Changing companies when you've got RSUs to consider

You're ready to move onto a new opportunity, but your restricted stock units (RSUs) are holding you back. Let's walk through converting your RSUs in company A to cash in company B.

If you’re fortunate to work for a company that awards you a long-term incentive (LT or LTI) in the form of restricted stock units (RSU), you’ll want to convert those into cash when you make your move to a new company.

RSUs, in their simplest form, are an options instrument in which your current company (company A) promises to award you:

• a specific number of shares,

• at a future maturity date (a specific date in the future), and

• at a specific price per share - usually below what the market value at the time the RSU is awarded to you

If you remain with your company for the specified time period (say 3 years), those RSUs convert to cash (@ t = 3 years) at the current market value of the shares. Once converted to cash, you are automatically taxed at your personal income tax rate (not the long-term capital gains tax rate).

RSUs are a way to reward loyalty and longevity with the company. The longer you stay with company A, the higher the value of the shares (hopefully) and the greater the cash conversion at t = 3 years (or whatever the maturity date is for your company).

Some employees, however, need/want to exit company A and take a role with company B. Provided you depart before the RSUs mature, you won’t be able to convert or take the RSUs with you. You’ll want company B to “do the cash conversion” for you by providing you with a signing bonus equal to what you would have received had you stayed with company A.

How much would you have received with company A? Therefore, how much should you expect from company B? Let’s walk through the numbers.

Let’s assume you received the option of RSUs at $10 per share. It doesn’t matter how many shares you’ve been awarded, because we will calculate the cash conversion on a per-share basis.

The RSUs were awarded to you in calendar year 2023 (t = 0) @ $10/share. The maturity period is 3 years — your RSUs will convert to cash in calendar year 2026.

You decide to exit company A in calendar year 2024 (t = 1).

How much should you expect from company B? You have three options that company B will present to you:

1. signing bonus of $xxx, which converts to $0.00-$9.99 per share

2. signing bonus of $yyy, which converts to $10 per share

3. signing bonus of $zzz, which converts to ≧ $10.01 per share

What do each of these options indicate from the perspective of company B? And is their perspective of your RSUs aligned with your financial goals? Let’s see.

The per-share market value at t = 3 (the value of the RSUs at the maturity date) does matter to you. T = 3 is when you can convert the RSUs to cash…and you want company B to *convince you* to leave company A by providing you with cash.

Option 1: signing bonus of $xxx, which converts to $0.00-$9.99 per share

You were awarded RSUs at t = 0 @ $10/share. Now at t = 1, company B is offering you *less* than $10/share. This means that company B believes that the market value of each share of company A will fall from t = 1 to t = 3. That belief is why company B wants to offer you less cash per-share than the market value of your RSU at t = 1.

So you need to figure out if the market value of each share of company A will increase at t = 3. For that calculation, you need the expected rate of return (k), so you can compound the investment from t = 0 ($10/share). For this discussion, we won’t discuss how to calculate or obtain the expected rate of return - it in involves the capital asset pricing model (CAPM) and is a really cool calculation.

Option 2: signing bonus of $yyy, which converts to $10 per share

The logic here is similar to that for Option 1. Company B believes that the market-value of your shares at t = 3 will be unchanged from what they were at t = 0. You’ll need to determine if the value of each share remains unchanged at t = 3, using the CAPM.

Option 3: signing bonus of $zzz, which converts to ≧ $10.01 per share

Finally, you’ve got a scenario in which company B believes the shareholder value of company A will increase from t = 1 to t= 3. Now, using the CAPM, you can determine if their optimism in the value increase matches the math. If so, you’re golden.

That’s it. I hope this exposition gives you the armamentarium needed to negotiate your RSU buyout.