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A quick guide to Restricted Stock Units (RSUs)

A quick guide to Restricted Stock Units (RSUs)

What does RSU stand for? Restricted Stock Units!

As equity compensation becomes more and more popular, restricted stock units (RSUs) are being doled out to hundreds of thousands of employees. If you work for a big public tech company like Facebook, Apple, Microsoft, Amazon or Google, chances are a significant amount of your long term compensation will be doled out in RSUs.

Note: This post is for illustrative purposes only. Consult an accountant for details and advice. I would also recommend reading my book on stock based compensation if you are new to the subject, as there is a lot of detail that I do not have the space to get into on a blog post!

So what ARE restricted stock units (RSUs)?

RSUs are a grant of a specific number of shares from your employer to you. In essence, the company is handing over shares of stock to you over a fixed time period. They deposit those shares in a brokerage account that you control, where you are able to sell the shares or keep them as an investment. 

In comparison to their close cousin, the Incentive Stock Option, restricted stock options are simpler. However, it's important to understand how they work and the terminology involved to maximize the value you can realize from your grant. 

An RSU example and a look at how RSUs are taxed

Timmy just graduated from Stanford, and he got hired at Google on 9/1/2018. As part of his offer, he received 48 shares of Google RSUs. That doesn't sound like a lot, but at a current stock price of ~$1200, his grant is worth a whopping $57,600 (48x$1200).

However, he doesn't just get those shares today. They will vest monthly over the course of 4 years, with a 1 year cliff. In plain English, that means that he will receive 12 shares after a year of employment on 9/1/2018, then he will get 1 share each month for the next 36 months. 

It's easy to think that Timmy just bagged $57,600, but he didn't. There are a lot of things at stake here. First of all, he has to remain employed at Google to get his shares. If he finds a better job or gets fired, no stock. That's why companies always issue stock options with a one year cliff. Timmy also has to hope that the price of Google stock continues to go up, or at least stay the same. If he vests his shares at a lower price, then he will either have to wait for it to rise again, or sell for less than the amount he expected. 

Here's what I mean.

Let's say that Google is having an incredible 2019 -largely thanks to Timmy's work as the chief intern. The stock rises to $1550. Then, they miss earnings on 8/31/2019 and the stock plummets from $1550 to $1000. The good news is that Timmy will still vest his 12 shares. After Google sells three shares for taxes, 9 shares worth a total of $9000 will be deposited in his account.

The bad news is that he still can't sell his shares! He vested them, and they are in his account, but he has to wait for the insider trading lockup period to end before he can legally sell them. The lockup period only lasts for 4-5 days after the earnings call, but a lot can happen in 4-5 days. 

In this case, the bearish slide continues and by 9/5/2019, when Timmy can finally offload his shares, the stock has slid down to $800. Timmy sells his shares, and manages to actually realize $7200. 

The moral of the story here is that RSUs are almost NEVER worth what you think they will be worth which is why it’s so important to have a plan for selling them. Even if they are worth what you think they will be, sometimes you can't sell them. Then the greedy hand of Uncle Sam comes in to whittle down your earnings by 30-50%. 

Depressed? Don't be! Something is always better than nothing, and RSU's have some big advantages. 

  1. They will almost always be worth something. Unlike ISOs that may fall below the strike price, you get a fixed number of shares with RSUs, and as long as the company is still solvent those shares will be worth more than $0.

  2. They are easy. There is no decision about when to exercise. Taxes are taken out automatically (most of the time, check with your company). You will still need to figure out when to sell them, though.

  3. They are free. Unlike ISOs, you don't need to pay for them. The company just hands them to you.

  4. Keep them for over a year and the gains are taxed as long term capital gains. If Timmy were to have kept his RSUs instead of selling them, the gains on his RSUs after his vesting date would be taxed at capital gains rates. In other words, if he kept them for another year and the stock went up to $1500 again, then the difference from $800 to $1500 would be taxed at the long term capital gains rate, which is 20% maximum as of 2018.

How to keep track of your RSUs

If you just got granted RSUs, the best thing that you can do is keep track of them with Personal Capital. In addition to enabling you to sync all of your investment, checking, and real estate accounts, you can add your option grants and see how they will vest over time (I have written a full post on how to do that here). Personal Capital will also keep track of price movements in the underlying stock, which will make it easier to see what the effect of a price swing will have on your net worth. 

Conclusion: Restricted stock units are becoming a more and more common type of compensation

If you have some RSUs, hopefully now you are armed with all of the info that you need to set your expectations correctly, and take advantage of this fantastic opportunity.

Other posts on startups and RSUs

How to avoid PMI without 20% down

How to avoid PMI without 20% down

Amazon RSU stock compensation is great as long as the stock keeps going up

Amazon RSU stock compensation is great as long as the stock keeps going up