Top Questions to Ask About Your Restricted Stock Units Grant

You’ve just been granted restricted stock units (RSUs). Congratulations! You’re likely here because you’re curious to know what questions you should ask your employer or your financial advisor about this unique income stream to avoid unexpected surprises in the form of an outsized tax bill or missed opportunity.

Here are the top 10 questions you should ask now that you’ve been granted RSUs:

1. Are these actually restricted stock units or some other form of equity compensation?
   
   This may sound silly, but the first question you should ask is understanding exactly what type of equity you’ve been awarded. Beyond restricted stock units there are also restricted stock awards, employee stock purchase plans (ESPPs), NSOs/ISOs (“stock options”), and other forms of deferred compensation. 
   
   Each of these types come with unique granting, vesting, and tax implications so it’s important to know exactly what you’ve been given up front.
2. What is your grant date?
   
   For more on what restricted stock units are and how they work, you can review this in-depth piece, but in short, RSU grants are compensation of company equity that pay out over time per what is known as a vesting schedule. Vesting can be based on time, hitting specific goals, or a mix of various factors.
   
   No matter what type of vesting schedule you have, you’ll want to know what the grant date is because it will impact when the vesting kicks off, starting the timer until your shares become unrestricted. Be sure to keep all of your paperwork so key information isn’t lost as the vesting may take anywhere from 1-5 years.
3. What type of vesting schedule do you have?
   
   The completion of this schedule will dictate when your shares vest or become ‘unrestricted.’ From a tax perspective this is when your shares will be recognized as income, but also when you gain any benefits that come with the vested shares (like dividends or voting rights) plus you’ll also be free to sell them if you wish.
   
   Be sure you fully understand your vesting date(s) to know how to plan for the value to hit your income. These are the three most common types of vesting schedules: 
   
   
   • Cliff Vesting: All granted shares are delivered at once after qualifying needs are met.
   • Graded Vesting: A portion of shares are delivered over a set vesting period (i.e. 25% of granted shares each year for 4 years).
   • Hybrid Vesting: A mix of time-based or metric-based vesting. For example, you may get 50% of the vested shares after 4 years and the other 50% when a certain sales goal is met.
4. What number of shares do I have?
   
   This may sound like a no-brainer, and the number of shares granted should be very clear on your grant documents, but understanding the number of shares you have overall and how many will vest each year becomes a bigger chore over time.
   
   If most of your grants are vesting on a 4-year graded vesting schedule, you could be simultaneously navigating 5 grants with unique amounts of shares and fair market values each year.
5. What is the stock price (or share price)?
   
   Especially if you work at a publicly traded company, you’re likely aware of how the stock price fluctuates over time. Once you are given restricted stock units, it’s important to remain aware of these changes as your RSUs vest because it will impact the fair market value (FMV) that will impact your ordinary income for tax planning (more below).
   
   Keep in mind that RSUs do not impact your taxable income until they vest, but once they do, your company stock is now an asset you own, including its performance from that point on. This is why working with a financial planner is so critical for those regularly receiving vesting grants of company stock. For now, just know that understanding the stock or share price over time helps you understand what your vesting shares are worth and therefore how they will impact your income.
6. What are the tax implications of my Restricted Stock Units (RSUs)?
   
   This is where things get really interesting. Restricted Stock Units impact your taxes at two key moments: at vesting and sale.
   
   As discussed above, the fair market value of the shares on their vesting date will dictate the amount of ordinary income you add to that year’s tax return, subject to your federal and state income tax rate. That said, plan ahead to cover the taxes because withholdings don’t necessarily come out of your normal paycheck. There are three key strategies you can read more about here, but here’s a high level:
   
   • Sell-to-Cover: Where you work with your employer to retain a portion of shares to cover your tax liability while maintaining ownership of remaining shares.
   • Same-Day Sale: Where you elect to sell all of your shares at vesting to cover your tax liability and convert your shares to cash that you can move or invest as needed. This option can be particularly helpful for those who have a concentration of company stock and want to diversify into a brokerage account or other investment vehicle.
   • Cash Payment: If you’d like to retain all of the shares, you can always pay the tax amount with cash to retain as many shares as possible. This can be a solid strategy if you expect the value to significantly increase.

   The second angle of tax treatment for restricted stock units comes when you are ready to sell, and therefore subject to capital gains tax. If you sell immediately, this will not matter, but if you hold for any amount of time after vesting, your company shares are treated as any other investment. The amount of time between vesting and selling is what is known as your holding period and will dictate this tax treatment.

   If you sell within a year of vesting, any profit is taxed at the same rate is ordinary income (short-term capital gain).When selling within the first year you’ll want to understand which tax bracket you currently fall into and how much additional income you can earn before edging into the next higher bracket, which may be undesirable if you don’t need access to the cash right away.

   If your holding period is greater than a year, your profit beyond the vest-date cost basis will be taxed at the long-term capital gains rate, which is lower than ordinary income for most taxpayers.

   So, you should always hold at least for a year, right? It depends. There is no one-size-fits-all tax strategy, but financial planning with an advisor who runs regular tax projections can help you identify the plan that maximizes your ability to save for the future, purchase the things you want/need today, and minimize the tax burden along the way.

7. Are my company shares restricted until IPO or other liquidation event?
   
   Startups or companies planning to go public within the next few years may heavily compensate in company equity because they want to preserve cash, retain great talent, and expect the value of the shares to be worth a lot more after going public. Consider someone granted restricted stocks at Facebook before IPO. This can be a lucrative stash of potential income.
   
   Folks in this situation should consider working with a financial planner as soon as possible because these large influxes of realized value build up over time. If you work at a startup for 5 years getting equity that vests upon going public, you could be integrating a large sum as ordinary income unless you plan appropriately. These are usually known as double-trigger restrictions which mean the recipient does not have to recognize them as income until the company goes public.
8. How many unvested shares do I have and if I leave do I forfeit them?
   
   Especially if you are evaluating a new job opportunity, understand how many shares you have unvested and whether ending your employment will mean that is money you are leaving behind.
   
   Although you may still choose to leave for a new opportunity, you can do so with full awareness, which could influence negotiating with a new employer as well as your personal financial planning. Remember that restricted stock units or other equity compensation is just one component of your total compensation package.
9. How close am I to retirement and how will that impact my Restricted Stock Units?
   
   It’s not unheard of for someone approaching retirement to be evaluating what to do with their company shares for the first time. You may have decided to hold your company stock for years, even decades, as a primary retirement savings vehicle.
   
   If this sounds like you, we’d recommend getting in touch with a financial planner sooner rather than later to understand single-stock concentration risks as well as how your company stock could impact key retirement income streams like social security or access to things like Medicare.
10. What unique rules does my company have for restricted stock units?
    
    The pieces covered above and in our other articles on RSUs and equity compensation tend to be universal, but it’s important to know that each company may have unique rules to their plans. One of the best questions you can ask at grant is what is unique about your company’s plan.
    
    Each company may have trading limits or blackout periods that could constrain the flexibility of converting your company shares into cash for diversification.
    
    According to candor.co, some of the top companies offering restricted stock units as a form of equity compensation are listed below:
    
    1. Microsoft Restricted Stock Unit Program
    2. Oracle Restricted Stock Unit Program
    3. Apple Restricted Stock Unit Program
    4. Salesforce Restricted Stock Unit Program
    5. Amazon Restricted Stock Unit Program

    If you have been granted restricted stock at a company listed above or any other public company, we’d love to schedule a call to talk through the financial planning potential and answer questions that may not be outlined above.

    Here are two options for your next steps:

    • Test your financial plan with our complimentary analysis. Our unique tool will identify potential weak spots in your plan, including equity compensation, tax liability, investment strategy and more.
    • Ready to dig in with guidance? Book a call with a member of our team to discuss your options and know what you could do with Plancorp on your side aligning your wealth with your goals and values. Remember: your equity is a tool to achieve your financial goals. You don’t have to follow the crowd unless it benefits you. If you’re curious to learn more about Plancorp and want an independent look at your options, reach out.