Learn How to Make this Employee Benefit Work for You
Restricted Stock Units (RSUs) are a common form of equity-based compensation. They can be a great way for companies to make their employees feel more included and to increase retention. If you have RSUs or are considering taking a job with RSUs in the compensation package, this guide will provide a run down on how they operate.
How Restricted Stock Units Work:
RSUs as their name states are not actually shares of stock (not to be confused with “Restricted Stock” a different form of equity comp from Restricted Stock Units). They are units that convert to shares of company stock. Although companies can grant RSUs in the form of an annual bonus or if they want to reward performance, they are often tied to a time-based vesting schedule. When the units begin to vest, they convert to shares of stock in the company. At this time, you are taxed just like any other bonus. Taxes are withheld from the shares that have vested and you receive the net result. Because the units are tied to the company stock when they are converted to shares, how much you receive ultimately depends on the performance of the company and its stock. Once you own these shares it is entirely up to you what you do with them. For a better idea of how they work let’s look at an example.
For our example let’s look at our friend Deion. Deion just received a job offer to work at XYZ Technology and is evaluating the compensation package. Here is what it looks like:
|XYZ Technology Comp Package|
Deion is curious about what these RSUs are and how much value they have. This will all depend on the value of the stock so let’s pretend we can see into the future and see how the price of the stock will move and how it will impact Deion:
With the timeline above, you can see based on the 4-year graded schedule that end of each year, 25% of his 10,000 units vest and turn into shares. Their value ultimately depends on the value of XYZ stock. If we look at year 1:
- 25% of his 10,000 RSUs vest and convert to 2500 shares of XYZ stock valued at $10 a share
- This will result in a compensation of $25,000 (Shares vested x Share price)
- Let’s assume that after his company withholds taxes, the net result is $22,000
- At this time Deion will have in an account $22,000 worth of shares of XYZ stock
Every year he will receive 2500 shares until the 10,000 shares are fully vested. You can see at the end of year 4 that the 2500 shares he receives will be worth $62,500 before tax.
What to Do?
You can see that in this imaginary example, this job offer Deion is exploring might be lucrative, especially with the RSUs and if the stock performed the way it did in the example. But what if the stock didn’t perform that way? What if the stock stayed flat or maybe even lost value? You can see that RSUs can certainly be a great compensation tool but also can create concentration risk and company risk in your portfolio and life. In our example with the stock increasing so much over time, Deion would also need to evaluate his tax situation to ensure that he was withholding enough. There are just a few items to consider now that you understand RSUs more in-depth. If you have RSUs or are considering a job with RSUs please contact us to see how they can impact your financial plan.
The information provided in this article is general information. It is not intended to be construed as investment, tax, or legal advice.
This is not an offer or solicitation to buy, sell, or endorse any company, security, fund, or other investment vehicle.
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