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My Company Is Going Public: What Happens To My RSUs? - YouTube
Channel: Java Wealth - Personal Finance for Tech Employees
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if you currently work for a private聽
company and you were granted RSUs but then聽聽
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there's an announcement that your聽
company is getting ready to go public,聽聽
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then what does that mean for your RSUs? Well today聽
we're going to talk about that we're going to talk聽聽
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about the way that it can work and a few of the聽
things to think about from a planning perspective.聽聽
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So first, before we get started it's聽
important to understand the basics of RSUs.聽聽
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So if you don't know that then聽
there's another video that I did聽聽
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on RSU basics that I'd encourage you to check聽
that out first and then come back to this one.聽聽
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Then also with equity compensation in private聽
companies, there's a lot of different ways that聽聽
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they can be structured and so I'm going to talk聽
about one common way that it's structured but it聽聽
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might be different for your particular situation.聽
So if you're unsure then I'd encourage you to聽聽
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reach out to a CFP庐 professional that focuses on聽
equity compensation like myself or somebody else.
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As I covered in my last video RSUs are granted to聽
you and then there's a vesting schedule that is聽聽
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tied to it. In this example, we're going to聽
say we're granted 4,000 RSUs and then every聽聽
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year you get a thousand of them and so in normal聽
circumstances at a public company then whenever聽聽
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this thousand would vest here then that would聽
become taxable income to you and then you have聽聽
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the option of selling the stock or you could聽
or you could hold it. But the thing is with a聽聽
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private company then whenever this year goes by聽
and then if a thousand shares would vest here,聽聽
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then it would be taxable income to you but聽
you would actually have no way of turning聽聽
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that into cash. So to fix this, a common way聽
that private companies will structure their RSUs聽聽
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is that they'll do something聽
called double-trigger vesting
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With double-trigger vesting the way that聽
the reason why it helps is that as the name聽聽
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implies there's actually two things that have聽
to happen in order for these RSUs to fully vest.聽聽
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The first one is time and that is very similar聽
to "regular" RSUs and the fact that if you start聽聽
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working at this company and you're granted these聽
RSUs then you have to stick around for one year,聽聽
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two years on in order for those to become yours.聽
and so that's the first trigger that has to聽聽
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happen. But then where it's different is that聽
there's this second trigger and it's some event聽聽
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and so in our example, we're going to talk about聽
an IPO and so that IPO will be the second event聽聽
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that will trigger the RSUs to vest. How does聽
this look like in practice? With your company聽聽
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saying that they're going to IPO and then once聽
that happens then it's really great news because聽聽
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all of these years of your hard work then you're聽
able to turn this bonus into cash. But then what聽聽
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it also means is that in this one year then you're聽
that's going to skyrocket your taxable income聽聽
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compared to all of your previous years. Now聽
don't get me wrong, it's still a champagne聽聽
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problem but it's still no fun to have to pay a聽
whole bunch of taxes. One quick clarification聽聽
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is that the actual event a lot of times isn't just聽
the IPO day, that it's IPO plus the lock-up period聽聽
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because that lock-up period is saying that, after聽
IPO as an employee, you still can't sell yet聽聽
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and so it's not until after that lock up period聽
that the actual second trigger happens and then聽聽
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that would be the date that would be considered聽
taxable income to you. So here's our situation.聽聽
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Now that we've gone, now that your company has聽
IPO'd and then you're past the lock-up period聽聽
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and all these RSUs have vested then that means聽
your income for this year has skyrocketed.聽聽
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So what can you do to plan for this? First聽
understand what your tax estimate is going聽聽
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to be and what tax bracket you're going to be聽
in. Now remember that whenever your RSUs vest聽聽
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then your employer is going to withhold an amount聽
but usually that is at 22% and there's going to聽聽
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be a high likelihood that you're going to be聽
in a higher tax bracket than that. The second聽聽
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thing you can do is try to defer as much income as聽
possible to try to lower your income for the year聽聽
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so common ways of doing that is by contributing聽
into your 401k pre-tax and contributing into your聽聽
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HSA and maxing that out. Most importantly聽
is to give this money a job. Remember聽聽
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that whenever this happens then it's going to聽
come to you in a lot of stock in your company聽聽
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and so if you're intentional and you and you've聽
given it a job then you can be a lot clearer聽聽
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in making that decision of how much to hold, how聽
much to sell and just cash out, how much to invest聽聽
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elsewhere and then how much to donate. Thanks for聽
watching, make sure you subscribe to the YouTube聽聽
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channel and check out javawealth.com if you want聽
more information and I'll talk to you guys later!
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