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My company gives out Restricted Stock Units (RSUs) each year. The RSUs used to vest 100% on the 3rd year after granting them.

This year they have changed the plan, and instead they vest 25% of the granted RSUs each year across 4 years, starting the year after granting them.

What financial consideration would a company have when changing from Plan A to Plan B? What would be the motives? Can changes like that tell about a company's future or direction?

  • I would assert it probably says something good about the company. First they are thinking about it, if the company was sinking, why would it matter if the plan changes? Second, they are interested in keeping employees longer. – Pete B. Oct 5 '18 at 17:24
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What financial consideration would a company have when changing from Plan A to Plan B?

Employees get access to some of the RSUs sooner, but the overall vesting period increases, so it's a trade-off.

The company has cash outlays sooner, but spread them out over a longer period.

From an expense standpoint, the expense is recognized over the vesting period, so expenses will be slightly lower since you're only expensing 1/4 of the RSUs rather then 1/3 each year. But that difference, coupled with the fact that employee RSUs probably aren't a big driver of financial performance, shouldn't have a significant impact overall.

Can changes like that tell about a company's future or direction?

Highly doubtful. There's no way to know what the motivations behind the move are, or how those changes would affect the future. It's most likely just a change to get cash in the employee's hands sooner and not going to make a significant impact on financials.

  • Sorry, the vesting for Plan A is 100% after 3 years, and it is paid out only after 3 years. Where Plan B has vesting done at 25% each year for 4 years - being paid out 25% of the RSU each year. Does that change your answer? – KingsInnerSoul Oct 5 '18 at 16:43
  • @KingsInnerSoul No. Employees get 25% of the RSUs each year for 4 years, rather than getting nothing for 3 years, so I believe my answer is correct. Which part seems wrong? – D Stanley Oct 5 '18 at 16:48
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The old vesting plan is unusual, the new vesting plan is much more common. I'd suspect that the company had an unusual vesting plan for some unusual reason and now that the company is getting more mature and "normal", the rationale for that unusual vesting plan has gone away.

For example, consider an early company that's several years away from having a product ready to hit the market. Having key employees leave after 18 months might harm that company more than a more mature company with a product already on the market. A company that was very dependent on long term plans or a few key employees might prioritize not losing any early employees for the first three years. However, once the company matures, that unusual requirement might go away.

The new vesting plan is better for employees in that they start getting some of their stock after just one year. Being terminated after 20 months and not getting any stock would kind of suck. To some extent it's worse for them since they don't get all of their stock until four years elapse, but they can also negotiate for additional grants during that last year if that's appropriate.

It's likely better for the company as well because it still gives them one year to terminate a poorly-performing employee without granting them any large chunks of stock and avoids hard feelings if they terminate an employee during the second year. Also, if they're considering additional funding rounds or acquisitions, it helps to have a more normal employee vesting plan.

I would take it as as sign that the company is becoming more mature and normal and less worried about unusual aspects of its early development.

  • Not sure about "mature". This company has been publicly traded for over 50 years. It is a multibillion revenue company - that is also growing each year. So I am not sure how to translate the "normal", and "common" here. – KingsInnerSoul Oct 11 '18 at 15:56
  • Then I would guess that they just finally got around to switching to a more modern and typical vesting schedule. It could also be because they're trying to be more competitive with other companies that have a more typical vesting schedule. – David Schwartz Oct 11 '18 at 19:05

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