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Navigating Liquidity Events: Key Insights for IPOs, M&As and Buyouts
October 17, 2024
Restricted Stock Units (RSUs) are a powerful component of employee equity compensation at many companies, especially in the tech world. But once your RSUs vest, do you know the best time to sell RSUs or the right strategy to manage them for your financial future?
These questions are common among employees from companies like Amazon, Meta, Alphabet, Tesla and Microsoft. I’ve often spoken with employees who received RSUs as part of their compensation package, yet many felt unsure about the right strategy for managing their shares. One person even expressed concern that selling her RSUs might make her look disloyal to her employer.
This feeling is common, but it’s important to remember that holding onto RSUs after they vest is just like buying more stock in your company. The choice to sell or hold should come from your financial goals, not from guilt or loyalty. Your future is important—and you deserve to make the most of this RSU financial planning opportunity.
Before diving into strategies for managing your RSUs, it’s essential to understand the basics. Whether you’re just starting to receive RSUs or have held them for a while, knowing how they work and how they fit into your compensation package is key to making smart financial decisions.
RSUs are a form of equity compensation granted by your employer. When comparing RSUs vs stock options, keep in mind RSUs don’t require you to purchase shares—they automatically become yours when they vest. Typically, RSUs are offered to employees who have a significant impact on the company’s growth, aligning your interests with the success of the company.
When your employer grants RSUs, you’ll receive a grant agreement detailing the number of units, the vesting schedule and any conditions—like staying with the company for a set period. Although RSUs are yours upon grant, they remain “restricted” until they vest.
Stock options and RSUs are often confused, but there are key differences. The main takeaway is that RSUs are simpler and offer more certainty. They automatically convert to shares when they vest, while stock options require you to purchase shares and involve more complex tax considerations. This makes RSUs a more straightforward form of compensation, though both require careful tax and financial planning to maximize their benefits.
There are also important tax differences. With RSUs, you’re taxed at vesting based on the value of the shares, which is treated as ordinary income. In contrast, stock options don’t trigger a tax event until you exercise them, and the tax treatment varies depending on whether they’re incentive stock options or non-qualified stock options.
Whether you’re a new hire or a long-time employee, RSUs may be included in your compensation package, reflecting the company’s commitment to your long-term contributions. RSUs are often granted to employees in roles that drive the company’s success, aligning your goals with the company’s future performance.
When granted RSUs, you’ll receive a detailed agreement that outlines the number of units, the vesting schedule and any specific requirements, such as staying with the company for a certain period. While the RSUs are granted to you immediately, they remain “restricted” until they vest. Your company, often with a stock plan administrator, will keep track of your RSUs, guiding you through important events like vesting and the decisions you’ll need to make about selling or holding your shares. Depending on your role within the company, you may have restrictions for when you are eligible to sell; often referred to as your open window.
RSUs can be a big part of your equity compensation package, but their value depends on the company’s stock price at the time they vest. For public companies, you can easily check the current market price to get a sense of what your RSUs are worth. But for private companies, RSUs are often tied to a liquidity event, like an IPO or acquisition, so their value may not be clear until that happens.
| Pro Tip: RSUs aren’t guaranteed income until they vest, and even then, their value can rise or fall based on the market. Planning around that fluctuation is key to making the most of your shares. |
Once your RSUs vest, you’ll need to decide what to do with the shares. One helpful way to think about this decision is to treat your RSUs like a cash bonus. If you received a cash bonus, would you turn around and buy company stock with it? If the answer is no, then selling your RSUs and using the proceeds for other financial goals may be the smarter choice.
A key risk to keep in mind is concentration risk—having too much of your wealth tied up in a single company’s stock. If your salary comes from the company and you have additional RSUs vesting in the future, holding shares can increase this concentration, making your financial success overly reliant on your company’s performance.
Selling your RSUs as soon as they vest can be a good strategy. The proceeds can be used to meet cash needs or diversify your portfolio, reducing the risk of having too much exposure to one stock. This approach is especially wise if you’re concerned about market volatility or if you have near-term financial goals.
If you’re financially secure, already have diversified assets and feel bullish about your company’s stock price, holding onto your RSUs might make sense. In this case, you can afford to take on additional single-stock risk because your broader financial situation is stable. However, it’s crucial to carefully weigh the risks of concentrated wealth before making this decision. RSU diversification strategies are vital to managing this risk.
RSUs come with a tax bill. The IRS treats your RSUs as ordinary income when they vest, based on the market value of the shares at that time. RSU tax implications vary depending on your income bracket and the amount of RSUs vesting. This means you’ll owe taxes on the RSUs whether you sell them immediately or hold onto them. For example, if your RSUs vest when your company’s stock price is $50, and you have 1,000 shares, $50,000 will be reported as income, and you’ll owe taxes on that amount—even if you don’t sell the shares.
While many companies withhold taxes at vesting, it may not cover your full tax liability, especially in high tax brackets. The key point to remember is that you don’t control when you’re taxed—it happens automatically at vesting. Additionally, if you hold the shares and they increase in value, you’ll pay capital gains tax on any future gains when you sell them.
It’s a good idea to plan ahead and set aside additional funds to cover any shortfall when you file your taxes. Need personalized advice for your RSUs? Our wealth managers can help you adjust for RSU tax strategies, efficiency and financial growth.
| Pro Tip: If you hold onto your shares for more than a year after they vest, any gains are taxed at the long-term capital gains rate, which is usually lower than ordinary income tax. This is especially relevant if you’re facing RSU capital gains tax in California, New York or other high tax states. Working with a tax professional can help you decide what’s best for your situation and ensure you’re prepared for any tax liabilities. |
When it comes to deciding what to do with your RSUs, the most important thing is making choices that support your bigger financial picture. Take a deep breath, and ask yourself:
If your financial plan shows that you’re on track without needing to sell, holding onto some shares might make sense. But don’t forget about the risks of having all your eggs in one basket—RSU diversification strategies are essential for long-term financial health. If you need help aligning RSUs with your financial plan, be sure to check out our wealth management services or talk with one of our wealth managers.
Having RSUs can be exciting, but having too much of your wealth tied to one company can feel like a rollercoaster. Diversification—spreading your investments across different types of assets like stocks, bonds and real estate—helps protect you from market volatility.
At Aspiriant, our investment philosophy focuses on globally diversified strategy designed to help you achieve your long-term financial goals through all market conditions. If aligning your investments with your personal values is important, we offer sustainable investment strategies that not only aim for financial growth but also reflect your commitment to responsible investing.
For corporate insiders, such as officers and directors, a helpful strategy is using a 10b5-1 plan. This allows you to sell shares at regular intervals, reducing the pressure of timing the market. By diversifying gradually, you can stay in control of your financial destiny, while complying with insider trading regulations.
RSUs are a valuable part of your compensation package, but they’re just one piece of the puzzle. Whether you decide to sell, hold or a combination of both, the key is making decisions that align with your long-term financial goals. Remember, you can think of RSUs as a bonus that you can choose to reinvest in your company—or use to diversify your wealth and reduce risk. Working with a wealth manager and tax advisor can help ensure you’re making the most of this unique form of compensation while keeping your overall financial strategy on track.
Managing RSUs can feel like a big responsibility, but you don’t have to do it alone. Whether you’re looking to sell, hold or diversify, we’re here to help you create a strategy that aligns with your financial goals. Let’s start the conversation—reach out to one of our experienced wealth managers and take the next step toward securing your financial future with confidence.
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Editor’s note: This article has been updated since its original August 15, 2019 publication.
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