Today we are going to cover a popular topic, especially for employees who are new to the world of Equity Compensation. The topic itself assumes you are just now receiving some Equity Compensation awards, specifically Restricted Stock Units.
First off, congratulations! Seriously. As I’ve mentioned, Equity Compensation is highly valued by participants who receive it. More and more potential employees are seeking positions that offer Equity Compensation. It will hopefully help you build wealth for your future.
Back on topic though. There are some key things to do now that you will be receiving Restricted Stock Units, better known as RSUs in my world. I will be touching on a variety of things for you to consider and to do for the rest of this article. This list will not be comprehensive and not everything may apply to you, however, these are some of the most common items I see with my Equity Compensation clients. Also, I will be going through them at a high level. Don’t worry. I will be sure to cover them in greater detail in future posts. Heck, some of them I’ve already covered.
Just in case you know absolutely nothing about Restricted Stock Units, I would encourage you to listen to Episode 18. This breaks down what exactly is a Restricted Stock Unit. None of my episodes are super long. I think the longest are 15 minutes. So, you may want to take a few minutes and listen to Episode 18 as some background if you are starting from scratch with RSUs.
Let’s begin from the position you were just told you will be getting some Restricted Stock Units. There are some key questions you will want to ask and things you will need to do now. Most employers are good about covering all of these, but just in case, we will cover some of the more pertinent items.
First, be sure to get a copy of the document explaining all the rules and ins and outs of your Restricted Stock Units. Do NOT lose this copy. Put it in a safe place at home. I don’t think it is worth putting in a safety deposit box, but don’t throw it in a box marked miscellaneous that will go onto some back shelf in your garage.
Next, be sure to get clarity on how the vesting works for your RSUs. This is when the RSUs are now fully under your control. This means you own them. It also is when taxes come into play.
Speaking of taxes, RSUs have taxation issues with them. You will want to verify how your employer handles these. Will they sell any of your shares to cover the withholdings your RSUs are subject to? Also, will they sell enough RSUs to deal with the taxes as a result of your RSUs vesting? These are two different items although they may sound the same. As I’ve mentioned before, many employees treat RSUs as cash bonuses. This makes complete sense. So, take the same approach with withholdings and additional taxes on this “cash bonus.” Basically, you need to verify if your employer will be doing this for you or if you need to plan for it yourself.
Another important question to ask is where exactly your RSUs will be held. This usually ends up at a large brokerage, like a Morgan Stanley or even a Fidelity. You won’t necessarily have your own personal broker at one of these places, but you should have a dedicated phone number you can call if you need to discuss your RSUs at all. Odds are the RSUs will stay there until you leave employment with the company or if you sell all of the shares.
This is one of those questions you may not want to ask but need to. What happens to any unvested Restricted Stock Units if you die? Typically, anything that has not yet vested will vest immediately if you die. It is also important you understand that if they do vest, what happens next. Often, the shares vest and then are immediately sold. Again, just like a one-time cash bonus as you will not be holding onto the shares.
Semi-connected to that question is what happens to your RSUs if the company is acquired. It can get a little more complex in this scenario. However, I will be covering this specific topic soon. So, stay tuned.
This isn’t really an issue to ask about, but I feel as though I should mention it. If your company goes under, well, your RSUs are probably worth nothing. This is a rare occurrence, but things like Enron do happen. Also, if you leave before your shares are fully vested, you get nothing. That seems pretty straightforward.
The final question you should ask is along the lines of education. This is one place employers are really lacking. Last survey data I saw showed 85% of employees want more education about Equity Compensation through their employers. My point here is you need to ask if your employer has a dedicated resource to help you learn more about Equity Compensation. Regardless of what they offer, do not hesitate to do some research on your own. I’m not here to toot my own horn, but hopefully you find my articles, podcast and even my website useful when it comes to Equity Compensation.
Okay, enough with the questions under the assumption you have just been awarded Restricted Stock Units. I think we should now move onto the stage of your previously awarded RSUs are now vested. This is where the rubber meets the road, so to speak.
Because taxes are so important, we are going to start here. As I say maybe too many times – It isn’t what you make; it’s what you keep. The point here is unlike the market, we know what is happening with taxes. With tax smart decisions, we can make sure we are keeping more in our pockets and accounts. I mean, unless you like tipping Uncle Sam. And this concept applies to all of your investments, not just Equity Compensation.
Enough of that background. What I am talking about is a flashback to what I just talked about a couple of sections ago. Now that your RSUs are actually vesting, you need to double check with your employer that they are withholding for the necessary taxes. This is typically achieved by them selling some of your shares automatically. And, you need to decide if you want any additional shares sold to cover income taxes, for Federal, state and any local income taxes. Odds are they will sell a certain amount to cover your income taxes, but it is up to you to verify whether this is the right amount. You may not know this number until you file your taxes. In this case, it may be too late for previous years, but you can still let your employer know for future years. Odds are you have more RSUs vested coming up soon.
If you want more details on taxes on Equity Compensation, I cover some of that in Episode 15.
Now that you have squared away how much of your recently vested RSUs you want sold to cover withholdings and income taxes, it is time for the big question. Do you want to hold onto your remaining shares? I covered this in great detail in Episode 41, but let me hit the highlights.
Your first option is simply to get rid of all of them. Reasons for this can vary from wanting the cash to maybe you have other holdings in the company stock and holding onto these newly vested RSUs would cause you to get above a concentration risk number you are not comfortable with.
Another option is the complete opposite. You hold onto all of the shares. How long you hold onto them is up to you, but it can range from hoping the value of the RSUs grows to a certain level or you are planning on not selling anything until you are in retirement. Again, totally up to you.
The final option I mentioned is one I call the Goldilocks option. Here you sell some and hold onto more. The actual percentages of what is sold and what is held is determined by you and your CFP® and based on your personal situation.
One thing to mention is my favorite question when it comes to Equity Compensation. The question is – If you were not an employee of this company, how much of their stock would you own? No right or wrong answer here. This is something you should ask yourself on a regular basis. The answer helps determine your approach to shares once they vest and whether you should sell some, all or none of them.
This seems like a good place to start wrapping up. Hopefully I covered enough ground to help those of you new to Restricted Stock Units. You can always reach out to me if you have more questions.
There are a few key things to remember. First, this is a highly valued form of compensation for employees. If you treat it right, it will treat you right. Man, I sound like a commercial for a car now. You get my point though. Also, you do have to take care of it. Don’t be shy asking questions of your employer. Too often I see people who have ignored their Equity Compensation for years. Sometimes they get lucky and it has done nothing but go up. However, that is not always the case. Plus, you don’t want to be the person who left a benefit go by simply because you didn’t ask the right questions.
Finally, be sure to engage a professional with these. Man, this part really sounds like a sales pitch. Regardless, do not hesitate to reach out to me with questions. You can schedule a call or just shoot me an email.
As always, thanks for taking the time to read this. Please do not hesitate to reach out if I can be of help with your equity compensation-related questions. The easiest thing to do is to click the little green box that reads “Schedule a Meeting” that can be found at the bottom of every page on my website. Or, just click my Calendly link right here.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.