By Jared Elson, Investment Adviser
Understanding Restricted Stock Units (RSUs)
In the corporate world, it has become increasingly common for companies to incentivize employee loyalty by rewarding them with stock. One of the most prevalent forms of equity compensation comes in the form of restricted stock units, known as RSUs. Consequently, it is important to understand what they are, how they work, and their benefits.
What are RSUs?
At their core, RSUs are retention tools publicly traded companies utilize to attract and retain their top talent. As an employee, you are awarded a certain number of shares of company stock after meeting specific conditions. Once these conditions are satisfied, your shares become vested, and you then become the owner of them. You can hold or sell the stock at any time, with no strings attached.
How do RSUs differ from stock options?
While RSUs grant you guaranteed shares that you receive after certain conditions are met, stock options enable you to buy shares of your employer’s stock at a specified price—commonly known as the “strike price.”
Stock options are typically utilized by early-stage startups or pre-IPO firms. This provides you the opportunity to purchase stock at lower prices, so if you remain with the company and it becomes successful, you could reap significant rewards! However, pre-IPO shares may lack accessible value for an unknown duration since they are not publicly traded yet.
What are the main benefits of RSUs?
Historically, stock options were among the most frequently used tools for talent retention and stock awards. However, stock options come with challenges for the employee receiving them.
For instance, a stock option can be underwater, meaning its value may decrease by the time it vests. If your strike price is $50 a share and the stock price drops to $25 at vesting, you end up paying more than it’s worth if you choose to exercise it! Therefore, many companies have shifted away from stock options and now prefer RSUs.
The significant difference is that RSUs never go underwater; they are essentially a gift of stock without a strike price. Typically, the number of RSUs granted to an employee is smaller compared to stock options, but as an employee, you are assured that they will never lose value. Upon vesting, you are credited with a fixed number of shares in your account. The company will typically sell enough shares to cover the taxes due on your RSUs. Thus, if you were granted 100 shares of RSU, you will receive fewer shares after taxes are settled, and you are free to sell or hold as you see fit.
What are the tax implications of RSUs?
When RSUs vest, they become taxable income for you. You are responsible for taxes on their cost basis, which is the market value of the shares on the vesting date. This cost plays a crucial role in determining your overall tax burden.
For example, if your shares vest at $100 each and you decide to sell them a year later when they are valued at $80, you may leverage that decline in value to offset any capital gains elsewhere. Conversely, if those shares grow in value to $120 each before you sell, you are only liable for capital gains taxes on the $20 increase since you already paid taxes on the initial $100 at the time of vesting.
RSUs can serve as appealing investment incentives that encourage employee loyalty. However, like any security, it is wise to carefully contemplate how RSUs function within your broader tax-planning strategy.
Disclaimer
This article reflects the perspectives of the contributing adviser, not the iBestTravel editorial staff. It is recommended that you consult with a qualified financial adviser for personalized guidance.
CEO, Authentikos Advisory
Jared Elson is a Series 65 Licensed Investment Adviser Representative (IAR) and the CEO of Authentikos Advisory. Following a decade-long tenure with Yahoo, Jared identified a growing need for sound financial advice in the tech industry, excelling in equipping tech professionals with tools to grow and safeguard their wealth.
