MSFT vesting calculator
Stock options or restricted stock units (RSU) are often used as an incentive to keep employees at the company for a certain period of time.
Stock options are a right to buy a stock at a certain price (strike price) at a certain time in the future. The strike price is usually the price of the stock at the date of the grant. And often the options vest over a period of time, say four years, with a one year cliff. This means that you have to stay at the company for at least one year before you can exercise any of the options. If the stock price goes up, you can exercise the options and buy the stock at the strike price, and then sell it at the market price, making a profit. If the stock price goes down, the options are worthless and you probably won’t exercise them.
As an example, let’s say you start your employment and the company grants you 1000 options. The market share price at that time is $100 (strike price). The options vest over four years, with a one year cliff. This means that for one year you can’t do anything with these options. After the first year you can exercise 25% of the options. After that you can exercise 1/48 of the options every month or 1/16 every quarter depending on the company’s vesting schedule. After 2 years, you can exercise 50% of the options, after 3 years, you can exercise 75% of the options, and after 4 years, you can exercise 100% of the options. If the stock price goes up to $200 after 4 years, you can exercise the options and buy the stock at $100, and then sell it at $200, making a profit of $100 per share. If the stock price goes down to $50 after 4 years, it wouldn’t make sense to exercise the options with $100 strike price. The benefit of options is you can make your decision about the purchase at a later date and won’t need to pay for them until then. Another possible benefit is you can delay paying taxes until later as well (although I get conflicting information here, so check with your accountant).
RSUs are similar to stock options, but instead of giving you the right to buy the stock at a certain price, the company gives you the stock itself when it vests. Similar to stock options, RSUs vest over a period of time, say four years, with a one year cliff.
It is possible for RSU grants not to have a cliff, but it is less common. In this case, the RSUs start vesting immediately according to the vesting schedule and you can sell them as soon as they vest.
Microsoft provides employees with on-hire grants and annual performance grants. The on-hire grant vests quarterly over four years with a one year cliff. The annual grant vests quarterly over four years and does not have a cliff.
A common question that employees have is how much of their RSUs will vest at a certain point in time and what it their value. This is important for two reasons. Firstly, vesting is when you actually own the stock and can sell it and therefore there are tax implications of the RSUs. Secondly, if employees are considering leaving the company, they may want to know how much of their RSUs they will be leaving on the table … and maybe reconsider? ;)
To help employees with this, I have created a simple calculator that takes in the details of each grant and calculates how many RSUs have vested, how many are unvested and estimates the total value of the unvested RSUs based on the current stock price. The calculator also calculates the total value of the vested RSUs per Australian financial year (July to June) to estimate the amount of tax that will be owed.
As usual, this is not a financial advice and you should consult a financial advisor or your accountant before making any decisions based on this information.