RSA vs RSU

A step beyond stock options

Class 13 - Group 27
 Agenda
Definition and applications of stock options, RSA and RSU

Section 83 b) and example

Tax issues

RSA vs RSU

Case study: Amazon

 Stock Options
A stock option gives an investor the right, but not the obligation,
to buy or sell a stock at an agreed upon price and date.

Rewarding only if the

company’s value Risky Agency problem
increases

…What if we “restrict” those options?


RSA
Definition
A RSA is a grant of company
stock in which the recipient’s
rights in the stock are restricted
until the shares vest
Application and rules
 Legally owned by employees at the
grant date
 If employees do not fulfill the vesting
requirements, the company can buy
back the shares
 Not given for free, but the investor may
have to pay
 Application and rules

RSU  Vesting conditions must be satisfied

Definition
A RSU is a promise made to an
employee by an employer to  Termination: unvested shares are
grant a given number of shares subject to forfeit
of the company's stock to the
employee at a predetermined
time in the future
 Given for free
 Employees don’t
have to pay taxes
on the gain

Section 83 b)
Income taxes
Allows employees to anticipate the paid on the entire
If FMV of shares
payment of tax liabilities, whether = amount paid,
amount of shares
the taxable gain
they expect an increase in the granted
is nil
share value of the company.

No sense if the
value of the
company decreases,
because it involves
higher taxes
Let’s clarify No Section 83 b) If Section 83 b)
with an
example Income to be recorded: Income to be recorded:
1/5 * (100*$20) = $ 400 100 * $20 = $2,000

No impact of the
Data: increase of FMV on the
Increase in market value taxable income
# shares = 100
$20  $25
Exception: shares sold
FMV at grant date= $20 after the 1st year.
Taxable income:
$25 * 100/5 = $500 Capital gain income:
Vesting period = 5 years 500 – 400 = $ 100
 RSA taxes
Without With Section
Section 83b) 83b)

- Employee is taxed at vesting, when the

restriction lapse

- In case of an increase of FMV  amount of

income taxed: difference between FMV of No need to pay on capital taxable income
the grant at the time of vesting and the because of upfront payment
amount paid for the grant

- If shares are sold, the employee will register

a capital gain equal to the difference
between selling price and total income of the
whole period
 RSU taxes
Without With Section
Section 83b) 83b)
» Income taxes paid at vesting

» No payments at grant
Not eligible for RSU
» Taxable income = market value of the shares
at vesting

» Taxable amount takes into account FMV of

the company
 RSA vs RSU
RSA RSU

 Owned since the grant day  Owned only after vesting period
 voting rights  no voting rights
 dividends on unvested  no dividends on unvested

 Possible payment No payments

 Section 83b) No Section 83 b)

 Taxation cannot be deferred Taxation can be deferred beyond

beyond vesting vesting if distribution of underlying
shares is deferred
 Help maximize capital gains Taxed mostly as ordinary income
 Case study
 Aim: attracting and retaining top talents for a long time
 Amazon can fire “bad” employees, thus preventing them
Amazon from acquiring a substantial number of shares

 Amazon plan specifies the number of share instead of the

Typical RSUs: computed current value
25 – 25 – 25 – 25
 Tax consequences in years 3 and 4, according to higher
vs income

Amazon RSUs:  Taxes at vesting: income basis

5 – 15 – 40 – 40
 Taxes if shares sold: capital gains on difference between
selling and vesting price
Assumptions:

 An employee receives 400 Price: $ 270

RSUs Income: $ 43,200 4th
Taxes: $ 15,120
 Current price: $200
Price: $ 300
 Income taxes: 35% Income: $ 48,000
3rd Taxes: $ 16,800

Price: $ 230
Income: $ 4,600 2nd Total income: $ 110.800
Taxes: $ 1,610
Taxes paid at vesting
Price: $ 250
1st Income: $ 15,000
Taxes: $ 5,250
Shares sold if price = $ 500

Capital gain: $ 89.200 (tax rate: 15%)

 What if Amazon issued RSA?

By applying Section 83 b) to RSA, taxes would be:

15 % on the capital gain

35 % on the total value: Capital Gain = $ 500 * 400 – 80,000 = Total taxes:
Total value = $ 200 * 400 = $ 80,000 = $120,000 28,000 +18,000 =
Taxes = $ 80,000 * 35% = $ 28,000 Taxes = $120,000 * 15%= = $ 46,000
= $ 18,000

With RSU, total taxes = $ 52,160

 To recap

Solved
Rewarding only if the
Risky Agency problem
company’s value
increases

But still…  Prerequisite of RSU: Listed company

 Less incentive to increase share value

 RSA cannot be redeemed for cash (RSU can)

Thank you for your attention!