Table of Contents
- 1 Five Steps for Airbnb Employees Make the Most of their RSUs
- 1.1 Step 1: Understand how your Airbnb RSUs work
- 1.2 Step 2: Avoid a surprise tax bill on your RSUs
- 1.3 Step 3: Determine how concentrated your position is in Airbnb stock
- 1.4 Step 4: Determine how and when you should sell your stock
- 1.5 Step 5. Plan what you should do with the proceeds.
Text Summary of Webinar
I’m going to start with a personal story which explains how I got to where I am today. Then we will get into the heart of the content about the five steps you can take as an Airbnb employee to make the most of your Airbnb RSUs.
To explain why I’m here today, I want to take you back to the late nineties. I was working at a tech startup. It was a dot com. I can remember the day, like it was yesterday. I looked around and there were people popping champagne, high fiving each other. We were all very excited because we’d done what every tech startup at that time wanted to do. We had just had our IPO, and so everybody was happy.
Following the IPO, the stock kept going up and up, and everybody was even happier. At a certain point, six, nine months down the road, I thought to myself, if this keeps happening, if the stock keeps going up, I may be able to stop working pretty soon.
Now for those of you who know the history, in early 2000, the dot com bubble burst and I was at a dot com. What actually happened was that my company shut down and all of the stock I had went to zero.
A couple of important things came out of that experience. One was I realized that I didn’t really understand how this equity worked and that I needed to educate myself about it because for tech employees it was (and is) an important part of compensation.
I started to do just that. And then the second thing that came out of it was that it started me down the path of making a career change into financial planning, which I did about a decade ago. And that’s the reason I’m here today. I want to make sure that Airbnb employees and other tech professionals with equity are able to make the most of that equity to get to their financial goals and not end up in a place where they don’t get the value out of the hard work that they have put in.
Five Steps for Airbnb Employees Make the Most of their RSUs
Step 1: Understand how your RSUs work
Step 2: Avoid a surprise tax bill on your RSUs
Step 3: Determine how concentrated your position is in Airbnb stock
Step 4: Decide how and when you should sell your RSUs.
Step 5: Plan what you should do with your proceeds.
Quick background, I specialize in working with tech people with equity. I worked in tech myself for about 20 years before making the career change to financial planning.
Really the way you should think about your RSUs is you have an opportunity. Your Airbnb RSUs can give help get you to your financial goals much faster than the typical corporate employee.
Step 1: Understand how your Airbnb RSUs work
Your Airbnb RSU is just compensation in the form of Airbnb stock that vests over time. The vesting schedule for most Airbnb employees is every quarter, and it all vests over a four year period. So you get your initial grant and over four years
you’ll be able to vest a hundred percent of that initial grant. You may get refresh grants each year and those will also vest over four years typically. What’s important to understand about RSUs is their tax treatment.
RSU Tax Treatment
When you get your initial grant, you don’t have to pay any taxes on that. However, the day you vest you pay ordinary income tax on whatever the fair market value of the stock is when you vest. Ordinary income tax rate means you just pay what you you would pay on your salary.
One thing that’s helpful for my clients is to have them view their RSUs as a cash bonus in the form of Airbnb stock. Here’s an example of why it is like a cash bonus. Let’s say the company gives you $100,000 dollars in Airbnb shares. On the day they vest, Airbnb sells $40.000 of your RSUs to cover your taxes and any other withholding, leaving you with $60,000 worth of stock in your Fidelity account.
If instead of RSUs, Airbnb gave you a $100,000 cash bonus, they would take out a normal withholding for taxes – $40,000 in this case – and they would put $60,000 into a checking account. If you took that $60,000 and bought Airbnb stock with it, you end up in exactly the same place – owning $60,000 in Airbnb stock. That’s why you can think of it as a cash bonus.
Now, the reason you should think of it as a cash bonus is so that you can ask this question of yourself – if Airbnb gave you cash bonus today, would the first thing you do with that cash be to go out and buy Airbnb stock?
When I ask most of my clients that question, the answer is “no.”
If your answer is “no, it wouldn’t be the first thing you would do with a cash bonus”, then you should consider selling your RSUs.
We’re going to talk a bit more about selling later, but when you sell is going to depend on your specific situation, your goals, how concentrated you are, taxes, and you may want to talk to your professional about that.
In general, I recommend you sell as soon as you vest because there’s really no tax benefit for holding onto the stock.
Clients will occasionally ask about holding onto the vested stocks for a year so they can benefit from the lower taxes associated with long-term capital gains, however it doesn’t usually make sense to do so. Let me explain why.
If you, for example, vest today and you hold that RSU more than a year, then you do qualify for long-term capital gains tax rate. You would pay the lower rate of 20% rather than the higher rate (as much as 37%). However, only for the gains, not the whole amount.
For example, you vest your Airbnb – worth $100,000 total, $60,000 of which is yours. You hold your shares more than a year and they go up to $65,000, and you sell them. You only get the long-term capital gains tax treatment on that $5,000 gain. You’ve already paid the taxes on the $100,000 on the day you vested.
Alternatively, if on the day you vest, you sell your shares, you take the $60,000 and buy more shares with it – Airbnb or another company’s. You then hold onto those shares for more than a year and sell them for $65,000. That $5000 would qualify for long-term capital gains. So, holding on for a year doesn’t change anything. There’s not a tax benefit for holding on for long-term capital gains..
Step 2: Avoid a surprise tax bill on your RSUs
I’ve heard this complaint from a number of people, including clients. When I say a surprise tax bill, you want to understand how the taxes on your Airbnb RSUs have been under withheld. As I said, you’re going to pay ordinary income tax on the value of your RSUs when they vest. Unless you choose differently, the company typically withholds at a standard rate, the 22% federal rate for RSUs.
If, for example, you’re actually in the 37% federal tax rate, the highest tax rate, and they’ve only withheld at 22%, they have under withheld by 15%. You still owe 15% in taxes.
What happens to many employees in this situation is that they assume Airbnb already withheld the the taxes and so they’re good to go. However, it you’re in a higher tax rate and were under withheld, you’re going to be stuck with a huge tax bill in April. The best way to avoid that surprise tax bill, what I do with my clients, is to work with a tax professional. We set up quarterly estimated tax payments. The tax deficit is then made up in a series of smaller payments. Or we’ll at least sell enough of our shares to set aside in a tax reserve so that when April comes around their able to pay the taxes.
Step 3: Determine how concentrated your position is in Airbnb stock
Being highly concentrated means that you own too much of a single company stock. The way I identify a concentrated stock position generally is if it’s more than 20% of your total investable assets. If you compare a concentrated stock position versus a diversified portfolio, you have a lot more risk and volatility with a concentrated position.
The following story really illustrates that risk. In the late 90’s there was a company called Enron. It was an energy company that everybody loved. Wall Street, retail investors, and employees loved it. The stock went up and up and up – went up to $90 per share by 2000.
And then some bad news… it came out that there were some accounting irregularities. Within a matter of a few months, the stock dropped to zero.
Within the company 401k, you could only invest in Enron stock, and the company match was made in Enron stock. As a result there were Enron employees who had almost all of their net worth in Enron stock, and it did very well for them for a long time. Then almost overnight it went away, some employees lost hundreds of thousands of dollars. That is the true risk of being too highly concentrated, you could lose everything very quickly.
The question then is, how do you determine if you have too much Airbnb stock? Following is a quick back of the envelope way to figure out where you are.
- Calculate the total value of your vested Airbnb equity – your RSUs and your ESPP (employee stock purchase plan) at the current stock price.
- Calculate the total value of your investible assets. That’s all your other savings, investments, retirement accounts, 401k, etc. Then add the total value to your vested equity.
- Take the total value of vested Airbnb equity and divide it by your total investable assets. You will get a percentage of concentration.
- If your concentration is more than 20%, you’re highly concentrated and should consider diversifying.
For example, you’ve got 4,000 vested RSUs at a $100 a share. That means you have $400,000 worth of vested equity.
You add up your other savings investments, 401ks, you get $600,000. That means your total investible assets is $600,000 plus $400,000, giving you $1 million dollars of total in investable assets.
Now, you take your $400,000 of Airbnb equity, divide it by the $1 million, you find that you have a 40% concentration – double the 20% threshold. You are highly concentrated.
It’s not uncommon for tech people to come in with a 50% concentration, or sometimes 80, 90, 95, or even 98 percent. If you’re an employee at a startup that’s been very successful, it’s easy to be highly concentrated.
Let’s do a quick poll, using the quick estimate that we ran through, determine your concentration levels. How concentrated are you in your Airbnb RSUs?
Based on your answers, we have 31% that are zero to 20 percent – in other words not highly concentrated. That means the other 70% of you are highly concentrated. This is not surprising result. Any of you in the 70% or greater level of concentration should be thinking about diversifying. Which takes us back to Step four – deciding when you should sell your Airbnb RSUs? This is probably the key question for most people.
Step 4: Determine how and when you should sell your stock
You should walk through the following steps to determine when you should sell your RSUs. First, do you have any valid near-term cash needs? For example, if you need to pay taxes on your employee equity, or you need to build an emergency fund, or you’re planning on buying a house – I would say sell, take your money off the table. You have something you clearly need to use it for in the near term.
Determine what percentage of your equity, if any, you want to keep for the long term. If you’re a big believer in the company so you want to keep a stronger stake, that’s fine, you just need to figure out how much you want to keep. With my clients, I typically recommend at most you have five to 10% of your total investable assets invested in your company, but you’ve got to figure out what you’re comfortable with.
Let’s say you decide, I’m going to carve out 10%. Carve out the 10%, sell what you need for near term cash needs. Okay, let’s talk about the remaining shares.
There are three approaches to this:
1.Sell immediately. That’s simple, sell everything, take the cash and and diversify. One thing to consider is from the data I’ve seen, with most tech IPOs, it makes sense to sell sooner rather than later. So, selling immediately is a reasonable option.
Having said that, most of my clients are uncomfortable with this strategy. There are still a couple of benefits to selling over time. One is, you avoid the risk of selling on the single worst day. Secondly, you have more control over your tax bill and can spread it out over multiple years.
2. Sell over time on a schedule. For example, sell 25% a quarter every quarter over the next four quarters, or 10% a quarter every quarter over the next 10 quarters.
The idea is to set up a schedule and follow it when the window opens. You don’t have to decide if the stock price is high enough or is it too low. Should I sell it? You just sell. You’re trying to put it on autopilot because that minimizes the emotions. As a result you will just automatically diversify over time.. You’re not going to worry about selling on the wrong day, because the price will sometimes be higher and sometimes lower, and you’ll also be able to spread it over time, multiple tax years.
3. Sell over time on a schedule, but you can sell more when the price is higher and less when it’s lower.
For example, if the price is $100 or less, I’m going to sell 15%. If it’s between $100 and $150, I’m going to sell 25%. If it’s more than $150, I’m going to sell 50%.
Each quarter you look at your guide and decide how much to sell based on the price. If the price is lower than $100, you sell 15%, or if it’s really high, more than $150, you sell 50%.
Again, it’s a way to put it on autopilot, minimize your emotion, but allows you to sell more when it’s higher or less when it’s lower.
Those are three ways of thinking about selling your RSUs with these three steps. Cover any near-term cash needs. Decide if you want to keep some percentage. Sell the rest using one of these three ways.
Step 5. Plan what you should do with the proceeds.
You’ve sold your stock and collected the proceeds, what do you do now? Ideally at this point you have developed a financial plan, including both your near-term and long-term goals and can apply your benefits to helping you achieve those goals.
We’re going to do another poll. What is the primary goal that you want to use the proceeds from the RSUs to help you achieve?
The different options here are:
- financial independence
- buy a house
- pay for an education
- family support
- to start your own business, or other.
The results to the poll – about 70% would use it for financial independence, 15% for a house, and the other 12% for family support.
Whatever the goal you identified, you next want to understand the time horizon for that goal – is it near-term or long-term? The way I define near term is anywhere less than two years. This might include paying taxes, building an emergency fund, or making a down payment on a home. Long-term is more than two years and might include reaching financial independence, or college savings if you have children.
Once you have identified your goal and time horizon, the next thing you want to consider is your risk tolerance – how comfortable are you with risk? A good way to think about your risk tolerance is to reflect on COVID first hit in March, 2020 and the market dropped about 35% in one month. How did you respond?
If you were aware of it, worried a lot about it, and considered acting (or acted upon) those concerns – then you probably have lower risk tolerance. If instead, you thought “here’s a buying opportunity, I’m going to put more money into the market,” then you probably have a higher tolerance for risk. If you were somewhere in between, you’d obviously fall somewhere in the middle.
Looking at your goals, and considering both your time horizon and your risk tolerance, you can decide on what financial planners call asset allocation. That is, the mix between stocks, bonds, and cash that meets your needs.
For example, if you have a near term goal like wanting to make a down payment on a house within 6 months, and a low risk tolerance, then you want to keep it in something that is highly liquid that you’re not going to lose money with. Maybe a savings account? However, if you goal is long-term – maybe financial independence – depending on your risk tolerance, you could invest in a mix of stocks and bonds. Generally, the longer your time horizon, the more risk you can afford to take on.
A simple rule-of-thumb when you’re thinking about a long-term goal like earning your financial independence – is to determine an appropriate mix of stocks vs bonds – as starting point, try taking 120 and subtract your age. For example, if you’re 30 years old, take 120 minus 30 which give you 90. Ninety percent of your portfolio should go into stocks. The remaining 10% should go into bonds.
Once you’ve determined a good mix, you’ll want to invest in a broadly diversified, globally allocated, cost effective portfolio of stocks and bonds. Broadly diversified means that you want to invest in different asset classes and different geographies (i.e. U.S. large cap stocks, U.S. small cap stocks, international stocks, emerging stocks, U.S. bonds, international bonds).
Now we’ve covered the five steps, just to recap, you need to understand how your Airbnb issues work, avoid a surprise tax bill, figure out how to determine how concentrated you are in your Airbnb issues, decide how and when to sell those Airbnb issues, and finally, determine how to use the proceeds to get you closer to your financial goals. If you have questions about your specific situation, then you can go to this URL or to the, schedule now button, and just put time on calendar. I’m happy to talk to you about your specific situation, your specific planning questions.
Before we get to the Q & A, I have one more story I’d like to share, just to give you some perspective on this. I call it the Yellow Jacket Story.
A few years ago we had yellow jackets in our backyard and my wife asked me call the exterminator to have them removed. I thought to myself, I don’t need to pay someone to handle this, I can take care of it myself.
So, that afternoon I went out back to take care of the yellow jacket problem. I took aim, and started spraying the yellow jackets with the bug spray. The next thing I knew, I had dozens of yellow jackets all over my head stinging me, I was in such a state that I actually ran into our house to find my wife so that she could help me out. In my panic, I ran right through our closed screen door.
Eventually, my wife hosed my head down and got all yellow jackets off me. I ended up calling the exterminator who got rid of the pests, but left me with the screen door to repair.
The moral of this story is that there are times when you have something important you want done in your life, that you could potentially do yourself. But if you if it’s truly important, you should consider hiring a professional – an expert – who does that work every day You may avoid making mistakes and end up in a better place. In my case, I should have just called the exterminator right away – saved myself the agony, embarrassment, and a screen door.
Questions & Answers
The first question is from Rajiv. “What percent of your assets in Airbnb is too dangerous?”
Being highly concentrated means having more than 20% of your investable assets tied up in one stock. If you have more than 20% you should consider diversifying. That is my general recommendation, however, it also depends a lot on your risk tolerance and your time horizon. If you have very high risk tolerance and you still have 50 years to work, then you may be willing to take more risk and you may say decide that 30% or 40% is okay.
If you’ve been an Airbnb employee long enough, you may have already experienced a near 50% loss in value – we know it can happen because it’s happened before.
Follow up on the question: When calculating the percentage, should we consider those future vests?
In general I would first do it without considering the future vests. That gives you a more realistic picture of of today’s reality. If you were to leave the company tomorrow, you wouldn’t get any of the equity that you hasn’t vested yet.
However, if you have a significant amount of RSUs that are going to vest in the future, you could consider them as well. If that is the case, you could look at it as follows.
Determine what percent has vested, vs what percent is still to vest. If most of your RSUs are unvested – for example, 90% is unvested and it makes a up a large portion of your network, you may decide that its best take some off the table now, knowing you will still have plenty left for upside n the future.
On the other hand, if 90% of its vested and only 10% is unvested, then you may decide that doesn’t constitute a lot of risk, it Isn’t that important? So that’s how I would think about it, okay?
My 20% recommendation as a bar for determining your whether or not your highly concentrated is based on academic research which shows that there’s much higher risk with higher concentration, and that a kind of the optimal balance between risk and reward is in fact 20%. Many planners will suggest a lower maximum of 10 or 15% in a single security.
However, because of my experience in working with Silicon Valley people. I know that below 20% is not very realistic. It all comes down to risk vs reward. In general, I’ve found 20% to be kind of a sweet spot, but plenty of early Google, Amazon, and Apple employees held onto everything and it paid off for them. It just means they took on more risk than they needed to.
Ryan A. asks, what do you recommend after selling? What should we do with the money, should we invest it in an index fund?
As I said, a broadly diversified, globally portfolio is what you want, which could be an index fund, as long as it is diversified across those different asset classes and across the different geographies that I mentioned.
For example, the S&P 500 index fund is made up of U.S. large cap stocks – a single asset class in a single geography. So that is not a diversified portfolio.
Question from Rajiv, “what is your favorite bond index fund?” If you’re looking for a very low cost bond index fund, one that is diversified between U.S. and international bonds. You can go to a place like Vanguard and you get their bond index funds, they should be fine. Anything like Vanguard, Fidelity, or Schwab should be fine.
Dana, “do you consider the price at which equity is granted when considering whether to sell?
If you have RSUs, which at this point almost to all Airbnb employees do, then your grant price doesn’t really matter. You will be taxed on whatever the price is on the day you vest. So if on the day your RSUs vest, It doesn’t matter if the stock is at $5 versus a $100, that is the price that you will be taxed on.
This is assuming you have RSUS. If you were an early Airbnb employee, you may have either incentive stock options or non-qualified stock options where you have an exercise price, then it matters a lot. But there’s a lot of complexity in that topic that could be a whole presentation onto itself. However, for RSUs, the grant price doesn’t really matter.
If you’re reading this at a later date and have questions, I want to make myself available to answer your questions too – schedule a free virtual consultation with me to talk about your specific situation.