The Golden Carrot
Think of RSUs as a promise of a bonus, not guaranteed compensation or even ownership.
Equity is a golden carrot dangling in front of the corporate donkey. It encourages you to stay, yet it shifts risk entirely onto you.
The idea that you “own part of the company and its success” sounds stirring, yet your stake is infinitesimal. A 1,000-share grant in a large corporation with 10 billion shares outstanding is 0.00001% of the firm. You already give the company many hours each day; the rhetoric that a microscopic slice now makes you a co-owner is pure marketing.
Quit, and unvested shares disappear. A four-year vesting period is above the median tenure of 3.9 years. For employees under 35 years that figure is 2.7 years. Many therefore never see all their RSUs vest, especially with typical 12-month cliffs.
RSUs hit as ordinary income at vesting. Any movement after that is taxed as capital gains. You carry the volatility and the tax timing, not to mention the fact that trading windows often prohibit you from selling when it is convenient for you.
The golden carrot is also smaller than it initially appears. Even in a friendly market, after taxes and inflation the figure on the grant shrinks considerably. See the table below for details.
Assumptions:
- 1,000 RSUs à $100 at grant with 250 vesting at the end of each year;
- 35% income tax, paid for via sell-to-cover;
- 15% capital gains tax on appreciation after vesting;
- Nominal annual return of 6.7% for large-cap equities per JPMorgan;
- 2% annual inflation.
| Year | Vest price | Gross at vest | Income tax at vest | Net shares kept | Sale value at year-4 price | Cap gains per tranche |
|---|---|---|---|---|---|---|
| 1 | $106.70 | $26,675 | $9,336 | 162.5 | $21,063 | $559 |
| 2 | $113.85 | $28,462 | $9,962 | 162.5 | $21,063 | $384 |
| 3 | $121.48 | $30,369 | $10,629 | 162.5 | $21,063 | $198 |
| 4 | $129.62 | $32,404 | $11,341 | 162.5 | $21,063 | $0 |
| $117,910 | $41,269 | 650 | Sale proceeds (nominal) | $84,250 | ||
| Capital gains tax | $1,141 | |||||
| Net cash at sale (nominal) | $83,109 | |||||
| Net cash at sale (real) | $76,780 |
The $100,000 promised in your contract is $76,780 in today’s dollars after taxes. If, however, you live in Western Europe where the capital gains tax is around 30%, that figure drops to $75,725, if the share price appreciates at 6.7%.
And that’s a big if. Most stocks perform worse than one-month treasury bills. Only a small minority create most of the market’s wealth. The best strategy is therefore to sell and diversify.
What about stock options?
Stock options are worse. Most startups do not deliver liquidity inside a four-year window. The median IPO age has drifted towards a decade or more in recent years. Many VC-backed firms never return cash. Options also require you to fork over the strike price from your own wages.
So, don’t be fooled by large carrots that glitter like gold.