The RSU Time Bomb: Regulating Startup Equity Compensation in the Unicorn Era

Abstract

This chapter explores the evolving landscape of startup equity compensation in Silicon Valley, with a focus on Restricted Stock Units (RSUs). Specifically, it details the risks related to double-trigger RSUs, a prevalent form of equity compensation among high-value private companies, or 'unicorns.' As these companies continue to delay their public offerings, their employees' hard-earned and often highly valuable RSUs are increasingly in danger of expiring before they can be settled for shares.

The chapter makes three contributions: First, it introduces a new perspective to the debate on unicorn governance by focusing on the issue of nearly-expiring RSUs, highlighting the risks startup employees face amid prolonged illiquidity. Second, the chapter places this issue within the wider context of startup equity compensation practices. It links current RSU challenges to the historical development of startup equity compensation and the deregulation of private capital markets, illustrating the interconnectedness of these factors and how deregulation has increasingly shifted risks from startups to their employees. This analysis illuminates the often-ignored impact of human capital considerations on the dynamics of private capital markets and the timing of tech IPOs. Third, the chapter proposes potential solutions to these challenges, focusing on the Israeli legal framework for startup equity compensation. It explores avenues for tax reform, such as the implementation of a trust mechanism that minimizes tax pitfalls for employees, as well as corporate and securities law concerns surrounding equity compensation.

By providing these insights, the chapter aims to lay the groundwork for developing more effective equity compensation strategies in Silicon Valley, ultimately benefiting not only employees and startups but also the broader ecosystem.

Keywords: Equity Compensation, RSUs, Restricted Stock Units, Stock Options, Startups, IPO, Venture Capital, Employee Ownership, Startup Taxation, Securities Regulation, Capital Market Dynamics, Deregulation, Risk Allocation, Comparative Law, Israel

JEL Classification: G32, G34, J33, K22, M12, M13, M52, O16, G24, J24