Restricted Stock Units: Everything You Need To Know

Showing up strong to a job interview and stunning your prospective employer with your shining personality, know-how, and big ideas has landed you an exciting job offer. Before you sign on, however, you want to make sure you understand the salary and benefits package offered to you, and determine if it is both fair and in-line with your financial goals and expectations. But compensation offers aren’t always as straightforward as an annual income and bonus offer.

If the whole idea of “complex compensation” — things like restricted stock units (RSUs) — seems, well, complex, we’re here to guide you through some of the particulars so you can make the right decisions for your future.

In this article we’ll explore the restricted stock units definition, how RSUs work, and we’ll take you through some of their benefits and risks. We’ll clarify terms like “RSU vesting schedules,” discuss more complicated issues like taxation, and leave you with some guidance regarding when and how to leverage your RSUs.

Getting Started with Restricted Stock Units

What Are Restricted Stock Units?

Restricted Stock Units (RSUs) are a type of equity compensation provided by your employer in the form of a grant that, along with your base salary, account for your total compensation.

RSUs are not stock. Rather, they are promises to receive stock after a period of time during which specific conditions are met. Your new employer hopes to encourage your long-term commitment by tying the availability of company stock with certain benchmarks based on the amount of time you’re employed or your job performance. This approach aligns your interests with the company’s growth – if the company thrives, the value of your future vested shares increases.

RSU Vesting Schedules

RSU vesting schedules revolve around time. Here are some common examples of how an RSU could come to maturity.

• A five-year vesting schedule might mean that each year, 20% of your RSUs become vested on the anniversary of your employment.
• Some RSUs follow a “cliff vesting” schedule, meaning they vest all at once after a specific period (e.g., one year).
• Monthly vesting converts some units to stock every month, often after an initial period of time employed.
• Less common are performance-based vesting plans, maturing when specific goals or metrics are achieved.
• In the event that the company is sold, vesting may be accelerated.

RSU Benefits

There are several RSU benefits that make them an attractive option for both employers and employees.

• No upfront cost: there is no initial fee or payment at the time when RSUs are granted.
• Deferred taxation: RSUs boast the benefit of not hitting your wallet with taxable income right away. Units aren’t taxed at the time they are granted.
• Low maintenance: you won’t need to worry about exercising options, as is the case with employee stock options, your units convert to shares automatically when they vest.
• Strong Value:  RSUs are less of a gamble than stock options because they are guaranteed to be worth something as long as the company is around, regardless of what’s happening with the stock market.

RSU Risks

Let’s keep things real and look at the risks of RSUs.

1. Market Performance
   • As we’ve mentioned, RSUs are essentially placeholders, only becoming real shares when they vest, meaning that their value is tied directly to your company’s performance and how the stock market is behaving that day. If the market is feeling down or your company isn’t doing so great, the value of your RSUs, now real live shares (i.e. actual income), can take a hit you probably weren’t anticipating on the day you signed the dotted line.
2. Concentration Risk
   • At the point when your stock units vest, you’ll need to decide whether to keep or sell your shares, and here’s where it gets interesting. If you do hold onto those shares or forget about your vesting schedule, you’re going to end up with a large portion of your investments being invested in your company’s stock. In other words, you’re keeping all your eggs in one basket. .
3. RSU Tax Liability
   • Let’s also note that there is no unique tax benefit to holding stock after it vests. At that point, the stock counts as income which is subject to payroll, federal, and state taxes. Your tax bill come April may be quite a surprise if you haven’t planned accordingly.
   • Some employers sell RSUs for tax withholding, but it’s unlikely that will be sufficient to cover higher tax brackets or stock gains. One option is to sell some of your vested shares to cover taxes – selling on the vesting date eliminates any additional taxes. Be careful, though: when you sell shares acquired through RSUs, any difference between their value at vesting and the sale price is considered a capital gain or loss and the tax implications become even more complex.

The Bottom Line

When it comes to RSUs, it’s best to treat them like a cash bonus. If you would buy company stock with a $5,000 cash bonus then hold on to your RSUs after they vest. If you would not buy company stock with a $5,000 cash bonus, sell your shares the day the vest and use the cash for something fun, charitable, responsible, or to buy different stock as a means to diversify – living with intent.

Where to Seek Guidance About Employee Stock Options

If you want to dive deeper into understanding and making the most of your employee stock options, it’s a smart move to chat with professionals who know their stuff. We suggest reaching out to your trusted tax preparer or financial advisor. These experts have a wealth of experience when it comes to handling complex compensation, and they can offer you personalized insights and strategies based on your unique situation.

Conclusion

While RSUs aren’t the most complex compensation instruments, they can get a little tricky without careful planning and consideration of your goals and overall financial situation – that’s why it’s important to understand the RSU meaning and how they work. . We recommend that you have a plan for managing RSUs well before they vest, including an understanding of the various tax implications, as well as consideration of how you will diversify your portfolio to protect your investments. Consulting with a qualified financial advisor or tax professional can be helpful in making informed decisions regarding your RSUs and overall financial strategy.

At SK Wealth, our financial advisors are all about helping you make informed choices regarding your complex compensation package and how to plan for your financial future. We’ve honed our financial planning process, The Integrated Financial Advantage™, over the past 25 years to offer you our personalized recommendations that empower you to live life with intention, tomorrow and today. Both today and tomorrow.

Click here to find out more about SK Wealth’s specialized financial planning and investment management services.