Restricted Stock vs. Restricted Stock Units, Ep 54
In today's episode, I'm going to spend a little time comparing restricted stock and restricted stock units. I know I've talked about them separately. However, I thought it was important to spend a few minutes discussing them in one episode. This isn't really a compare and contrast like we had to do a million years ago in grade school and high school. However, I want to be sure to hit the highlights for both. Both good and bad items.
Before we start just a little bit of housekeeping as always. When I say restricted stock, I'm referring to restricted stock awards, or sometimes they're referred to as restricted stock grants, just to keep things simple, I'm going to call them restricted stock. Also, restricted stock units don't have any other names they're known by except for their abbreviation of RSUs. I'll most likely refer to restricted stock units as RSUs. Let's now get to it.
You will want to hear this episode if you are interested in...
- A little housekeeping before we start [0:53]
- What are restricted stock and restricted stock units? [1:27]
- Vesting requirements [2:27]
- Taxes make all the difference [3:14]
- Restricted stock is a slightly different animal [6:55]
- Unique aspects of restricted stock [10:23]
- This week’s FLASHBACK [13:44]
What’s the purpose of restricted stock units?
Restricted stock and restricted stock units or RSUs are both common forms of equity compensation. The trend recently has been an increase of restricted stock, at least compared to non-qualified stock options. I covered this in episode 52, where I even gave an opinion on which is better. Restricted stock and RSUs are awarded to employees as an economic incentive. We get into the differences in the episode but know that employees receive them to encourage certain activities or behaviors. The most common things employers want to encourage are tenure and performance so making sure an employee stays or it could be something as simple as hitting goals, such as a sales goal, a profit goal, performance goal, or whatever it may be.
Restricted Stock -vs- RSUs
There are a few differences between restricted stock and restricted stock units. Mainly due to the unique structure of restricted stock. Although RSUs are great they don't mean anything to you until they vest and are under your control. This is when you recognize their value and enjoy things like dividends and voting rights. Restricted stock is different. Unofficially, when you are awarded restricted stock, you "own" the shares. Technically, you don't own them because they're sitting in escrow so if you do not meet the vesting requirements it's easy for the company to take back any unvested restricted stock. However, before they fully vest, you do get to immediately enjoy dividends and voting rights upon the award of them. You do not have to wait until you're fully vested. I'm not sure how many people use the voting rights, but at a minimum, the dividends are nice. I like both, restricted stock and RSUs because they give you a direct connection to the success of your employer. They help you build wealth and they're relatively simple to fulfill because so many of them only require that you stay employed.
This week’s FLASHBACK: Electric Avenue
One year in high school, the school decided it would be cool to put a jukebox in the student center. Student center is just a fancy name for our cafeteria. It was a nice gesture. Students were allowed to bring in single records to add to the jukebox. It costs to play a record and I think the proceeds went to the student council for prom or something. One of my best friends brought in a record I’d never heard before he added it to the jukebox. The record itself was the single Electric Avenue by Eddie Grant. I have to assume you're familiar with the song as it was so popular in the 80s and it's very catchy. Everyone thoroughly enjoyed his addition to the jukebox, at least initially.
Thanks to one kid who seemed to have an obsession with the song it quickly became overplayed and met an untimely demise when the administration had enough of hearing Eddie Grant and someone removed the record from the jukebox. I don't think my friend ever was given his record back though. Ultimately, that's the only song I remember being played in that thing. However, every time I hear Electric Avenue I flashback to the student center.
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.