What to Know About Restricted Stock Units

Restricted stock units could be one of the perks of your next job. So it is important to know what they are and how to act when you receive them. Here we explore how restricted stock units work, the contexts they might appear in and what to do if offered them.

By Lora Korpar

It is easy to hear the term “restricted stock units” (RSUs) and feel bored and move on if you are not interested in finance. However, RSUs are a benefit many employers offer, so it is important to understand them.

Investopedia defines an RSU as “an award of stock shares, usually as a form of employee compensation, that comes with conditions that typically include a vesting period before they are transferred to the owner.”

In basic terms, RSUs are an assurance that the employee will receive shares in the company after a predetermined period. Once the RSUs have “vested,” or become available, the employee can choose what to do with them.

But how long does it take for these to vest? And how do you act when they do?

I spoke with financial planner Jennifer Dazols and certified equity professional at Corporate Equity Services and managing director of SVB Private, Ann Lucchesi , to discuss what kinds of jobs offer RSUs, how they work and what to do when you receive one.

How RSUs Work

“A restricted stock unit is essentially the right to receive shares at a future point in time,” Lucchesi said. “That's the most basic way to think about it.”

Dazols said RSUs are like a promise that the new employee will receive shares, but only after a vesting period.

The vesting schedule depends on the company. Lucchesi said the average period for a Silicon Valley company is about four years. It could also depend on when the employee hits performance goals.?

However, Dazols added that RSUs don’t tend to vest in a lump sum. For example, you can receive 1,000 shares over four years, meaning 250 vest each year. Or the vesting can be frontloaded, so you receive more in the first few years.

A monthly vesting schedule can happen, but Lucchesi said this is less common because that takes more work on the administrative side.?

Dazols said RSUs are taxed as income. So once they have vested, they will count toward regular income tax. Lucchesi said some companies withhold enough to cover the tax, while in other cases, you have to sell shares to cover the tax.

Lucchesi added that vesting differs depending on whether the company is in the public sector or private. An RSU acts the same in a public company as a regular stock once vested.

“In the private stock world, it’s a little different because they often will have two vesting conditions,” Lucchesi said. “So they'll have one vesting condition that is time-based, then the second one will be a liquidity event. And the reason they do that is they don't want you to vest in shares that you can't sell to cover your taxes. So they might tie that to, for instance, the end of a lockup period after an IPO. And so then all the shares you've vested up to that period, you get at that point in time.”

Also, it is important to consider that you might be eligible for more RSUs further into your career.

“Often these grants are not just one-time — they're going to be refreshed,” Dazols said. “So perhaps every year at your performance review, you're going to get another set of RSUs that will then vest over the next four years. So you can imagine that by the time you've stayed at a company for four years, you have all these grants from every year, so you’re going to have a lot more stocks vesting.”

Companies That Offer RSUs

Dazols and Lucchesi said publicly traded companies or late-stage private companies often offer RSUs to employees.

They are most common in the tech industry, but, Lucchesi said, “even companies outside of the tech world use RSUs to give value to employees and encourage a form of equity ownership within their program.”

Offering RSUs that take a period to vest provides several advantages to the company. Dazols said it encourages employees to stay with the company longer.

“It's really about retention,” Dazols said. “So they're not going to give it to you all upfront. They're going to dole it out over time.”

Lucchesi added that RSUs are good compensation options because you always retain some value from them. According to Charles Schwab, “RSUs are almost always worth something, even if the stock price drops dramatically.”

“If a company is giving you RSUs, it's real money — unlike options, which you don't know if it's going to be worth something,” Dazols said. “So unless the stock price goes to zero, it's worth something and you should consider it as part of your overall compensation package.”?

“If [the RSU] were granted today, and a year from now the stock is down 20%, you still get value,” Lucchesi added. “Whereas if you had an option, that option might be underwater, and wouldn't have real value to it at that point in time. So that's one reason [companies] give it — so that even in volatile markets, people are continuing to get value from this equity grant.”

What to Do with an RSU

You can sell the stock or keep it once the RSU vests. Dazols and Lucchesi said choosing which action to take depends on each person’s financial situation and goals.

Dazols said it is common for people to believe in their company so much that they don’t want to sell their RSUs. However, it is important to consider each factor.

“If you need to use this money for life and you don't want to take additional risk, remember you're already quite invested in your company,” Dazols said. “You're already working there. You're already collecting your salary from there. Your prospects are attached to it. Just sell them when you receive them. That's definitely one approach.”

But also consider the tax elements of selling them immediately.

“If you sell it as soon as they vest, there's no additional tax implications,” Dazols said. “A lot of people are like, ‘I should hold onto them and wait for long-term capital gains.’ But actually, if you receive them and they were worth $100 and you sold them at $100, there's no capital gains. And you just paid ordinary income tax as if you received $100 of salary.”

Another option Dazols and Lucchesi recommend is selling enough to pay the income tax, then keeping the rest.

“The risk is that while you're holding [the RSUs], the stock price could keep going up, but could also go down, in which case you've lost part of your compensation by holding onto it,” Dazols said. “That's why a lot of times we are really recommending our clients to at least sell a portion to cover taxes and to get that in hand and then to take that money and use it for your life or reinvest it in a more diversified way.”

“Oftentimes, [clients need some liquidity] because the tax withholding is not going to be enough to cover what their actual taxes are when they file, and we want to make sure that they're selling enough to have cash on hand to pay those taxes when they file,” Lucchesi said.?

Lucchesi said those who want to accumulate shares in the company can do so if they have the means. But Dazols and Lucchesi suggest diversifying your investments because having all your eggs in one basket is risky, no matter how much you believe in the company.

Top Takeaways

What Are Restricted Stock Units?

• Restricted stock units (RSUs) are a form of compensation in which the company provides shares that vest, or become available, after a certain period or milestone.
• RSUs are different from stock options because they almost always have value, even if the stock price declines.
• Vesting periods can take several years and often provide a portion of the RSUs each year.
• RSUs are subject to income tax once vested, so selling enough to cover the tax can be advantageous.
• Your safest move is to diversify by selling some or all of the RSUs and investing the money elsewhere.