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Stock Options vs. RSU

Measure content performance. Develop and improve products. List of Partners vendors. Restricted stock units RSU are a form of stock-based compensation used to reward employees.

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• About Restricted Stock Units.
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RSUs will vest at some point in the future and, unlike stock options , will have some value upon vesting unless the underlying company stock becomes worthless. As a financial advisor, your advice can assist a client in getting the most out of this portion of their compensation.

There is no value to the employee when issued. The RSUs will vest at some point in the future based on time passed or perhaps the achievement of a goal. They are then distributed as shares of stock but can be distributed as cash—although this is less common. Until the RSUs vest, they are nothing more than an unfunded promise to issue shares of stock to the recipient at some point in the future. Holders have no voting rights nor do they receive any dividends paid while they hold the RSUs. Some companies will pay dividend equivalents on the RSUs. Companies can let dividends accrue and use these funds to cover some of the taxes due at vesting.

Once they vest and the shares are distributed, the recipient is taxed on the value of the shares at the time of vesting. They are subject to taxation at ordinary income rates plus the applicable state income tax rate. There are four key points about RSUs that recipients should be clear on:.

Some companies may have made arrangements for employees to be able to receive a cashless distribution in which they will have enough shares withheld to pay the taxes due. There is no preferential capital gains tax treatment at vesting.

🤔 Understanding restricted stock units

With no opportunity for preferential capital gains tax treatment from holding the stock for a year, there is nothing to stop you from selling some or all of the shares if you so desire. So should you retain the shares or sell some or all of them? Once vested, the RSUs are just like any other shares of company stock.

The client should take into account all other shares of company stock held in taxable and retirement accounts. If the shares have greatly appreciated, this is like buying at the top of the market and hoping that the shares continue to appreciate. Remember that the RSUs are a part of compensation and should be treated as such. If an employee loses their job with the company, it may be a result of the value of the stock from the RSUs and any other shares losing significant value. Combined, this could be a stiff financial hit.

Financial advisors working with clients who receive part of their compensation as RSUs should advise their clients regarding the best use of the stock. What happens if your client receives a job offer with a competitor before the vesting of some or all of the RSUs granted? You can help that client place a value on the RSUs which would be lost, and could then be used as part of the compensation negotiation between the client and potential employer. If there are significant unvested portion of RSUs, it may also behoove your client to stay with the current employer until they are vested.

However, the firm may have an employment agreement or other arrangements that specify the treatment of RSUs. This is another key point that your client should have nailed down. This approach does not reflect the fact that restricted stock has a lower value than unrestricted stock due to the vesting conditions attached to it, and therefore the market capitalization of a company with restricted stock outstanding may be overstated.

Restricted Stock Units Made Simple (Part 1): Understanding The Core Concepts -

However, restricted stock has less of an impact than stock options in this regard, as the number of shares awarded tends to be lower and the discount for illiquidity tends to be smaller. From Wikipedia, the free encyclopedia. Category of stock. Retrieved 19 August Grant Thornton. Archived from the original PDF on 30 June Journal of Accountancy. Irish Revenue Commissioners. Financial markets. Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock. Authorised capital Issued shares Shares outstanding Treasury stock.

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