Good Financial Reads: Restricted Stock Units (RSUs)

You get a grant notice from your employer explaining that you have been or will soon be awarded RSUs. “This is great!” you think. “Free stock. The chance for some upside if the company does well.” But … 

Now you have to wrap your head around what exactly you own and what you can do with these RSUs.

The jargon, perceptions, and financial planning strategies surrounding RSUs can be confusing. In this article, I’ll bring clarity to how you can handle your RSUs.

When working for a boss, there are far more exciting remuneration options than a monthly salary. Some companies will offer On Target Earnings (OTE) incentives or bonus schemes. Most of these are linked to personal performance as expressed as a function of meeting goals and targets. The downside of these options is that they elicit unwanted behaviors such as gamesmanship or sacrificing longer-term growth for short-term gains. 

A good option to shift the focus away from the individual and short-term thinking is by offering equity in the form of stock shares in the company. The benefit of these forms of compensation is that these types are inherently more beneficial over a longer period of time. By removing the individual metric linked to goals and targets and taking overall company value into consideration, actions to enhance remuneration are shifted from the individual to the company as a whole.

If you work for a public tech company, or a private company that’s about to go public (hello - Coinbase, Oscar Health, Instacart and Rivian!), it’s highly likely that restricted stock units, or RSUs, are part of your compensation structure. Restricted stock units are a form of equity compensation that give you ownership in the company. It’s not uncommon for a large portion of your compensation to be granted in the form of RSUs. This can be advantageous if you’re part of a growing company, and particularly if you were an early employee in a growing  company. However, while RSUs aren’t terribly complicated from a tax perspective, they can cause tax confusion, because the IRS withholding rules are different from how they are actually taxed. In today’s blog, we want to break down the options you have in dealing with these tax issues, and shed some light on why they happen. 

Restricted stock units have become a popular vehicle to incentivize and reward highly valued employees of publicly traded companies.

*Important to note, restricted stock units are different than restricted stock awards, and we’ll be covering restricted stock awards in our next video and article.