Quick Read: Valuing Restricted Share Units

Compensation packages for senior employees at publicly traded companies often include compensations such as Restricted Share Units (“RSUs”) (they may also include stock options, different share units, performance shares, etc.). The purpose of this “Quick Read” is to discuss the valuation of RSUs.

RSUs are similar to regularly traded shares of publicly traded companies except they generally come with some restrictions (common vesting restrictions include the employee remaining employed at the company during a vesting period which often is as long as three to five years). As a result of these vesting restrictions, RSUs are less valuable than regular publicly traded shares.

The value of RSUs reflects the various disadvantages associated with their various restrictions. The discounts generally included are as follows:

a)???????Liquidity– During the vesting period, the RSUs are prohibited from being sold. This restriction creates a liquidity discount that consists of two distinct disadvantages, as follows:

• The owner is unable to sell the shares should the share price of the company decline (“Downside Risk”). In order to quantify this downside risk, we typically utilized the Black-Scholes option pricing model to estimate the theoretical cost to prevent downside risk during the vesting period through purchasing a notional put option.
• The owner is unable to liquidate the RSUs during the vesting period and would have to notionally borrow money to access the value of the RSUs (“Borrowing Cost”). We typically estimate this discount based on the estimated cost to borrow the gross value of the RSUs utilizing the Prime interest rate.

b)???????Risk of non-vesting – During the vesting period, RSUs can be forfeited under different circumstances specified by the employer’s RSU plan (i.e. termination with cause or resignation). When quantifying the risk of non-vesting, we typically consider the employee’s employment history with the company, history of non-vesting of prior RSUs, etc.

c)????????Non-receipt of dividend during the vesting period – Depending on the specific characteristics of the RSUs, the owner may or may not be entitled to dividends otherwise paid while the RSUs vest. If the owner is not entitled to dividends it is necessary to consider a discount for the non-receipt of such dividends during the vesting period.?This discount is typically quantified by estimating the dividends that will not be received during the vesting period, present-valued to the valuation date.

d)???????Opportunity cost adjustment – Employees who receive RSUs do benefit from participating in any increase in the value of the company’s shares without having to borrow money or use their capital to purchase the RSUs. This premium is typically based on notional interest savings in this regard.

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If you or your colleagues require assistance in valuing RSUs, other stock-based compensation, or in the areas of business valuation, damages quantification or family law matters, it would be our pleasure to assist you.

For more information, please do not hesitate to contact Wayne B. Rudson, CPA, CA·IFA/CBV, ASA, CFE ([email protected]) or Vincent Lam, CBV, MAcc ([email protected]) at 416-598-4500.