Equity Compensation

What are Restricted Stock Units?

Michael Kelly, CFA, CFP®

Restricted Stock Units (RSUs) are one of the most common types of equity compensation and are a crucial part of many tech employee’s income. As more employers in North Carolina and across the country include equity in employee’s compensation packages it’s becoming more important for people in the tech industry to understand how these benefits work. We’ve put together this short guide to help you understand what RSUs are, how RSUs work, how RSUs are taxed, and what happens to your RSUs if you’re laid off. 

What are RSUs?

Restricted Stock Units (RSUs) are a popular form of equity compensation used by many companies in the tech and biotech industries. Unlike traditional stock options, RSUs represent a promise to receive a specific number of company shares at a future date. However, employees do not own the shares outright until a specific vesting period is completed.

How do RSUs work?

Understanding how your Restricted Stock Units work will help you plan your income and account for expenses like taxes more easily. RSUs typically have a vesting schedule, during which the employee must remain with the company to unlock the shares. Once vested, employees can either sell the shares to use the funds or hold onto them, potentially benefiting from any increase in the company's stock value. The mechanics of vesting will vary from company to company and may include different vesting periods or conditions that have to be met in order to be fully vested. It’s important to review the materials your company provides with the help of a qualified Financial Planner to make sure you understand how your RSUs will function.

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How are RSUs Taxed?

The most common questions we get are around how equity compensation is taxed. When RSUs vest, they are considered taxable income, and the employee must report the fair market value of the shares on that day as part of their income. Since RSUs are taxed at the time they vest it’s important to have a plan for how to manage that equity. Many employees feel drawn to hold the company stock they’ve received through RSUs. While this can be a path toward wealth, it also means you will have an increasing amount of your portfolio invested in a single company (which also happens to be your source of income). Additionally, your company will likely withhold taxes from your RSUs at the same rate they would for any bonus payment (usually 22%). This amount may not be the actual tax rate that you are required to pay, meaning you will either pay additional taxes or receive a refund. If you hold on to your company stock make sure you have cash on hand to pay any taxes you will owe. Some tech employees have found themselves with company stock that has gone down through the year and not enough cash on hand to pay their bill at tax time.

How Can I Plan for My RSUs?

We call planning for equity compensation Strategic Planning. That’s because it requires looking at your situation both now and over the long term. It also means consider multiple areas of your life like income, expenses, and taxes. Strategic planning is key to maximizing the benefits of RSUs. Here are a few common elements of Strategic Planning for Restricted Stock Units

  • Understanding your Vesting Schedule- You need to understand how and when your RSUs will be paid to you in order to project your income, time your planned expenses, and project your tax bill. If you don’t feel up for making these projections on your own, it’s a good time to talk to a professional
  • Plan Your Selling- Many employees end up holding on to their company stock, simply because they didn’t create a plan for what to do with it. This leads to a concentrated position in the company that also pays their income. This situation is pretty high-risk for any family. That doesn’t mean you should immediately sell all company stock but it does mean having a purposeful plan for when, and how much, you hold on to will be a huge advantage.
  • Take a Global View- You should always look at your investment portfolio across your whole household. We call this taking a global view. It isn’t uncommon for employees at big tech companies to receive equity compensation as a large part of their income and also see that company’s stock show up in other accounts and investment funds. Similarly, if you hold equity in a smaller tech startup you will want to diversify the rest of your portfolio appropriately.

What Happens to my RSUs if I leave or get laid off?

The tech industry is no stranger to layoffs, especially in recent months. The treatment of your RSUs will vary between companies and situations. Broadly speaking there are 3 scenarios that tech employees will encounter if they are laid off with RSUs:

  1. Equity from RSUs that have vested will always be yours
  2. RSUs that have not vested may be forfeited. This loss may be a point of negotiation as senior tech employees consider severance agreements. 
  3. In certain situations, your company may offer “accelerated vesting”. The terms will vary but this means you’d have the opportunity to receive some or all of the equity represented by your RSUs. This may avoid the loss of income but also means it’s time to update your income and tax plans.

Good planning around your Restricted Stock Units means not only understanding what RSUs are, how they work, and how they’re taxed but also how they fit into your personal goals and plans in the event of life changes like moving jobs.

As financial planners who specialize in working with equity compensation, we have seen how important it is to have a professional on your team to coordinate how you build and preserve wealth so you can lower your stress, pay less in taxes, and focus on reaching your goals. Schedule an Intro Call to get a better understanding of how your RSUs fit into your plan to build wealth.

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