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RSUs or Stock Options what did you do and how to think about it
Old 11-23-2021, 02:25 PM   #1
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RSUs or Stock Options what did you do and how to think about it

Hey all - hoping to gather some insight into what to choose. I am now eligible for the long term incentive plan at w@rk. I understood that it was coming, but I was happily surprised that on top of my bonus increasing this year I get another 10% in long term incentive. I can choose RSU/Stock Options the following way. 100/0, 75/25, 50/50, 25/75 and 0/100.

The RSU cliff vests at 3 years and the options vest 1/3 every year over three years.

The RSU s are exercised and you get them plus dividends on vest day and you also get to pay a lot of taxes as it is ordinary income, and I'm still working.

The stock options can be exercised whenever within the next ten years.

My current thinking is that I will retire in the next 3-10 years and I was hoping I could avoid exercising the stock options until after I am retired and thus exercise some every year and not have as great of a tax burden.

What did you do and do you have any suggestions as how to think about this? Are there additional things I should consider?

Thanks
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Old 11-23-2021, 05:07 PM   #2
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It seems like it would depend on the performance of your company's stock whether it would be better to take RSUs or options.
If your stock is balling, then going heavy into options might be a more profitable choice. If returns are rather flat, then the RSUs would be a better choice since you can exercise them at full value as soon as they vest; sell them, and reinvest the proceeds. You get the dividends too.
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Old 11-23-2021, 05:20 PM   #3
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Congratulations on getting stock incentives!

An RSU typically has value on the day it is assigned, while the stock option only has value when the stock price rises above the strike price. Small increases in the price of stock create greater value in options than RSUs.

If you choose more stock options, make sure you can keep the options after retiring. Some companies ask option holders to exercise within a short window after leaving employment, and this might interfere with your tax plans.

Also, one thing to keep in mind is, in the unlikely case you are fired or separate on unfriendly terms, options might be withdrawn.
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Old 11-24-2021, 04:32 AM   #4
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Thanks for the input thus far. The company is a dividend aristocrat with relatively stable stock price, but the last five years the stock performance has been lackluster, so the 2016 options are still under water.

I understand the risk of losing stock options if fired for some reason, but I don’t think that is likely. What I am uncertain about is with ER, 55 is considered earliest retirement age to be eligible for a pension, but I am not part of that plan, so I don’t know what would happen if I were to retire at 52 at this point. Most retirees today all fall under the pension plan, so they stay until 55 at least, but most go by 59.

I have studied the different scenarios for the stock. If the stock appreciates at 3% you then stock options are worth more in year 8, 5% break even is 5 years and 8% break even is two years.
In general you get 4-5 stock options or 1 RSU.

I’m leaning towards the options since this is “found money” and that I have not counted on for my FIRE, so could take more risk, but on the other hand I have also read stories here about stocks/options expiring worthless or people wanting yo avoid taxes and end up losing more because of that.
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Old 11-24-2021, 04:49 AM   #5
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I purchased my RSUs when they were under water, I was trying minimize my ordinary income. After that, I simply collected the divvies and sold for capital gains. But I'm a long term investor, so while I didn't make a killing on the RSUs, my return on my capital invested was over 5 years instead of 8 was extremely good. I had 5 years of RSUs that I did that way, before megacorp ended the program, because the stock price languished for over 5 years.
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Old 11-24-2021, 04:56 AM   #6
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Just my 2 cents from someone who helps administers stock comp plans at my work. Difficult to say which is better without additional details, but generally speaking I would personally prefer to receive RSUs over options. Reason being if your company’s stock declines, the RSUs are still worth something whereas your options are worthless if stock price dips below strike price. If stock price increases, I believe the value of RSUs vs options should be similar in theory and that’s where the other considerations such as timing of taxable compensation come into play
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Old 11-24-2021, 06:16 AM   #7
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When I first started working in my industry, options were the only stock incentive granted. As others have noted, the upside is bigger but you can go under water with them, unlike RSU's. Eventually, my industry switched completely to RSU's with options only occasionally granted. I recall when the switch happened as they specifically called out that upon switching to RSU's one could expect to receive only about 25% of the number of shares one had previously received. And that's pretty much been the case, at least in the companies where I've worked for almost 40 years now.

Regarding RSU vesting, most companies I've worked for had a 3 or 4 year vesting period where a fraction became vested each year. For example with 3 linear year vesting it would be 1/3 after 1 year, 1/3 after 2 years, 1/3 after 3 years. So after you're at a company for 3 years, you've filled up the queue. Though one should never just assume that grants will happen ever year. My previous employer, a European company, had something closer to stock options with a 3 year cliff vest. They shut down our office about 2 months before my first options would have vested. Grrrr...

One more twist. My current employer grants RSU's in two buckets. Regular RSU's and Performance RSU's. Performance RSU's are vested based on pre-defined corporate goals being met. The goals seem to be different each time. Could be EBITDA over a certain number of quarters, a particular gross margin, or whatever. My experience so far with these is that the Performance RSU's is that they are hit or miss. Also, they can be set up to be all or nothing or the goals can be set up such that the amount that actually vests depends on how much of the goal was attained. My experience so far is that I've been granted Regular RSU's vs Performance RSU's at about a 50/50 split.

Another twist. Beginning next year, my current employer is changing the vesting from annual to monthly. Since everybody who is granted RSU's always had their vesting dates on the same days, I suppose this smooths out the attrition that happens when a big chunk of RSU's vest simultaneously for a lot of employees.

Finally, for me it's no fun being named an "insider" for the purposes of ESPP and RSU's sales. My policy for my entire career has been to sell on the same day that shares show up in my E-trade account. Now I'm subject to trading windows. I treat all of this as "free money" from my company and choose not to add more concentrated risk by owning stock in the same entity that creates my paycheck.

An article on the differences and pros/cons: https://smartasset.com/investing/stock-options-vs-rsu

Cheers,
Big-Papa
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Old 11-24-2021, 06:42 AM   #8
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Quote:
Originally Posted by NgineER View Post
Thanks for the input thus far. The company is a dividend aristocrat with relatively stable stock price, but the last five years the stock performance has been lackluster, so the 2016 options are still under water.

I understand the risk of losing stock options if fired for some reason, but I don’t think that is likely. What I am uncertain about is with ER, 55 is considered earliest retirement age to be eligible for a pension, but I am not part of that plan, so I don’t know what would happen if I were to retire at 52 at this point. Most retirees today all fall under the pension plan, so they stay until 55 at least, but most go by 59.

I have studied the different scenarios for the stock. If the stock appreciates at 3% you then stock options are worth more in year 8, 5% break even is 5 years and 8% break even is two years.
In general you get 4-5 stock options or 1 RSU.

I’m leaning towards the options since this is “found money” and that I have not counted on for my FIRE, so could take more risk, but on the other hand I have also read stories here about stocks/options expiring worthless or people wanting yo avoid taxes and end up losing more because of that.
Thanks for the additional detail. Two more comments.

First, if you can get a copy of the stock option contract / terms, that would help. My megacorp employer allowed employees to hold options after leaving only when they qualified as “retired employees”. If they just quit they had 60 days to exercise. Those terms are critically important.

Second, the ISO options got a bad rap back in the tech market collapse in ‘00 because they paid AMT on the very high valuations but then lost value when the market collapsed. This is not typical and doesn’t sound like the case of the OP. The ISO stock option is otherwise an attractive alternative because, when the options are exercised and the stock held for >1 year the gain is taxed as LTCP and not income.

The options definitely have greater upside potential, both before and after tax.
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Old 11-24-2021, 09:21 AM   #9
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Thanks for the additional detail. Two more comments.

First, if you can get a copy of the stock option contract / terms, that would help. My megacorp employer allowed employees to hold options after leaving only when they qualified as “retired employees”. If they just quit they had 60 days to exercise. Those terms are critically important.

Second, the ISO options got a bad rap back in the tech market collapse in ‘00 because they paid AMT on the very high valuations but then lost value when the market collapsed. This is not typical and doesn’t sound like the case of the OP. The ISO stock option is otherwise an attractive alternative because, when the options are exercised and the stock held for >1 year the gain is taxed as LTCP and not income.

The options definitely have greater upside potential, both before and after tax.
Yes, it's important to know if the options are ISOs or NQSOs when figuring the tax implications. The options DH and I had were always ISOs when in start-up mode and NQSOs after the company went public. In no case could we have held onto the unexercised NQSOs for more than 30 or 60 days after leaving the company.

I don't recall any provisions for retirees to hold stock in the various stock option plans we had, but typically in benefit plans there's a specific definition of "retired" that involves a formula with a minumum age and years of service. Usually a 52 year old will not qualify.
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Old 11-24-2021, 09:41 AM   #10
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I had options for ten years, RSU for two.

Options allowed me to retire at 58. RSU's were not great. The tax regime in my jurisdiction made options much more attractive. Primarily because most options were in the 15-22 range and were exercised in the 44-54 range. The stock hit 55, then was down to 17 a year later. Several of my colleagues failed to exercise at higher prices or saw some options go under water.

As above, understand your option vesting T's and C's. My remaining unvested options were deemed to vest on my retirement-age 55 and above.

Don't drink the company kool aid. Watch the market, the market analysts, and options sold each period by senior execs. These are part of the corporate quarterly financial disclosures.
There was a period each quarter during which I was not able to exercise options by virtue of my position. As a recall, it was quarter end time when the results were being announced.
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Old 11-24-2021, 09:56 AM   #11
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Originally Posted by Eastfolk View Post
Just my 2 cents from someone who helps administers stock comp plans at my work. Difficult to say which is better without additional details, but generally speaking I would personally prefer to receive RSUs over options. Reason being if your company’s stock declines, the RSUs are still worth something whereas your options are worthless if stock price dips below strike price. If stock price increases, I believe the value of RSUs vs options should be similar in theory and that’s where the other considerations such as timing of taxable compensation come into play
Great point here. In 2000 I received an option grant near the top of the internet bubble. I left the company in 2001, but had I stayed, there was only like a couple months where my shares were vested and I could exercise for a profit. And this was over a 10yr time frame.

The point above regarding ISO or NQ is important. Exercising and holding ISOs can trigger AMT and nasty tax consequences (search for ‘bargain element’). Exercising the NQ at one time, say 10yrs from now, could be a very large tax bill. You can always quickly sell a portion of the RSUs to cover the tax and hold the rest each time.

Another significant benefit of the options are that they are held in a taxable account. This give you accessible money prior to 59.5, some of which could be used to pay tax on Roth conversions.

Congrats on the award.
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Old 11-24-2021, 10:28 AM   #12
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Thanks for your input. Here are some more details:

The stock options are NQSO, so no taxes when granted or upon vesting, just ordinary income taxes when exercised.
This a long term incentive, so grant occurs regardless of how the company is doing, but there is an individual performance component. If you are performing below expectations you get 70% of the amount, 100% at meets expectations and then 130% if exceeding expectations.
would
There are multiple different scenarios of what happens upon retirement, divestiture, termination and disqualified termination. Retirement keeps vesting at normal timeline and unvested vests on schedule (would lock me in until 55). Retiring early would potentially force me to exercise within 90 days of leaving. Getting job eliminated would forfeit all unvested shares and getting fired for not meeting our company code of conduct would forfeit all vested and unvested options and RSUs.
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Old 11-24-2021, 10:30 AM   #13
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If your company’s stock price is relatively flat then there is little potential for gain from a NQ. NQ options must be priced at FMV on date of grant.

The RSU becomes ordinary income to you at the vesting date at the FMV. Generally you can elect to sell some of the vested shares to cover tax withholding. So if 150 shares vest you might have 65 sold to cover tax and net 85 shares that you can hold or sell whenever you wish. If you don’t elect to “sell to cover tax” then you have to come up with cash on each vest date.
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Old 11-24-2021, 11:57 AM   #14
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Thanks for all the input here. In general the stock price has gone up over the 10 year periods.

3% annual return over 10 year rolling periods since 1970 in 96% of the time periods, 5% annual return over 10 year rolling periods in 90% of the time periods and 10% return over 10 year rolling periods in 57% of the time periods.

Annual return over the last 40 years is over 10%.
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Old 11-24-2021, 04:20 PM   #15
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Thanks for all input. My decision for this year is to go for 100% stock options for next year's long term incentive plan and then revisit every year. Stock performance has been relatively flat over the last five years (except for the Covid dip). This is aggressive, but I don't need the money now.

I am hoping this is the right choice and that it will help me balance taxes and provide me with an additional pot of gold at the end of the rainbow when I retire.

The 3% yoy return for RSUs results in about 70% gain over 10 years (including dividends and paying the taxes from an after tax account) whereas the options result in a doubling in value over that time period.

The 5% yoy return for RSUs results in about 100% gain over 10 years (including dividends and paying the taxes from an after tax account) whereas the options result in a 250% return over that time period.

The 10% yoy return for RSUs results in about 240% gain over 10 years (including dividends and paying the taxes from an after tax account) whereas the options result in a 800% return over that time period.

The 0% yoy return for RSUs results in about 22% gain over 10 years (just dividends and paying the taxes from an after tax account) whereas the options result in a 0% return over that time period.
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