Startup Legal Talks (7)
How does Starbucks use "coffee bean stocks" to motivate employees? Detailed explanation of RSU's operation mode | Is it reliable to hold shares by all employees?
In the past, we have introduced six ways of employee equity incentives in two periods, of which RSU is the most interesting one. Today we will use an example to analyze how the restricted stock unit (RSU) works.
Open Starbucks' official website and you will see three side-by-side employee benefits, including Bean Stock, Stock Investment Plan, and Future Roast 401(k), The third of these is U.S. pensions, which are outside the scope of our discussion today. Then the other two, coffee bean stock (Bean Stock) is actually restricted stock unit (RSU), and stock investment plan (Stock Investment Plan) is what we call Employee Stock Purchase Plan (Employee Stock Purchase Plan). What we will focus on today is the coffee bean stock (Bean Stock) or RSU.
I also found the introduction about Bean Stock on Starbucks Chinese official website.
Starbucks' Bean Stock (RSU) is very favorable, most companies are four years, but Starbucks is two-year maturity. (Vest can be translated as mature or vested) Suppose a total of 10 shares of RSU, which is 10 coffee beans. After one year of working, half of the employees are mature, that is, 5 shares, and the other 5 shares are not mature.
For example, on the first anniversary of the closing price of $60, the employee's total pre-tax earnings would be $300.
5 shares x $60 = $300
But everyone knows that taxes in the United States are very high, and RSUs are all taxed on W2 salary income, not capital gains. The personal income tax in the United States is also super progressive. It depends on each person's situation, so let's assume that if the tax rate is 35%, that is, the tax should be $105.
$300 x 35% = $105
The company has to withhold and pay taxes in advance and then distribute it to the employees. Up to now, there is no cash in this link, so where will it be withheld and paid? It's a direct deduction of a portion of the stock. Because the stock must be a whole number, Starbucks will deduct two of the employee's coffee beans as tax withholding, and the remaining three shares will be deposited into the employee's stock account. But note that the two coffee beans are actually worth $120, and the tax to be paid is actually only $105, so Starbucks will refund the employee $15 in cash after deducting the two coffee beans.
So now the employee has 2 of the 5 mature coffee beans to pay the tax, received a refund of $15 in cash from the company, and kept 3 coffee bean stocks in his hand. Next, just wait for the day when Starbucks stock goes up and sell it and realize it.
This RSU operation method of Starbucks is also used by most large technology companies now.
As for the other stock investment plan (Stock Investment Plan), I did not find the official introduction of the Chinese version. I looked at the official website of the English version. This kind of incentive method is only available to employees in the United States and Canada. Judging from the introduction in the English version, Starbucks only gives a 5% discount in the Stock Investment Plan, so this incentive is not very strong. The discount usually given in this way is not much, that is, a discount of 5% or 10%.
https://www.starbucksbenefits.com/en-us/home/stock-savings/stock-investment-plan-sip/
After introducing Starbucks' employee incentives, let's think about a question. Now, "all employees hold shares" are popular in the entrepreneurial circle, but is it really good for all employees to hold shares? The benefits of full stock ownership are of course obvious, because it can make employees more motivated. But if all employees really hold company stock, then the following problems may arise:
1. Legal and accounting costs have risen, and companies need corresponding professionals to draft and organize these documents and deal with corresponding accounting and tax issues. Not only the distribution of employees when they join the company, but also the handling of immature parts when each employee leaves, all require lawyers and accountants.
2. When everyone holds shares, employees will not care about the company's shares, causing the company to waste their feelings in vain.
3. Old employees can enjoy the stock options or options they have already acquired, and they can make money by relying on stock options without working hard. At this time, there is no other way than dismissing them.
Therefore, I still recommend to everyone that the company must have employee equity incentives, but it must be selective. It is not necessary for all employees to have stocks, options, and virtual shares once they join the company. It is better to let really suitable people get incentives, so that rewards and punishments are clearly defined. It is the core of motivating employees.
Among them, there is a concept valuation in all these employee stock incentive methods. If a company wants to raise VC financing, it also needs to consider the valuation, so how is the valuation determined? In the next issue, we will talk about the valuation of the company.
More dry stuff, less verbose. Here's what startup law says, thanks for watching, and see you next time.
