A Guide to Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are a form of equity compensation where an employer promises to give you shares of company stock according to a vesting schedule. Unlike stock options, RSUs always have value as long as the company's stock has value, since you don't need to purchase them at a strike price.

How RSUs Work: The Basics

Vesting Mechanics: Most RSU grants follow a vesting schedule that typically includes:

• A cliff period (usually 1 year) before any shares vest
• Periodic vesting (often quarterly) after the cliff
• A total vesting period (commonly 4 years)

For example, if you receive 4,000 RSUs with a 4-year vesting schedule and 1-year cliff:

• After year 1: 1,000 shares vest (25%)
• Years 2-4: 250 shares vest each quarter (6.25%)

Tax Treatment: RSUs incur tax obligations at two key points:

At Vesting:

• RSUs are treated as ordinary income when they vest
• The fair market value of shares on the vesting date is taxable
• Your employer typically withholds some shares for taxes

At Sale:

• If you sell vested shares, you may owe capital gains tax
• Short-term capital gains apply if held < 1 year after vesting
• Long-term capital gains apply if held > 1 year after vesting

Real-World Examples

Example 1: Public Company RSU Grant: Sarah receives 1,000 RSUs at TechCorp when the stock price is $100.

Initial grant value: $100,000

• Vesting schedule: 4 years with 1-year cliff
• After 1 year: 250 RSUs vest when stock is at $120
• Taxable income at vesting: 250 × $120 = $30,000
• Shares withheld for taxes (assuming 30% rate): 75 shares
• Net shares received: 175 shares

Example 2: Pre-IPO Company RSUs: Mike joins StartupX and receives 10,000 RSUs.

• Initial 409A valuation: $5 per share
• Grant paper value: $50,000
• Double-trigger vesting:
  • Time-based vesting (4 years)
  • Liquidity event (IPO/acquisition)

• If StartupX goes public at $20/share, Mike's vested shares become significantly more valuable

RSU Strategies and Best Practices

Managing Concentration Risk: Consider diversification strategies:

• Sell some shares as they vest to diversify
• Keep some shares for potential upside
• Balance RSUs with other investments

Tax Planning: Optimize your tax situation:

• Understand your withholding elections
• Consider selling enough shares to cover taxes
• Plan for quarterly estimated tax payments if needed
• Consult with a tax professional for complex situations

Financial Planning Considerations:

• Build RSUs into your overall financial plan
• Don't count unvested RSUs as guaranteed income
• Consider dollar-cost averaging when selling
• Account for blackout periods and trading windows

Special Situations

Leaving Your Company: If you leave your company:

• Unvested RSUs are typically forfeited
• Vested shares are yours to keep
• Review post-termination exercise windows
• Understand any clawback provisions

Company Acquisition: During a merger or acquisition:

• RSUs might accelerate vesting
• May be converted to acquirer's stock
• Could be cashed out
• Review change-in-control provisions

Common Pitfalls to Avoid

Overconcentration

• Holding too much company stock
• Not diversifying after vesting
• Emotional attachment to company shares

Tax Surprises

• Underestimating tax obligations
• Not planning for withholding
• Missing estimated tax payments

Poor Planning

• Counting on unvested RSUs
• Not understanding vesting schedules
• Ignoring trading windows and restrictions

Action Items Checklist

• Review your grant agreement thoroughly
• Understand your vesting schedule
• Plan for tax implications
• Create a diversification strategy
• Consider consulting financial and tax advisors
• Monitor trading windows and blackout periods
• Keep records of all grant documents

RSUs can be a valuable component of your compensation package, but they require careful planning and management. Understanding the mechanics, tax implications, and various strategic considerations will help you maximize their value while minimizing risks. Regular review and adjustment of your RSU management strategy ensures alignment with your overall financial goals.