As a tech professional, you’ve likely heard the term “RSU,” aka Restricted Stock Units, tossed around in job offers or compensation discussions. Restricted Stock Units (RSUs) are a form of employee compensation where your employer promises that “Stick with us, and you’ll own a piece of our company.” It’s not just empty words – it’s a tangible commitment to your future with the organization.

But what exactly are RSUs, and why should you care? Let’s dive into the world of Restricted Stock Units and uncover why they’ve become the go-to perk of tech company compensation packages.

What Is A Restricted Stock Unit (RSU)?

Restricted stock units (RSUs) are company shares granted to employees as part of their compensation package, providing them with shares of the company's stock. Unlike stock options, RSUs do not require the employee to purchase shares. Instead, the company grants shares outright, but they are subject to a vesting schedule, meaning the employee must meet certain conditions (such as staying with the company for a set period) before fully owning the shares. Once vested, RSUs are considered ordinary income and taxed accordingly, and the employee can sell the shares for profit.

How RSUs Work: RSU Vesting, Taxes, Etc.

So, how do RSUs work? Let’s break it down: how rsus work Imagine you’re granted 1,000 Restricted Stock Units with a 4-year vesting schedule:
  • After Year 1: 250 RSUs become yours
  • Years 2-4: The remaining RSUs vest quarterly
At the time of vesting, which is when shares ‘vest’ or become yours, you will pay Social Security, Medicare, and ordinary Federal income tax on your RSUs.

Types of Vesting Schedules

Time-Based Vesting and Performance-Based Vesting definitions In order to understand restricted stock units (RSUs), the vesting schedule is a crucial element that determines when you actually gain ownership of the stock units. Here are the most common types of vesting schedules you might encounter:
  • Time-Based and Performance-Based Vesting Schedule: The time-based vesting simply means you have met the time requirement of employment set by your employer to receive the RSUs you were granted. Where as the performance-based schedule ties the vesting of RSUs to the company’s performance metrics, such as revenue or profitability targets. For example, you might be granted 1,000 RSUs that vest only if the company meets certain revenue targets over a three-year period.
  • Hybrid Vesting Schedule (aka Double-Trigger Vesting): A hybrid vesting schedule often is referred to as a ‘double-trigger.’ This usually means your RSU grant is determined by more than one lever being pulled. For many this will be represented by a time-based vesting requirement as well as a company target being met like an IPO (Initial Public Offering). This type of schedule is not as common for most employees but usually reserved for executives and more senior roles.

Features of Vesting Schedules

It is important to be aware of how shares vest. Both types of vesting features can impact your financial plan.
  • Graded Vesting Schedule: This type of vesting schedule allows a certain percentage of RSUs to vest at regular intervals, such as monthly or quarterly. For instance, if you’re granted 1,000 RSUs with a graded vesting schedule of 25% per year over four years, you’ll receive 250 RSUs each year until fully vested, which will fulfill 100% of your grant.
  • Cliff Vesting Schedule: A cliff vesting schedule usually doesn’t begin until the first year of employment is completed. At that time, you usually receive a portion of your grant all at once. Then the remaining shares vest over the next few years depending on the length of your grant. Vesting can be as frequent as monthly or quarterly for some companies. Let’s look at an example.
    • If you’re granted 1,000 RSUs with a four-year cliff vesting schedule, you’ll receive a portion of your shares after the first year but not before that. After that initial cliff, then the rest of your shares will vest over time (Worth noting is that cliff-vesting is quite common when any of these three vesting forms are used: time-based, performance-based, or hybrid/double-trigger).
Understanding the type of vesting schedule and the unique features associated with your RSUs is essential for planning your financial future and making informed decisions about your equity compensation.

RSUs: Unique Features

Restricted Stock Units are an incredible benefit, but they do have a few key features to be aware of.

You cannot make an 83(b) election for RSUs. When shares vest, you will pay Social Security, Medicare, Federal income tax, and any state or local taxes (when applicable) on RSUs. RSUs can be deferred if the company offers a deferred compensation plan and the employee makes the deferral within the acceptable time frame. Unlike stock options, RSUs retain value even if the company's stock does not reach a higher market price. A final feature to be aware of is that you may have blackout windows to be aware of which can put parameters around when you can and cannot sell your shares. Each of these features should be clearly detailed in your equity grant agreement, so be sure to read the fine print. RSU Features RSUs vs. Restricted Stock: Similar But Not the Same When learning about RSUs, confusing Restricted Stock Units with restricted stock is easy. The most critical differences are: RSUs compared to Restricted Stock Summarizing the key differences comes down to ownership and tax flexibility.

RSU vs. Restricted Stock Ownership

Restricted stock units are a promise for the future but essentially remain in the companies until vesting occurs. You don’t own your shares until the vesting period occurs and shares are transferred to your account. Whereas restricted stock is given at the time of the grant. The shares are often held in escrow (meaning a third party is holding the shares on behalf of the company for the employee) and remain locked until the vesting requirements are met.

RSU vs. Restricted Stock Taxation

Above, we mentioned an 83 (b) election, which comes down to taxation. Restricted stock units have zero flexibility on when they are taxed. Once shares vest, they are taxed. But restricted stock allows you to file an 83 (b) election, which means you can choose to be taxed on the fair market value of your stock when the grant is made instead of waiting until they vest. Not every company allows this, but if yours does, speak to your financial advisor to understand the nuances. The best-case scenario is it may help reduce your tax consequences. This depends on the stock's price at the time of grant and is not a guarantee. *If you want to file an 83(b) election, you must do so within 30 days of receiving your shares.

Why Restricted Stock Units Are Popular

Restricted Stock Units, or RSUs, have become the go-to compensation tool for most tech companies and others. But why?

Restricted Stock Units (RSUs) are a popular form of stock-based compensation used widely in the tech industry and beyond. They align the interests of companies and employees, fostering a win-win scenario when both succeed. RSUs come with a vesting schedule, which could be tied to time, milestones, or both, encouraging employee retention as they must stay with the company to gain the full benefits of their stock grants. This setup not only aids in keeping employees longer but also simplifies the compensation process compared to stock options, as there's no strike price involved. Moreover, RSUs appeal to international talent, expanding a company's hiring pool and competitive edge.

The RSU Advantage for Tech Professionals

As a tech pro, Restricted Stock Units can be a game-changer for your financial future. Here’s why:
  • Skin in the Game: You’re not just an employee but a part-owner.
  • Upside Potential: If your company’s value skyrockets, so does your RSU value.
  • Predictable Value: Unlike options, RSUs always have value (unless the company stock price hits zero or the company folds). When considering selling RSU stock, it's important to evaluate company trading policies, stock performance outlook, tax implications, and the rules surrounding the vesting and expiration of RSUs when leaving the company.
  • Tax Planning Opportunities: The tax treatment of RSUs allows for strategic financial planning.
  • Minimal Effort: Shares are often withheld to cover taxes, but they may need to be checked for income tax brackets.

What to Consider When Accepting an RSU Offer

When evaluating an RSU offer, it’s important to carefully review the terms and conditions to ensure it aligns with your financial goals. Here are key factors to consider:

  • Vesting Schedule: Understand the vesting schedule and how it will impact your ability to sell your shares. Knowing when you’ll gain ownership of the RSUs can help you plan your financial strategy.
  • Number of RSUs: Assess the number of RSUs you’ll receive and their potential value. This can give you an idea of the financial benefit you might gain from the offer.
  • Company Performance: Consider the company’s performance and growth prospects. The value of your RSUs is tied to the company’s stock price, so a strong, growing company can enhance the value of your equity compensation.
  • Tax Implications: Be aware of the tax implications of receiving RSUs and selling vested shares. Understanding how RSUs are taxed can help you plan for potential tax liabilities.
  • Other Benefits: Evaluate the overall compensation package, including other benefits such as health insurance, retirement plans, and paid time off. A comprehensive benefits package can add significant value to your employment offer.
Let’s look at a hypothetical scenario. Imagine you are considering two job offers. One offers a $120,000 base salary plus 1000 RSUs, which will begin vesting after you have completed one year of service in a graded vesting schedule. The other offers a $140,000 base salary plus 600 RSUs on a cliff vesting schedule that begins after your first year of employment. Each offer needs to be considered in view of your financial needs and risk tolerance. The stage of a company is an important consideration but so is your marginal tax rate. By taking the time to consider these factors, you can make a more informed decision about whether to accept an RSU offer and how it fits into your overall financial plan. Pro-Tip: See the bigger picture with the help of a professional.

Your Next RSU Move

Restricted stock units are more than just a compensation perk—they're a pathway to building real wealth. But like any powerful tool, RSUs need to be used wisely.

Are you making the most of your restricted stock units? Are your RSUs aligned with your short—and long-term financial goals? If you're unsure, it might be time to chat with a financial advisor who speaks your language.

Remember, in the fast-paced world of tech, your financial strategy should be adaptable and resilient. Don't let your restricted stock units be an afterthought – make them a cornerstone of your financial future.

Ready to optimize your RSU strategy? Let's talk. At Schmidt Financial Management, we're here to help you turn those restricted stock units into potentially unrestricted possibilities. Schedule an Intro link Disclaimer: Schmidt Financial Management, Inc., (SFM) is a registered investment adviser. This information is only intended for clients and interested investors residing in jurisdictions in which SFM is qualified to provide investment advisory services. Blog posts do not intend to provide personalized investment advice through the various broadcasts and does not represent that the securities, services, or strategies discussed are suitable for any investor. Investors should consult with their financial advisors before making any investment decisions. The S&P 500 Index is a market-value weighted index representing the 500 largest U.S. public companies. The Bloomberg US Aggregate Bond Index measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This video is for informational purposes only and does not constitute a recommendation to buy or sell cryptocurrency. This content specifically addresses restricted stock units (RSUs), which can be complex financial instruments. The information presented here may not be applicable to your individual situation. We strongly recommend consulting with a qualified financial advisor, tax professional, or legal counsel before making any decisions regarding RSUs or other financial matters. Equity 411, presented by Schmidt Financial Management, Inc. (SFM) does not guarantee the accuracy, completeness, or timeliness of the information provided. We are not liable for any losses or damages arising from the use of this information. Investing in securities, including RSUs, involves risks and may not be suitable for all individuals.