Brittany Falkner
The world of employee benefits and compensation is constantly expanding, making it ever more important that you fully understand what your employer is truly offering you. One VERY attractive way to compensate employees is in the form of Restricted Stock Units (RSUs). Below we’ll discuss the high-level facts you should know about this type of compensation.
What: A restricted stock unit (RSU) is an award of a company’s stock share that comes with certain requirements the recipient must meet before the stock is transferred to your ownership. This is a great benefit to have as it means more money coming to you, it’s just in the form of company stock. If the company does well, the value of your shares will increase as the stock price increases. Of course, the opposite could also hold true.
Why: RSUs are a way for your employer to offer higher compensation without affecting the business cash flow. You benefit by receiving additional income and participating in the company’s success. An advantage of RSUs versus other types of equity compensation is that there is no expiration date, and you will receive some value for these shares down the road (although it could be more or less than originally stated). Employers use RSUs to reward long-term employees and help align employee interests with the company’s performance. This is a common perk used to attract top talent in job offers.
*** Tip: If you are negotiating a new contract/job offer, you can likely negotiate for more RSU shares if they will not go higher on salary, allowing you to receive higher compensation.
Vesting: RSUs come with a vesting schedule (aka distribution schedule) that details the time frame and required performance milestones you must meet to own the shares. The vesting schedule can encourage long-term employment as most employees do not want to leave a company with shares left behind.
Taxes: RSUs are taxed as ordinary wages upon the vesting date. The mandatory withholding is 22% but be careful as your actual tax bracket may be higher than that causing you to potentially owe additional taxes on that income. You can hold the shares after vesting if desired. In that case, any future gains or losses will be subject to capital gains tax treatment. Keep in mind that if you hold the shares after vesting, you will still owe ordinary income tax on the original vested shares, and you’ll need to come up with the cash to pay your tax bill elsewhere.
***Tip: We highly suggest discussing your vesting schedule with your CPA to ensure you pay an adequate amount to taxes each year and avoid underpayment penalties.
Diversification: Holding a concentrated position of any company’s stock increases risk. While you may start off with a small portion of your shares vesting, eventually you may own a large amount of your employer’s stock as more shares vest. Diversifying your portfolio by selling some shares may become prudent to remain aligned with your targeted investment allocation (and necessary to fund some of your goals!).
***Tip: Most companies have blackout windows where key employees cannot sell their shares so be sure to watch for those.
RSUs for a Private Company
Double-Trigger/Single-Trigger Vesting: For private companies, vesting requirements may include what’s known as a double-trigger for vesting. This type of vesting states that the company must go through a liquidity or succession event to own the share. It is known as single-trigger vesting if you can own the share after the time/performance period alone, even if the company has not gone public.
Valuation: Unlike public companies with readily available stock prices, valuing RSUs in a private company is harder to determine. If a company has a single-trigger vesting, a 409A valuation is done by an independent appraiser to provide the value for the shares.
Exit Strategy: It’s important to note what options you have to sell your vested shares, and the company’s planned timeline(s). Is the company planning to IPO? Are there other exit opportunities/succession plans on the horizon? If double-trigger vesting is in play but the company does not IPO, your shares could never come to fruition. If a single-trigger vesting is in play, you will need to know the possibilities of selling these shares back on the private market.
Diversification: After IPO, it is important to note that there is typically a 180-day market blackout where no shares can vest or be sold.
In conclusion,RSUs can offer rewarding (and confusing!) compensation opportunities for employees. Boardwalk Financial Strategies’ advisors are well equipped to answer your RSU and other equity compensation questions. At Boardwalk, we include your equity compensation in your financial plan integrating your RSUs with your tax planning, cash flow, diversification of your portfolio, and more.
