Why did Facebook stop giving out options in 2007 and start giving out RSUs (restricted stock units)?
Generally, I'm asking, what advantage did the company see in switching to RSUs over options?
2 Answers
From abovethecrowd :
In an effort to avoid the restrictions of 409A, Facebook long agoFrom my understanding of this, it means that as Facebook's valuation went up, so did their strike price (because their corresponding 409a valuation would have gone up). Giving out options at such a huge strike price wasn't so appealing to employees. Instead they gave them restricted stock (so essentially an option with a zero strike price) but it didn't vest until six months after a liquidity event (after lockup expires), so the employee wouldn't owe taxes until the time when they could sell the shares.
created an RSU structure whose shares vest on a liquidity event. As a
result, a large amount of stock (close to $1B in value) will all
“vest” on the IPO. This will result in an enormous one-time, non-cash
charge.
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BTW, RSU's have a tax implication for the employee not only at the sale/liquidity but also when the RSU's vest. That tax is calculated based on a $0 strike price. If the underlying stock price rises between the RSU vest date and the actual sale date, the extra profit is also taxes (or loss accrued). – Sid 13 years ago
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@Sid Sure, but Facebook set it so the RSUs only vest on the liquidity event. I wonder when the Long Term Gains clock starts ticking... grant date or vesting date... – Michael Pryor 13 years ago
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@ Michael Very unlikely. The vesting schedule is determined ahead of time, defined as the restrictions themselves. ('R' of RSU). At that predetermined time/schedule, it vests and the stock becomes 'unrestricted' and property of the employee. Facebook cannot tell an employee 'you must sell this stock on the day it vests' - it's the employees property. He or she may sell that stock 1 day later or 10 years later. – Sid 13 years ago
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@Sid I think we agree. I'm not saying that FB is specifying the sale date. They are specifying the vest date and they are making it equal to the date of the liquidity event. – Michael Pryor 13 years ago
Restricted options are similar to regular options but can have a range of conditions attached to them before they become transferable. Company performance on financial targets, continued employment over a period of time - these kinds of stock grants are becoming more and more popular, especially for executives.
Facebook probably went with RSU's because it allowed them to hand out chunks of stock that have enormous dollar appeal and still limits the financial risk of hiring a potential dud of an employee. Also, as I said there are usually transfer restrictions on the stock before a certain period of time or condition - my guess is that this was used to prevent anybody from accumulating a large enough block of shares to have influence within the company.
This is all speculation, of course, because I have no idea what conditions Facebook has been attaching to their RSUs. But those are some general reasons.
