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Recent revelations shed light on concerning practices by ByteDance, TikTok's parent company, regarding their employee stock program in the form of restricted stock units (RSU).
💡 RSU is a type of equity reward in which taxation is different from options. RSUs become immediately taxable upon vesting as this is the moment when the shares are received. Options are not typically taxable upon vesting as no shares are received at that point in time.
ByteDance stock program reveals what happens when corporate overreach goes against individual rights and when RSUs are done in a way that does not consider the individual person's rights and needs and creates cumbersome consequences resulting in a 100% tax liability on vested shares with limited or no liquidity events for employees to minimise the burden of vested shares.
In addition to that, the process of administering RSUs lacked transparency as the ownership details were managed via ByteDance’s China-based stock platform, which made it difficult for employees to access information about their shares.
The key takeaway from the ByteDance case that you should never repeat with your stock award program would be:
- not matching liquidity events with your employee needs, especially when you have put your employees in difficult situations with taxes;
- FMV attributed to vested shares not matched with FMV under the BuyBack program led by the company, offering to buy shares at prices far below their actual value;
- differentiating FMV under the BuyBack program based on the status of employment, creating unequal treatment against specific groups of people, such as ex-employees;
- not consenting to employees finding buyers for their shares or not using Rights of First Refusal to buy such shares for the price offered by third-party buyers;
- creating fear and formal restrictions for individuals to address issues with given stock awards programs under the clauses that limit employees from voicing concerns that might negatively impact the company and penalising such activity with clawback of such shares in case they do.
On top of that, you should choose a platform to manage your stock award program that is accessible to your employees at any given time or location to foster transparency.
When a private company offers RSUs, and there is no way for employees to sell the vested shares, dry tax obligations arise. As ByteDance is still a private company, employees cannot sell these shares and pay the dry tax. If the company were public or created liquidity events on fair terms for all employees (including ex-employees), none would be a problem.
The situation highlighted corporate responsibility and showed once again that there is a need for greater company accountability and providing support for employees navigating complex stock award programs.
If your company wants to provide transparency for your employees’ stock awards programs, let us know, and we can provide you with access to a platform to manage your stock awards. 💪
