Equity compensation is one of the strategies used by fast-growing companies (and enterprises) to capture the best talents for their workforce. In recent times, it is also being used for employee retention as well as motivating employees to work harder and more efficiently. Stock compensation in private companies is often in the form of Restricted Stock Units (RSUs), which can be more complex and work differently than RSUs in public companies.Some challenges to Restricted Stock Units in private companies lie in uncertainties about when they might mature, how they will be taxed, and how employees can maximize their gain.Here is a quick guide on RSUs offered by private companies and how they can be used efficiently for you:
RSUs in Private Companies
RSUs in a private company are similar to RSUs in a public company. Except, in a private company, the RSUs are owned by an employee after the vesting date.When a private company offers RSUs, the employee becomes a stakeholder, meaning they hold partial ownership of the business and its profits.The RSUs may or may not be worth any profit. But, the employees are required to pay taxes on the RSUs they own as soon as the RSUs vest. The good thing is that RSUs are taxed only based on their profit. Read this to know more about how RSUs are taxed.
Fixing The Tax Problem
Many companies have a well-structured stock option plan to help employees pay minimum taxes on a risky incentive. One such plan is a “double trigger.” The double trigger requires two conditions to be met for the employee to own the shares: (1) Vesting period is complete, and (2) company has issued an IPO.However, for employees who work in companies that don’t have the double trigger requirement, the 83(i) tax election can be beneficial.83(i) tax election allows employees to defer paying taxes for a period of 5 years after the vesting date. Hopefully, the company can go public within this period of time, allowing employees to start making profits on their Restricted Stock Units and easily pay for the implied taxes.Employees must remember to take the 83(i) tax election within 30 days of the RSU vesting. It is also important to note that companies must fulfill specific criteria to be able to qualify for the 83(i) tax election, and the company is obliged to notify its employees regarding the same.Now that there is an understanding of RSUs in private companies and how to avoid paying hefty taxes, let's look at some tips on making the best use of RSUs and maximizing their profits.
How to Use the Restricted Stock Units
Knowing the crucial details such as the number of RSUs given to the employee, and the vesting date, among others, you can enjoy maximum leverage on these stock units. We recommend reading the documents provided thoroughly so that you can avail the benefits of electing section 83(i), etc.You can also learn what will happen to the RSUs if and when you leave the company before the second vesting trigger or the company goes public. Using this data, you can easily manage the RSUs. You can strategize on the taxing schedules and schemes, plan on selling them with maximum profits, and also analyze your personal finances based on their returns.
How to Tax Stock Compensations
In private companies, the RSUs are taxed immediately after they are vested. However, RSUs with a double trigger requirement are not taxed until the company goes public.Employees can choose to sell them as soon as they vest to avoid additional taxes. However, employees will not be able to profit from the RSUs as the company grows and gains more value.There are certainly effective strategies that employees can adopt to minimize the taxes on Restricted Stock Units.Here is a quick guide on tax strategies to maximize RSU profits.
Manage Risks with trica
When Restricted Stock Units make a profit, employees can easily pay off the taxes with the profits while minimizing the tax liabilities with effective strategies. Although, equity compensation benefits are subject to market risks.However, in an off chance of a drop in the company’s market value, the RSUs may not be worth as much. Additionally, the taxes implied on the vested RSUs before the company went public can be quite hefty.Trica equity is a digital solution that creates a robust interface, enabling startups and employees to manage their stock options efficiently. With Trica, employees can understand their Restricted Stock Units, manage their portfolios, and maximize their return even with pre-IPO companies.Read more about trica equity here. Request a demo to learn more about our services.
ESOP & Cap table
Management simplified
