According to a late 2019 survey by Ayco, 72% of the 325 companies they provide financial services offer restricted stock units (RSUs) as part of their long-term incentive compensation programs. In 2009, only 47% of their then 250 companies did so.
In short, RSUs are on the rise. You can be sure major corporate giants such as Amazon and Google are offering them.
As employees, you need to educate yourself on what restricted stock units are if you want to get as much value as possible. That’s why, in this article, we’ll go over what you need to know about RSUs, so you’re better prepared for your next negotiation.
Restricted stock units (RSU) supplement your compensation package (salary, stock, and stock options). They are an employer’s vow to provide you compensation in the form of stocks, based on meeting performance goals and/or a vesting schedule. .
Vesting is when a restricted stock unit becomes a share of company stock you now own. A vesting schedule, then, is the timeline that determines when your RSUs turn into shares.
They are not stocks. Again, RSUs turn into stocks when you’ve waited out the vesting schedule and/or met your performance goals. That’s why ‘restricted’ is in the name.
They are not stock options. ‘Option’ is the operative word here. With , you have the option or choice to purchase the company’s stock at a fixed price on a certain date. RSUs, on the other hand, become your shares at vesting dates. No purchases necessary.
Stock options can end up being worth much more than the fixed price, or much less. RSUs, on the other hand, always possess value. Just as long as the stock price doesn’t hit zero.
Typically public companies, if they offer stock-compensation packages, will give you RSUs. Private companies will offer stock options.
The value of vested RSUs depends on the market price of your company’s stock on the vesting date. If you’ve got 1,000 units at $1 per stock, you’ll be compensated $1,000 worth of shares.
Most vesting schedules span over four years, with a one year cliff at the beginning. The cliff is, essentially, the period where your shares will not be vested. So typically, none of your restricted stock options will be vested until you’ve reached your one year anniversary at the company.
Example of a vesting schedule:
Your employer plans to give you 10,000 RSUs over four years.
Maybe after each year, 2,500 units vest.
Or the employer’s vesting schedule could go like this:
Year 1: 2,500 (25%)
Years 2-4: 7,500 (75%) divided into 36 monthly portions
After that standard one year cliff, you could be getting restricted stock units vested on a monthly basis. The vesting schedule varies from company to company, so don’t expect it to be exactly like the one above.
|NOTE||Be aware if your future employers are close to a buyout. They will not have to honor any RSUs that have not been vested. That means, if you haven’t reached that one year milestone, you won’t be getting any stocks.|
Restricted stock units let companies provide an extra incentive for employees to stay long term and work harder, without actual compensation until the RSUs vest. Both sides—at least, in theory—get more from the partnership.
You obviously stand to gain stocks in the company, but what’s in it for them?
Well, the good news first. You’ll get the stocks, of course.
But here’s the bad news. As people say, two things are certain in life: death and taxes.
You have to pay income, state, and local taxes when your restricted stock units vest, and capital gain taxes when you sell your stocks.
Just like many companies withhold taxes from your normal paycheck, companies will do the same with your restricted stock units. So don’t be surprised when you receive less than the total amount of RSUs specified in your contract. You are ‘tendering’ the RSUs to your company. This means you’re giving back some of your restricted stock units to the company, and they’re giving it to the tax man for you. This just makes your life easier. Plus you won’t get blindsided by taxes you didn’t think you owed.
As far as what you’ll need to do when tax season comes, you just have to report this income in box 1 (wages, tips, other compensation) of your W-2 form.
|REMEMBER||When it comes to federal income tax, anybody in a tax bracket above 22% will owe more. Your company will take care of the legally mandated 22%.|
You owe capital gain taxes if you sell the vested RSUs and it has appreciated in value since the vesting date.
Let’s say your 100 shares were worth $1 each on the vesting date, and now you’re selling them at $2 each. Per share, there is a capital gain of $1 (value at time of sale – value at vesting date). This means your shares have gone up in value, so you owe taxes on the $100 worth of gains you’ve made.
The perk of selling immediately is that you probably won’t have to pay much capital gains, if any. There isn’t enough time for the stocks to fluctuate greatly, so the value will pretty much be the same as it was on the vesting date. You can diversify your portfolio, deposit the money in a savings or investing account, and so on.
That being said, shares sold within a year of the vesting date need to be reported as short-term capital gains. Ordinary income tax rates apply here.
If you choose to hold the stocks a year and beyond the vesting date, your capital gains will face long-term capital gains tax rates. Depending on your income bracket, those rates vary, but the highest bracket will owe 30%.
Restricted stock units are often likened to a cash bonus:
We cannot provide you with individualized financial advice, so you should always consult your financial advisor to make the most prudent monetary decisions.
The potential danger RSUs pose is when you’re working for a failing company. Not only will your position be in jeopardy, but also those restricted stock units will be worth less and less when they vest. While you won’t have to pay capital gain taxes, you’ll be hemorrhaging money, and may not have a job in the near future.
If we can make one generalization, diversify your portfolio to mitigate risk.
One cannot predict the future. Plus, you aren’t a day trader, constantly monitoring the stock market. Better to play it a bit more safe than gambling big, especially if you’ve got a family to feed.
Standard advice is to keep each of your investments below 10% of your net worth. You should likely sell whatever excess stocks you have (RSU or otherwise) and invest it elsewhere.
As RSUs become progressively more common in compensation packages, you need to be aware of how they can help you best leverage them to achieve your financial goals. We hope we’ve provided you with some helpful information, so you feel more confident when you go into future contract negotiations.
GrowthAdvisor can help you compare potential job offers, complete with salaries, stock grants, and even potential exit scenarios so you can save time applying to companies that won’t generate you money down the road.
Got questions? Email our team at email@example.com
Article Number: GA-115
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