As private companies continue to evolve and rapidly grow in size, retaining and attracting top talent has become increasingly challenging. What might a private company consider when offering restricted stock units (RSUs) as an equity incentive for employees?
What might a private company consider when offering restricted stock units (RSUs) as an equity incentive for employees? Nasdaq Private Market (NPM) explores this topic in their new paper, “An Overview of Restricted Stock Units.”
As private companies continue to evolve and rapidly grow in size, retaining and attracting top talent has become increasingly challenging. 1 There are many ways to structure an employee equity program, but the vast majority of private companies choose stock options or restricted stock units. Nasdaq Private Market has facilitated more than 200 secondary programs since 2013, working with companies that allow employees to sell vested shares or exercise and sell options. As companies continue to explore RSUs as an equity incentive option for their employees, the NPM team is sharing their knowledge and experience.
- An Introduction to RSUs:
Restricted stock units are an offer by the company to provide a specific number of company shares (or the cash equivalent of those shares at the time of vesting) at some agreed-upon timeframe in the future. RSUs resemble options in this way, in that options represent the right to buy company’s stock at a specific price (referred to as “strike price” or “exercise price”) at some point in the future (“exercise date”). Similar to how option holders become official company shareholders when they exercise their options, RSU holders become official company shareholders when the RSUs vest.
- Benefits and costs of using RSUs compared to options:
The decision to use RSUs or options is very specific to each company’s lifecycle, liquidity needs, and employee retention and recruitment plan. While RSUs typically do not need to establish 409a which therefore saves money on valuation, options, for example, do not have taxes as they vest.
- Key considerations before including RSUs in liquidity programs:
With the demand for liquidity on the rise, talent acquisition teams at private companies are feeling the pressure to compete with more established businesses in their industry. Taking into consideration key factors, such as vesting and liquidity conditions, will help inform whether RSUs are the right asset class structure for a private company or not. Nasdaq Private Market has found that by working closely with a legal counsel to map out all implications of these incentive structures, designing a path that addresses potential problems, and considering a blended approach like a blended RSU plus option program may lead private companies to an effective equity incentive program.
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