Restricted stock units (RSUs) are a form of equity compensation that some companies offer to their employees. Through this benefit, you receive shares of company stock subject to certain terms and conditions. Once these conditions are met, your shares vest. You get full ownership of these shares and are free to sell them on any available marketplace. Here’s what you need to know.
If you need help selling RSUs, or advice on any other type of investment, a financial advisor can walk you through specific options for your portfolio.
What Are Restricted Stock Units?
Restricted stock units are a benefit known as equity compensation. Through equity compensation, an employee receives shares of company stock as part of their compensation package.
A company might offer equity compensation for a number of reasons. Ideally it aligns the employee’s incentives with that of the firm, so that the employee will be personally enriched if the company succeeds. Depending on the nature of the benefits this can also be used as a retention package, incentivizing people to stay with the firm for several years so that they can collect the full value of their benefits.
There are several ways of distributing equity compensation. The two most common are stock options and restricted stock units (RSUs).
With an RSU, you are offered a package of shares in the company that you will receive based on certain conditions. Until these conditions are met, you have no rights to these shares. They are an offer only. Once the conditions are met, you receive full ownership of these shares.
How Are Restricted Stock Units Distributed
There are two main kinds of restricted stock units: Single trigger and double trigger. With a single trigger restricted stock unit, you receive the shares once a single condition has been met. With a double trigger restricted stock unit, you receive your shares once all of multiple conditions have been met.
The most common condition for a restricted stock unit is a “vesting schedule.” This means that you receive shares after you have worked for the company for a certain amount of time. It’s not uncommon for a company to have tiered vesting schedules, in which you receive shares in stages over time. For example, say that Sue has equity compensation with the following schedule:
- 1,000 Shares of restricted stock units
- Vesting schedule of 10% per year of employment
Sue has single trigger restricted stock units. She doesn’t receive anything at first. Then, every year that she stays with the company, she gets 100 shares of stock (10% of her overall 1,000 shares). After 10 years, all her stock vests and she will own all 1,000 shares.
It is also fairly common for companies to set performance or liquidity triggers on the restricted stock units. For example, a startup company might have an IPO trigger. With this condition, an employee would not receive their shares until and unless the company issues its initial public offering. Other companies might have price triggers, meaning that an employee would not receive their shares until the company hits a certain market value, event triggers or other specific metrics.
For example, say that Roger has equity compensation with the following schedule:
- 1,000 shares of restricted stock units
- Vesting schedule of five years
- Subject to acquisition by ABC Co.
Here, Roger has double trigger restricted stock units. He cannot receive his shares until he has worked for the company for five years. He also cannot receive his shares until and unless ABC Co. acquires his company. Once both of those conditions have been met, in any order, Roger will receive 1,000 shares of company stock.
Value and Taxes for Restricted Stock Units
When shares of restricted stock units vest, you receive these shares in full. Unlike with stock options you don’t have to pay for these shares.
Shares of restricted stock units are considered compensation. And, as a result, are added to your taxable income for the year in which you receive them. The value of these shares is determined based on their fair market value at the time they are distributed. For publicly traded stocks, fair market value is typically set based on share price. For private stock, fair market value is usually based on a number of factors, typically including the number of shares in circulation, how much investors paid for those shares and any assessed value of the company.
For example, take our case above with Sue. In her first 12 months, she has no shares or salable rights to those shares at all. At the one year mark, she receives 100 shares of stock. She owns these shares in full. Sue’s company distributes those shares on January 1, when the stock is publicly trading for $15 per share. Her shares are valued at $1,500 ($15 per share * 100 shares), which will be added to her taxable income for the year.
How You Can Sell Restricted Stock Units
Selling restricted stock units depends on whether your company is publicly or privately traded.
Once you have met the conditions of a restricted stock unit package, you receive those shares entirely. They are yours and you can buy or sell them subject to the same conditions as any other shares of stock.
With a publicly traded company, this means that you can freely sell your shares as you would any other stock in your portfolio. The timing of this is entirely based on your personal judgment about the value of these shares in your portfolio, although it’s common for employees to sell at least some of their shares right away to cover the tax bill.
Private companies are more difficult because their shares are not freely traded, nor are they publicly valued. Instead, private shares are usually valued based on the company’s last round of investment. Individuals also typically face trading restrictions on private shares, since you must be an accredited investor to freely buy and sell this asset class.
In most cases, the best way to sell private shares is to wait for your company to issue an IPO. Alternatively, it’s common for companies to buy back shares from their employees, creating what is effectively an internal market for the company’s stock. Beyond that, you may need to consult with a financial professional to determine if and how you can legally sell these shares to interested private investors.
Once you own a restricted stock unit, you can sell these shares subject to the same rules and conditions as any other share of stock. With a publicly traded company, you can contact your brokerage of choice and sell the shares directly. With a privately traded company, it is more difficult and you may need to either sell your shares back to the company itself or consult a financial professional about your options for brokering a legal sale to private third parties.
Investment Planning Tips
- Stock options are another common form of equity compensation. Employees purchase shares at a set price instead of receiving them directly. While this can be more expensive up front, it could also pay off significantly in the long run.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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