this is what we end up with. So incentive stock options, you've got the alternative minimum tax and all of that to think about. Restricted stock units, you don't. For tax purposes, restricted stock units are fairly straightforward. Once the shares end up in your brokerage account, 100% of that value on the day that they release or settle to you becomes taxable and it becomes taxable as ordinary income. Right.

21:49 - 22:03 | Christopher: And with pre-IPO RSU shares, that's where you have the double trigger. So you vest and you actually own the shares, but they're not at that point deposited in your account. That's going to happen post IPO. Is that correct?

22:04 - 23:16 | Landon: Yeah, that's correct. So, prior to the IPO, they vest. And if you leave the company, they go with you. They are yours. You just do not have ownership of them or possession of them so that they have not yet become taxable to you. So in the IPO, one thing that can kind of catch people off guard is, You know, you may have four or five, six years of restricted stock units that have vested that are now going to become taxable in a single event. And so you've got your income, which prior to the IPO has just been salary and whatever cash bonus you're receiving, usually pretty consistent year after year. And then you hit that IPO year and you may suddenly rocket from you know, a 24% tax bracket all the way into a 37% tax bracket and start dealing with numbers related to taxes and tax bills that are just really hard to, you know, wrap your mind around having never dealt with that before.

23:17 - 24:30 | Christopher: Here's what I think the biggest struggle is, having been somebody who's been through this, is when I'm having to write a check to the government that's larger than anything that I've even brought into my bank account yet, or I'm holding onto as like real tangible cash and assets, that's where I think it's hard because you feel like you're giving more than you're getting. And I've been doing the hard work. So that's where writing that first big tax check is like, what was it like? You go through all the stages of grief, like you're dealing with a loss. You know, there is, there is denial. You do fantasize about running off to South America or Switzerland somewhere, knowing sure well that the government will track you down. But that is really important. And so when technology employees are thinking about getting a grant of pre-IPO RSUs, it's so important that they understand when they're getting the shares, what are the current values of the shares. With RSUs, what is the most important thing for them to understand of the pre-IPO values of the shares? Is there any risk to them like a exercised ISO would have?

24:31 - 26:55 | Landon: I don't think there's any risk to them. And with restricted stock units, when we talk about kind of the most important thing to understand. So prior to IPO, you know, whether it's startup or it's, you know, a company that's been around for a while, that's raised, you know, a, a number of rounds. The thing that, um, you know, clients they'll, they'll really struggle with trying to quantify what they're being granted in their equity. And so prior to the IPO, a lot of times they'll go to, you know, the number of our issues or options or the percentage of the company that they're being granted. And I tell them, yeah, you know, that's great. And being granted more, you know, is better. But the price, you know, what's that, that big unknown variable, the future liquidity event and the price that you're going to be able to sell at. And so whenever I'm working with someone prior to an IPO, I just start really encouraging them to think about that future exit that we're planning for to really start thinking about that in terms of. of price. What is the price in the future that I'd like to sell at? Especially if we get to where we're done with our issues and we're done with stock options and now we've got shares that you're holding on to and we're trying to make that investment choice of when is the best time for you to exit that position. Really start thinking about what's the price that I'm happy to sell at. But most of them prior to the IPO, if they're getting RSUs, they're hoping for the IPO and then they're not really thinking about anything else in terms of the RSUs. So one, you know, kind of thing to consider is at what point does it make sense for me really to, you know, to think about getting some help with this? And that's a very personal choice, but it, you know, it's definitely like when you get to the point where you're going, okay, this might happen this year, or it might happen at the start of next year in terms of the IPO, it would really be a good time to, to start working with someone and get a really good understanding of, What do I have? And in the IPO, how is this going to work for me? What are the things that I need to know? What are the mistakes that I should avoid?

26:55 - 28:06 | Christopher: I think that's, that's with RSUs. I think if you have ISOs, my, I always recommend it like as soon as you get those, because, um, one of, and again, I know this is, this isn't the show about ISOs, but I just want to touch on something like I, in my last IPO with GitLab, we had the opportunity to do early exercise, meaning that I could eliminate AMT if I believed in the company and wanted to make the investment of my own dollars up front, which we ended up doing for a portion. We said, OK, let's go long on this portion. But that was something that was a result of having been through a couple IPOs before, having had a team in place. I was able to understand, OK, I am going to take a position in this company. I'm going to lower my tax burden. I'm going to go long on this small set of shares. And here's going to be my investment. If you're just starting out trying to get, you know, tax help, trying to get some, you know, fee only financial advice so that you're not, you know, feeling any pressure, but you're starting to surround yourself with information, education and understanding what's going to happen when I think is critical.

28:06 - 29:16 | Landon: Yeah, absolutely. I agree. And so with incentive stock options, you know, I tell folks there's kind of that early opportunity, you know, real early on when you've just started where there's not a lot of difference between your exercise price and the value of the company. You know, you've got a window there and then you enter this kind of desert in the middle where there's a big gap between your exercise price and the fair market value of those shares and the alternative minimum tax just keeps getting bigger every year. But you don't know when you're going to have an exit. That's really tough. And then there's kind of right there. Your next really good window is right around that IPO. And then we get into the question of how much risk are we going to take around an IPO? you know, that maybe it happens, maybe it doesn't. And so incentive stock options are a whole nother thing. And they're a lot of fun, you know, for me, because of all the different variables and kind of the combination of things that we can consider doing.

29:17 - 29:41 | Christopher: 100%. I think that's actually worthy of another show, because we can go down all the nuances there. One of the things I wanted to touch on, because I know that we talked about at the beginning, is where do employees need to know about their pay stubs when it comes to equity compensation? Because I know pay stubs then have a relation to taxable events and those things.

29:42 - 31:08 | Landon: Yeah, absolutely. Prior to Equity Comp becoming taxable, your pay stub, your direct deposit every other week, it's all standard straightforward. You get a W-2 at the end of the year, you file your taxes. A lot of times our clients, they're typically going to be around 35 years old when they reach out for the first time. They've got 10 years of their career where they've gotten accustomed to this regular pay stub that they get. But now when you're dealing with RSUs that start to settle and become taxable, you're all of a sudden going to be getting pay stubs, but no direct deposit. And so now you've got this whole new thing going on. And so when we talk about equity comp, there's two pieces there. There's the equity and there's the comp. So property and income and you're going to have things that are going to be reported on your pay stub that are going to end up on your W-2 and now you're going to have to match what's going on on the pay stub and the W-2 to what's being reported at E-Trade or Schwab on a 1099-B and make sure that when you file your taxes that those two kind of pieces the capital gain the property side and the income the W-2 side that they match up and that you avoid getting taxed twice on the same income.

31:08 - 31:22 | Christopher: If you were going to run through a process and say, okay, you get your pay stub, you get the cashless pay stub, what are some of the two things or three things that you would do right away to just sort of verify that?

31:22 - 32:57 | Landon: Yeah. So initially it is just the pay stub and you've got to wait until the end of the year to get those other tax documents to then be able to do kind of the audit and the accounting. to draw the line through. But starting with that pay stub, you know, and we mentioned supplemental withholding earlier. So that's super important and it relates to the pay stub. Because one thing that, you know, new clients who are dealing with this for the first time will sometimes say to me is, they sold the cover, there were withholdings, so I'm good. You know, the taxes are taken care of. And what they don't realize is supplemental withholding is 22% federal. That's standard. And the majority of our clients, you know, are not in a 22% marginal tax rate. And so I start to tell them, look, every time those RSUs release and settle and you get that pay stub, your tax bill coming due next year is growing. And the pay stub lets us quantify that so we can verify, looking at your federal income tax that was withheld, at what rate was it withheld from those RSUs. So you take the federal withholding divided by the RSU income on that pay stub. And if it's 22%, you know, okay, I need to, you know, red flags, I need to start to pay attention to what's going on here. Really good chance I've got a big tax bill coming next April.

32:57 - 33:07 | Christopher: I think that's, that's really, really important is for people to understand that. And that, to be clear too, that's the 22% federal state tax may or may not be taken out either.

33:07 - 34:13 | Landon: Right. That's correct. And so, you know, if we're talking about a state like California, the standard supplemental withholding rate for California is 10%. So less of a problem there, 10%, you know, you may be good. 22% federal, you know, once we start getting into hundreds of thousands and sometimes millions of dollars, you know, then we're talking about tens of thousands or hundreds of thousands of dollars, you know, that's coming due next April. And especially if we're talking about, you know, our issues that are being released at an IPO, it becomes really important to pay attention to the settlement date. The withholding's great. And then the day that you can actually start trading, because, you know, depending on how all of that falls, we've got a plan for how are we going to pay these taxes? When am I going to be able to sell these shares if I need to sell more than what was sold for the standard withholding?

34:13 - 35:31 | Christopher: It's so important. Well, I know you and I could continue to talk about RSUs all day long, but I think the big takeaway here is that, you know, RSUs are a staple for public company equity compensation. It's now being seen more and more, especially in late stage private companies. Get educated. I'm going to put a couple links to some of your blog posts. I think you have some very, very well written blog posts on RSUs. Thank you so much for joining Landon and I in this conversation about RSUs. RSUs are such an important part of tech equity compensation because for public companies that give you guaranteed liquidity because they're already public, That is the main type of equity compensation that they provide. So understanding what they are, how they impact you is critical. If you want to know more, go to Tech Careers and Money News where we have on the website an RSU primer so that you can dig in and understand more. And also check out our YouTube video as we will have some instructional videos around how to understand and manage your RSUs. Thanks so much for joining. See you next week.