How to Understand the Complicated World of Restricted Stock Units (RSUs)
Introduction
Restricted Stock Units (RSUs) are one of the most common ways that companies give employees stock. But they're also complicated and confusing. So, if you’re not familiar with Restricted Stock Units (RSUs), we're going to demystify them for you!
What are Restricted Stock Units (RSUs)
Restricted Stock Units (RSUs) are a type of equity compensation. Restricted Stock Units (RSUs) are a form of deferred compensation, meaning that employees do not receive the stock until the vesting period has passed and after they have satisfied all the terms and conditions of their contract.
RSUs are used by companies as a way to reward and retain employees. They can also be used as an incentive for employees to be loyal to their company over competitors, as RSUs generally vest over time—and are thus only available after several years or may never be available at all if an employee leaves before they’re fully vested.
Why do companies grant Restricted Stock Units (RSUs)?
Restricted Stock Units (RSUs) are used by companies to attract, retain, and reward employees.
They help companies attract talent. Talent is one of the most important factors in a company's success. The way you go about attracting talent can have a big impact on your business’s future growth and profitability. You can use RSUs as an incentive for people to come work for your company, or even just stay with it after they've joined the team!
They align employee interests with shareholder interests. Companies need talented people to help them grow—and those talented people want high paychecks and good benefits packages. By granting stock options (which tend to vest over time), RSUs encourage employees' financial well-being while also benefiting shareholders through increased performance metrics like revenue growth or ROI from stock appreciation over time due to equity dilution caused by issuance of new shares via option exercises or sales/exchanges made during vesting periods.
RSUs encourage employees' financial well-being while also benefiting shareholders. Employees are incentivized to increase performance metrics like revenue growth or ROI. Of course, the employee will benefit from this growth as their RSUs vest.
What are the benefits and disadvantages of RSUs?
When you receive RSUs, you're not guaranteed a payout. You might have to work for your company for an agreed period of time before they vest and turn into actual shares of stock. If they do vest, the value of your RSUs is taxed when they vest. This could mean that you pay taxes on the amount of stock at a time when it's worth less than what its future value will be once it receives liquidity in an IPO or other sale. Additionally, when you sell some or all of your shares as an RSU holder, those gains are taxed at ordinary income tax rates rather than capital gains rates (which are lower).
RSUs are an important part of a compensation package, so it's worth understanding the basics.
Restricted Stock Units are an important part of a compensation package, so it's worth understanding the basics.
RSUs are a popular form of equity compensation, usually granted in conjunction with other stock options or restricted stock. They represent shares that have not yet vested and can be thought of as stocks that aren't publicly traded yet. When you earn RSUs, they're usually tied to some sort of vesting schedule:
You don't receive your full allocation until after some period of time has passed (usually 12-18 months but this can vary from company to company).
The amount you receive is based on several factors: what percentage all employees get; how much was given out last year; whether there were any adjustments during the current year; etc. It's also important to note that if the price per share declines significantly, then those who hold RSUs may be able to exercise them at a lower price than what they would get if they held onto them until they were vested.
What Does Vesting Mean When It Comes to Restricted Stock Units (RSUs)?
When you receive restricted stock units (RSUs), you don't immediately gain the right to sell your shares. Instead, you wait for a period of time—the vesting period—before you can exercise that right. Vesting is often determined by a vesting schedule, which is a predetermined schedule of when an employee will be able to sell their shares.
According to the website Moonchaser.io, a company that specializes in salary and RSU negotiations, a typical vesting schedule at the social media company LinkedIn looks like this:
“At LinkedIn, you receive shares of Microsoft stock with your offer. The equity you are granted (i.e. RSUs) is subject to a 4-year vesting schedule: 25% vests at the end of the 1st year (otherwise known as a cliff), then 25% in each of the 2nd, 3rd and 4th years, at a rate of 6.25% every 3 months.”
For example, if given a stock grant of $500k over 4 years, the equity would vest as follows:
Year 1 - $125,000 (25%)
Year 2 - $125,000 (25%)
Year 3 - $125,000 (25%)
Year 4 - $125,000 (25%)
Source: Moonchaser.io - source link here
What is the tax treatment of Restricted Stock Units (RSUs)?
Restricted stock and RSUs are taxed differently than other kinds of stock options, such as statutory or non-statutory employee stock purchase plans (ESPPs). Restricted stock usually becomes taxable upon the completion of the vesting schedule. For restricted stock plans, the entire amount of the vested stock must be counted as ordinary income in the year of vesting.
When your company grants you stock options, you need to report the value of those options on your taxes. The amount that must be declared is determined by subtracting the original purchase or exercise price of the stock (which may be zero) from the fair market value of the stock as of the date that the stock becomes fully vested. The difference must be reported by the shareholder as ordinary income. However, if the shareholder does not sell the stock at vesting and sells it at a later time, any difference between the sale price and the fair market value on the date of vesting is reported as a capital gain or loss. source: Investopedia
What is the difference between Restricted Stock Units (RSUs) and Stock Options
Restricted Stock Units (RSUs) are a form of equity compensation that is awarded in the form of stock. They can only be exercised after a vesting period, which means that you won't receive any immediate benefit from them until then. RSUs differ from Stock Options in two main ways:
With Stock Options, you receive the full value at exercise time. With RSUs, this is not true because vesting periods apply to them as well. This means that there may be restrictions on when and how much you can sell shares depending on various factors like performance or other requirements set by your company's board of directors or human resources department personnel.
In contrast with stock option plans where employees merely receive an option for their shares at no cost upfront, with Restricted Stock Unit (RSU) plans they pay taxes up front on the fair market value of their award immediately upon grant date before they even have any rights under those awards
Conclusion
As you can see, RSUs are complicated. They're also an important part of a compensation package and one that you should understand. Whether or not they make sense for your situation will depend on the specifics of your business, but if you're looking for an incentive to motivate employees or incentivize yourself, then RSUs may be the perfect fit for your company's needs.
Companies like LinkedIn, Google, Sprout, Doordash, Facebook, Abbott Laboratories and others use RSUs in their compensation package to attract the best talent and to reward employees with stock incentives.
If you hold RSUs and would like a detailed analysis of how they fit into your overall financial planning and investing strategy, please contact us. We can help you create a financial road map to better navigate your financial future.