how do restricted stock units work for a company that isn’t public
In: 0
It will likely vary a bit based on the company. Stock options do something called vesting. Basically, there’s triggers in place so you only get the stock when certain conditions are met. Some really common ones are time (so you get the stock over a period 4 years as an example) or employee performance. But for startups, you can have additional triggers like an IPO, company being purchased or similar stuff. So you don’t technically have the stock until then.
I have RSUs for a pre ipo company. Mine basically act as an IOU. I get them based on years at the company, but they don’t actually exist yet. Once we get to IPO (or a few other events) they pop into existence and I get them.
They function like normal RSUs. The RSU has a vesting schedule (when you actually get ownership of the shares), and as each tranche of stock vests, you pay taxes on the market value of that stock at that time. In cases where the stock isn’t publicly traded, the company will publish a fair market value for the stock that is used for all tax-related calculations.
Once vested, the stock is yours to do with what you wish. You can keep or sell it. If the stock isn’t publicly traded, you just have to find a private buyer for the stock, rather than go to an established marketplace for the sale.
Imagine you have a favorite toy store called “Toyland” that you really love. Now, Toyland is not a public toy store, which means you can’t buy shares of the company on the stock market like you can with big companies like Disney or Apple.
But even though Toyland isn’t a public company, they still want to reward their hardworking employees. So, instead of giving them regular money or shares of the company, they give them something called “restricted stock units” or RSUs.
Here’s how it works: When an employee does a great job or reaches a certain milestone, Toyland decides to give them RSUs as a special reward. Each RSU is like a promise or a special coupon that says, “Hey, in the future, when Toyland becomes a public company or gets sold, you will get something special!”
Think of the RSUs as magical tokens that the employees keep safe until something big happens to Toyland. When that special moment comes, and Toyland becomes a public company or gets sold, those RSUs can turn into real shares or money for the employees. It’s like the magical tokens transforming into real toys or treats!
Now, it’s important to remember that RSUs can have rules and restrictions. For example, the employees might have to wait for a certain amount of time, like a few years, before they can get the actual shares or money. This helps Toyland make sure the employees stay committed to the company and continue doing their best.
So, in simple terms, restricted stock units are like special tokens given to employees by companies that aren’t public. These tokens can turn into real shares or money in the future when something big happens to the company. It’s a way for the company to say, “Great job, and we appreciate your hard work!”
Using SpaceX as an example, lots of workers got stock in the company. But they can’t just sell them on the open market to cash out, so SpaceX did a round of funding with institutional investors so those workers effectively sold their stock to the investors. There were a lot of overnight millionaires.
Latest Answers