RSUs, ESPP? How your W2 can lead to financial famines & feasts

W2 stock is flat, still make 91%? The surprising math that could give you some easy wins with W2 stock based compensation.

Often requested, today is finally a deep dive on big tech compensation. Specifically, 3k words going into every aspect of how stock-based compensation for your tech W2 will impact you in unexpected ways, causing seasons of famine and feast.

Today's post will be focused on working at public US big tech companies. For private or smaller companies the structure may look different such as involving options contracts. Regardless, many of the principles will still apply though your path to sell may be more limited or different than simply clicking a button every 3 months.

None of this is financial advice, tax planning, or legal counsel. The implications of any of these different structures can vary by state or country, so make sure to find your own local professionals.

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Total Compensation Breakdown?

"Total compensation breakdown?" is the question that you immediately need to ask when recruiters reach out on LinkedIn.

This is because your W-2 salary will not simply be in cash showing up on your paycheque every two weeks. Almost always for tech jobs there will be an equity component which exposes you to both upside and downside of the company that you're working at.

There are different ways that that component can be structured, including options, but most common for public big tech companies is RSUs, or restricted share units.

It's important when considering job offers to dig into all the details of total compensation and equity breakdown. There can be all sorts of slight nuances that make one offer significantly better or worse, depending on the structure (RSUs vs options), whether the company is public, and the vesting schedule.

Why do companies offer options / RSUs / ESPP?

The biggest factor is that companies can reduce their cash outlays by turning more employee compensation into stock based compensation, which notably partially moves the cost of labor from an expense on their income statement to simply a stock issuance on their cap table / balance sheet owner's equity.

When companies report their earnings publicly or to their VCs this can have a huge impact.

Specifically, companies can appear much more profitable than they really are by hiding much of their biggest expense (labor) in stock issuance, instead of up front in the income statement expenses.

This is a big part of the "adjusted, adjusted, adjusted EBITDA" meme for most tech companies.

Secondarily, incentivizing stock purchases and ownership by employees effectively adds more buyers to the market for company shares since not every employee will automatically sell all their stock from RSUs or ESPP (employee stock purchase plan).

Just as there are HODLers in the market, there will be employees at the company who regardless of what may be best for their personal finances, will jump on the hype train, sense of loyalty, or other investor psychological pitfalls and hold company stock through huge volatility.

The more stock that is effectively locked up with HODLers, the better for the company.

Vesting Schedules

Regardless of the legal structure, equity will almost always have a vesting schedule.

Vesting means that you'll be given a large equity package when you sign or when you get a promotion, but you will only get the full equity if you continue to work there. Your package will vest over often four years, and be released to you in equal amounts every month or every quarter.

For example, an equity package of $480k on signing that vests over four years means that you'll get $120k/year (or $30k/quarter or $10k/month) and you will only receive the full amount if you work the full four years.

It's important to get full transparency on the vesting schedule and also conditions which would cause it to be paused. For example, some types of leave or time off can pause vesting which will have a material impact on your total compensation for that year.

Some vesting schedules, especially at startups have a 1 year cliff, which means that your vesting for the first year only is locked up until the 13th month when the entire vested first year amount is granted. Then, regular vesting on a monthly or quarterly schedule begins. For startups, this provides effectively a 12 month probation window on equity, preventing cluttering the cap table with equity holders who in month 9 were fired, but had already vested 9 months of equity.

Many public companies let you start vesting immediately without a cliff, but again it can vary by company or even by job offer, so read the fine print and retain your own professional services as necessary.

Trading Windows

As a reminder, public companies have a limited number of days per year during which insiders can sell the stock to prevent insider trading. Often this will be 2 to 6 weeks following quarterly earnings being published.

For example: earnings might get released May 3, and the trading window could open May 6 and close June 10.

Notably, given the limitations of the trading window, you will need to up your budget planning game. Your stock compensation will not be available to you in equal even increments like your paycheque every two weeks. You will need to get much better at budgeting and planning because your income will now be quite lumpy.

Many job packages even have more than half of the total compensation annually being structured as equity. This means that your biweekly paycheck could be so small that it barely even covers your expenses, while you may have very large five or six figure lumpy income landing in your account each quarter from stock sales.

Big one time costs like your house insurance, property tax, or a car repair could wipe out your savings for the month if you don't plan ahead and keep sufficient buffer between your trading windows.

Options Contracts

Briefly, options are a contract that let you purchase a certain amount of stock at a certain price (strike price) at a certain date.

Options contracts are much more common in private companies since they are simpler to issue with less regulatory burden than taking the company public, and are less common to be found in packages from tech companies.

One thing to consider with options contract is that it is contract that gives your the "option" to purchase shares under set conditions, you don't actually own the equity yet.

You'll need to come up with cash on your own to exercise the option before you actually own the shares which then you can sell (if it's a public company) or liquidate through a buyback or employee liquidity program (if it's an private company).

RSUs (Restricted Share Units)

RSUs in public companies are much simpler.