Do you work for an employer that granted you restricted stock units (RSUs)? This form of non-cash compensation has become increasingly popular among start-ups and Fortune 500 companies alike that are using RSUs to lure new hires and retain senior executives to create a culture of ownership. As employers continue to grant fewer stock options than in years past, the granting of RSUs is becoming more common.
RSUs can be beneficial for both employees and employers as they help to align the interests of both. Let’s examine some of the different aspects of this increasingly popular form of compensation.
Employees granted RSUs have received a deferred and restricted grant which become shares of stock upon vesting. An employer offers RSUs to recruit, incentivize, compensate, and retain key employees. The employer commits to giving an employee stock in the company on a certain date in the future (known as the “vesting date”) once certain requirements are achieved. Vesting is usually tied to continued employment until the vesting date, but predetermined performance requirements can also be used to determine RSU awards.
RSUs have no actual value to the employee until they are vested. On the vesting date the value of the stock represented by the RSUs determines the amount of compensation earned by the employee. If the company does well, the value of its stock should increase with time, increasing the value of the shares the RSUs represent. Income from RSU’s is treated as ordinary income at the time the RSU’s vest. Shares are commonly sold to cover the necessary tax withholding. If you continue to hold shares after the vesting date the rules covering capital gains will apply to any future appreciation.
For example, let’s say your company grants you 1,000 RSUs when your company’s stock price is $10. The stock price has since risen to $20 by the date your RSUs vest. In this scenario, the 1,000 RSUs would be worth $20,000 of stock (before taxes) on the vesting date.
There are a number of potential benefits and also some drawbacks of RSUs. Below, we break down some of these factors for both you and your employer:
When it comes to RSUs, there can be many different complexities, some of which may be unique to your employment or financial situation. Your adviser can help you both better understand your RSU award and navigate its potential implications for your overall financial plan.
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