4 Facts About RSU Vesting You Should Know
Restricted stock units (RSUs) are an increasingly common part of compensation packages for big tech employees — and for good reason.
This equity-based compensation is more straightforward than other forms of incomein its category. RSUs can also retain value until your employer’s shares hit $0 and are highly flexible after they vest. Meanwhile, the value of RSUs is tied to the stock price of the employer that grants them, giving workers a strong incentive to add value to the company.
To get the most out of your RSUs, you’ll need to understand the nitty-gritty of this form of compensation, including when and how your units will vest. Read on for four facts about RSU vesting everyone in the tech industry should know.
1. The Type Offered
First of all, not all RSUs are created equal. Depending on the restrictions placed on the units your employer offers, your RSUs may be subject solely to a vesting schedule or under a vesting schedule and further conditions.
Make sure you won’t get caught off-guard by unexpected requirements by familiarizing yourself with the two main RSU types.
Single-Trigger RSUs
Single-trigger RSUs are the simplest RSU type, because they only follow a vesting schedule. These RSUs become vested as soon as the vesting date is met.
Double-Trigger RSUs
Vesting schedules are the most common restrictions placed on RSUs, but they are by no means the only conditions employers can put on these units. Before your RSUs vest, your company might need to hit a specific milestone, like launching a service or product. Other triggers that may need to be completed by your workplace before RSUs vest can include going public with an IPO or completing an acquisition or merger.
2. Varying Schedules
Single-trigger RSUs have fewer restrictions than double-trigger RSUs, but that doesn’t mean these units are always straightforward. The next step towards effectively using RSUs is figuring out what vesting schedule your workplace uses and when your shares will fully vest.
For example, imagine you’ve been granted 2,000 RSUs that vest over a four year schedule. After a year of service, 20% of these units will become vested. From then on, you’ll get matching vests each year until your shares are 100% vested.
When your first year at your new company is complete, 400 of your RSUs would vest and are now owned by you. This process would repeat each year for the next four years. At the end of this process, all the RSUs included in your initial grant would be vested.
This example shows what you can expect if your employer uses a graded vesting schedule, in which RSUs vest periodically over multiple years. Alternatively, your workplace may offer cliff vesting — meaning all the grants given to an employee vest simultaneously — or tie its vesting schedules to stock market performance targets.
3. Tax Liability
No matter what vesting schedule your office uses, your RSUs have zero value until you meet the requirements for vesting. When the shares are granted, you won’t need to worry about tax consequences immediately — after all, you technically don’t own the shares yet. But when your shares do vest, you’ll need to be ready to deal with the resulting income tax liability.
To calculate the value of your vested shares, take the number of shares you own and multiply that amount by the stock’s fair market value. That value is taxable as income, meaning your employer should withhold taxes as required.
Some (but not all) employers that provide RSUs also help employees deal with their tax liabilities. To do this, they simply reduce the number of shares employees are set to receive by the taxes they owe.
As an example, let’s assume that 500 of your shares have just vested at a value of $10 per share — meaning you’ll owe tax on $5,000 of income. Assuming you fit the 30% tax bracket, that’s equivalent to a bill of $1,500 (or 150 shares). Instead of paying this bill outright, you could opt to receive 350 shares and use the remaining 150 shares to handle your tax liability.
There are ways to reduce taxes on RSU income, too. Work with a financial advisor or take the time to learn about your options so you’re ready when tax day arrives.
4. Selling Depends on The Company
Once your RSUs have vested, your first instinct may be to make some money by selling your new shares of stock. However, what you can do with vested shares varies based on the type of company where you work.
Public Companies
Do you work at a publicly-traded company? If so, selling your shares shouldn’t be an issue. Since these shares are traded on a stock exchange, you’ll be able to sell them whenever you want — assuming you’re satisfied with the price of shares at the time. If you need money to pay for income taxes, you’ll be able to sell shares after they vest to cover this cost.
That said, you don’t have to sell your shares the moment they vest. If you’re confident enough in your company’s direction to hold out for higher stock prices, you’re welcome to hang on to your shares. Just be aware that having too much stock in a single business can make your portfolio more risky. It may be a good idea to sell some shares and diversify the profit into other investments.
You might face additional tax consequences if your share sale leads to a capital gain. By holding onto your shares for at least a year after they vest, your profits will be considered a long-term capital gain, which is usually taxed at a lower rate than short-term capital gains.
Finally, depending on your company and role you might be subject to trading restrictions. This means that your employer will restrict when you can buy and sell company stock, typically after the company releases earnings to the public markets. It is extremely important that you reference your employer’s legal department to determine how you are subject to trading restrictions.
Private Companies
Creating a strategy for what to do with vested RSUs in private companies can be trickier since you won’t be able to sell your shares on the open market. Because of that, you may have to pay taxes out of pocket. Some private businesses avoid these issues by providing double-trigger RSUs, which require a liquidity event before the shares vest.
Since share sale options at a private business are limited, chances are high that you’ll need to wait until a liquidity event arrives before you can do much with your RSUs. Even then, certain liquidity events (like SPAC listings and IPOs) come with lock-up periods — meaning you’ll still need to wait before you can sell off your shares. Some private companies will offer liquidation periods for employees, but they are typically limited to only a few times per year.
Because of these factors, putting your shares up for sale as soon as an opportunity arises may be tempting. However, if you believe your company is on track for healthy growth (and if you can afford to cover taxes by yourself), it may be in your best interest to hold out for higher sale prices in the future.
Guidance from Experts
RSUs are simple enough in theory, but knowing when you can (or should) do something with your RSUs gets complicated quickly. Even the most highly qualified professionals in the tech industry can benefit from working with a team of trusted financial advisors to create an RSU strategy.
If you’re looking for a financial advisor you can count on, consider Consilio Wealth Advisors. As the tech industry’s number one choice for financial planning services, Consilio’s team of experts can give you reliable advice on what to do with your RSUs — without all the buzzwords. Start your journey with Consilio Wealth Advisors today!
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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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