RSUs or ISOs ?

Amazon
azmax

Go to company page Amazon

azmax
Apr 1 140 Comments

Which is more favorable ISO or RSU ?

Most startups offer only ISOs. But I am at a loss as to why would people put their own capital to get paper money when they are exercising options at a strike price? At what upside % does it make it worth putting your own money in ?
I am sure I am missing something and ISOs can't be that bad as almost all startups give ISOs and tenured and smart people from FAANG and elsewhere move to startups.

When a startup moves from ISOs to RSUs in Comp - what does that imply ? Are they close to IPO, doing well OR they are not doing that great ? For ex., I hear Verkada moved from ISOs to RSUs recently.

Please shed some light if you know more about ^.

Update:
Lot of relevant information here! Thanks! Although, I didn't know there were double trigger and single trigger RSUs. Also, what happens to ISOs in case the startup gets acquired ?

A follow

Blind tax:
TC: 295
Yoe: 7

#equity #startup #iso #options #rsu #faang

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 TOP 140 Comments
  • Google
    sPer32

    Go to company page Google

    sPer32
    ISOs have way better tax treatment. RSU get taxed as ordinary income, and in some cases (like Uber) employees have actually ended up owing more tax than they cashed out.

    Incentive ISO are tax free if granted at the existing 409a valuation. Then, when (if) you sell the stock, it's long term capital gains at worse. Best case scenario it was a "small business" for tax purposes (assets < $50 million) and it's 100% tax free.

    The flip side of course is that you have to pay to play - RSUs will usually not cost you any money (Uber example notwithstanding). And if you want very favorable tax treatment, you have to exercise when the company is really small.
    Apr 1 23
  • People on blind are scared of risk so they will vote for RSUs
    Apr 1 10
    • Meta
      deprssd

      Go to company page Meta

      deprssd
      You won’t have these luxuries if the company is a startup! Ask those who worked at Uber and got RSUs about how they got screwed on taxes post IPO.
      Apr 2
    • Amazon
      idk1984

      Go to company page Amazon

      idk1984
      Stock at a startup is worthless unless pre-IPO. Might as well take the no risk option, chances are they're gonna fail. Rather be out a job than out a job and my savings.
      Apr 8
  • Meta
    BUap76

    Go to company page Meta

    BUap76
    Startup RSUs can be dangerous for the employee. Say you get “150k worth” RSU for the year in addition to your base. You’ll have to pay income tax on these in the year of vesting (30%*150 =45k). If stocks are still pre-IPO, this will come out of your base. This is why pre-IPO companies do ISOs as it helps defer taxation to exercise time.
    Apr 1 12
    • New
      HNlC

      New

      HNlC
      ^ no it’s always a taxable event. you may not owe any tax though
      Apr 1
    • Google
      Tzfw47

      Go to company page Google

      Tzfw47
      If you use 83B and exercise while FMV=strike the gain is $0. If you wanna split hairs, sure it’s “taxable”. But I meant $0 of tax. You know what I mean…. Cmon
      Apr 1
  • Amazon
    nohomework

    Go to company page Amazon

    nohomework
    I prefer ISOs cause they mount better in Windows 10
    Apr 1 3
  • Google
    Tzfw47

    Go to company page Google

    Tzfw47
    Pre IPO: ISO >> double trigger RSU > single trigger RSU
    Apr 1 4
    • Google
      Tzfw47

      Go to company page Google

      Tzfw47
      Lots of ISO are granted at FMV and if you exercise then, there is no gain thus no tax. If you wait and FMV climbs, then you aren’t necessarily taxed but it counts toward AMT (share exercise # x (FMV AT EXERCISE - STRIKE)). Thus if it is large enough you could trigger AMT and have to pay that. But it’s avoidable
      Apr 1
    • Spokeo
      ruhwoof

      Go to company page Spokeo

      ruhwoof
      I believe Tzfw47 points out an important thing and is on the mark regarding AMT.
      Apr 1