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What is an RSU? Understanding Restricted Stock Units and How They Work

GeneralEdward Kiledjian

It's important to note that this post is for informational purposes only and does not constitute legal or financial advice. Every individual's situation is unique, and it is always best to consult with a licensed and qualified professional for specific legal or financial advice. This post should not be relied upon as a substitute for professional legal or financial advice.

An RSU, or Restricted Stock Unit, is a type of compensation companies offer their employees. It is a promise from the company to give the employee a certain number of shares of the company's stock at a future date, typically when certain conditions are met.

RSUs work by vesting over a set period of time, during which the employee has the right to receive the shares promised to them by the company. The vesting period is typically based on the employee's length of service with the company. For example, an RSU may vest over a period of four years, with 25% vesting each year. This means that after four years of employment, the employee would be entitled to receive all of the shares promised to them by the company.

Companies may choose to give RSUs to their employees for a variety of reasons. One reason is to incentivize and retain top talent by giving employees a financial stake in the company's success. RSUs can also be used as a tax-efficient way for companies to compensate their employees, as the employee does not have to pay taxes on the value of the RSUs until they are actually received.

RSUs gain value when the value of the company's stock increases. For example, if an employee is promised 100 shares of stock valued at $10 per share, and the stock increases in value to $20 per share, the employee's RSUs would be worth $2,000 (100 x $20, instead if $1000).

In addition to benefiting the employee, RSUs can also benefit the company. By offering RSUs to employees, the company can align its employees' financial interests with those of the company. This can help create a sense of ownership and encourage employees to work toward the company's long-term success.

Keywords: RSU, restricted stock unit, employee compensation, equity, tech companies, financial stake, vesting period

Dramatic drop in the number of US Public Companies

GeneralEdward Kiledjian

Going public was considered the ultimate sign of success for any company in a capitalist market. It meant the company had succeeded and the founders and original investors could reap some of the benefits. Public stock also allows companies to raise money, use stocks as a means to acquire and much more.

Would it surprise you to learn that the number of publicly listed American (USA) companies has declined dramatically?

We are currently sitting at about half the number of public companies, compared to the 80s and 90s. More are taken off the market through mergers and acquisitions. In 1996, 9080 companies were listed in the USA. In 2017, that number fell to 4336 (an almost 50% drop).

We are seeing more and more companies stay private longer. Why is this? Many, like the US Chamber of Commerce, believe overly burdensome regulations like Sarbanes Oxley are encouraging companies to stay private. Going public means spending millions on compliance and executives running the risk of jail time.

The numbers show that the decline started around 1997-1998, Sarbanes Oxley was enacted iJuly 30 2002. So SOX could be partly to blame for an acceleration in the rate of decline but it cannot be the sole culprit. The other half of the decline could be attributed to the end of an era of irrational exuberance (where hundreds of unprofitable companies couldn’t find continued funding and folded).

While the number of publicly listed companies fell sharply, the value of those that remained listed grew dramatically.

In 1996, the market capitalization of listed US domestic companies totaled 8.48 trillion dollars. In 2017, it hit 32.121 trillion dollars (all the while the number of companies listed dropped ~50%).

Many market purists now complain that this illustrates an unhealthy concentration of market power in the hands of fewer and fewer companies. Perhaps there is some truth to these concerns but on the other hand, many of the winning companies did so through technological innovation and global expansion.

Does this concentration mean newcomers are starving for funding? The answer is a resounding no. Look at the company everyone loves to hate, Uber. According to Crunchbase, Uber has raised 24.2B$ through 21 rounds of funding. The same can be said for dozens of other companies.

Innovative startups are still able to secure critical funding to build, grow and expand.

Aren’t public companies more transparent? The belief is that private companies are more opaque because there are less disclosure requirements and in most cases the company is managed by a small number of investors. Although government regulations like SOX impose a higher burden on public companies to be transparent, the truth is that a select group of large investors hold the majority of the shares for most companies (think hedge funds, pension funds, etc). So if we agree that public and private companies can be controlled by a select group of large investors, then the only difference is forced transparency through government regulation.

In addition to being VP Information Security for a large tech company, I am also responsible for many of the company’s compliance activities. Would I love the compliance burden to lighten? Of course, but the truth is that these compliance requirements instill a certain level of trust in the market. It is this forced transparency that makes the Western Markets so attractive to investors. Additionally we saw that the US attempt to lighten the regulatory burden on early-stage companies, through the 2012 jobs act. The JOBS act was designed to encourage smaller companies to go public. The argument was that these organizations were delaying going public because of overly-burdensome government regulations. The JOBS act dramatically reduced this burden hoping to spur a mad dash to IPO-heaven for companies under 1B$ in annual revenue. 12 months after go live, the number of companies that IPOed were just 63 which was down 20% from the previous year. It didn’t really help companies improve their performance and it didn’t spur a mad dash to the public markets as anticipated.

None of the available data shows that a reduction in government regulation or control would lead to a statistically significant increase in the number of IPOs

Conclusion

The moral of the story is that the USA is still a world leader in free markets and has the most valuable public companies of any country. Part of this success is due to the perceived transparency USA government regulation creates and hurting this in any way could undermine US public market leadership.

US pubic companies are raising more money than ever before, US public companies are larger than ever before. Foreign companies looking for cross-border listings are overwhelmingly choosing US markets.

The US remains the most attractive public equity market in the world.

Although there are fewer IPO companies today (compared to 20 years ago), modern companies are more stable, are raising more money and are considerably more sustainable.

Most Snapchat users are on IOS and other cool information

GeneralEdward Kiledjian

Tech companies are notoriously secretive about their user makeup and their internal operations. Snap filled its paperwork for its IPO (Initial Public Offering) and it makes for a fantastic read. You too can read the S1 here

As much as Android fans want to pretend they are as vibrant as the IOS community, the Snap S1 begs to differ. They clearly highlight that most users of Snapchat are on IOS thus making it the priority development platform for the service.

The majority of our user engagement is on smartphones with iOS operating systems. As a result, although our products work with Android mobile devices, we have prioritized development of our products to operate with iOS operating systems rather than smartphones with Android operating systems.
— Snap S1

The other interesting tidbit is that the mast majority of the service operates on Google's cloud service (instead of Amazon AWS and Microsoft Azure). Snap recently signed a $2B 5-year deal with the sultan of search.

We rely on Google Cloud for the vast majority of our computing, storage, bandwidth, and other services.
— Snap S1

They also talk about a continued commitment to innovation and this is seen as a way to improve user engagement and thus improve ad revenue. Hopefully innovation is more than filters and glasses.

Another interesting tidbit is their underhanded acknowledgement of Facebook and its potential to disrupt Snapchat's business model.

Many of our current and potential competitors have significantly greater resources and broader global recognition and occupy better competitive positions in certain markets than we do.
— Snap S1

The final snippet of information I wanted to share was that they aren't profitable and may never be profitable.

We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.
— Snap S1

Even with this grim view of the world, analysts expect the IPO to be a smash hit. Time will tell but what does it say when investors are willing to spend billions for a company that may never return a penny?

Are Apple's best days behind it?

GeneralEdward Kiledjian
Image by Dominik Fusina used under Creative Commons License

Image by Dominik Fusina used under Creative Commons License

Apple stock took a tumble even though the company made boatloads and boatloads of cash last quarter. Why? Because some investors believe Apple's profitable run has lasted too long and obviously it must eventually come to an end. They saw the reduced growth rate in iPhone sales as a bad omen.

Unfortunately this is not how the world works and it isn't how statistics work. This misguided belief actually has a term and its called the "Gambler's fallacy". 

[...] is the mistaken belief that, if something happens more frequently than normal during some period, it will happen less frequently in the future, or that, if something happens less frequently than normal during some period, it will happen more frequently in the future (presumably as a means of balancing nature).
— Wikipedia

When a product has been such an incredibly huge success (like the iPhone), it is natural for observers to be pessimistic about the company's ability to generate another similar home run hit but... Keep in mind that Apple is supplementing its product revenue with service revenue. 

Apple had total revenue of $50B this quarter. Statistica says $6B came from services. Obviously Any other company would love to have a $6B quarterly service business. Apple is working hard to increase its share of the monthly recurring service business, which would complement its fixed-cycle product revenues nicely.

Apple has room for improvement in services like Siri, Apple Music, iCloud online, etc I think Apple maps is a great example of how they can dramatically improve a product if they put their money, people and determination behind it.

I believe (maybe mistakenly), that WWDC will be the launching platform for Apple's push into services. I believe they will challenge  Microsoft and Google head-on. Competition is always good for consumers.

So don't fall for the Gambler's fallacy and don't count Apple out just yet.  Yes Apple growth slowed slightly compared to last year but this is a blip in the radar of an otherwise healthy, innovative, tech leader.