What are restricted stock units (RSUs)?
When companies offer equity to employees, they usually offer stock options (like ISOs or NSOs) or restricted stock units (RSUs). You typically don’t get to choose which type of stock you receive; instead, what you receive depends on your role and the size, stage, and preferences of your company. But regardless of the type, you may get a chance to own a piece of the company, which motivates you to do your best work for the company.
An RSU is a promise from your employer to give you shares of the company’s stock (or the cash equivalent) on a future date if certain restrictions are met. Unlike with stock options, with RSUs you don’t have to pay anything to get the stock. Instead, you are usually only responsible for paying the applicable taxes when you receive the shares. And unlike RSAs, with RSUs you don’t get the shares until the restrictions are met.
How is RSU stock restricted?
For you to receive your RSUs, certain restrictions must be met. These restrictions are usually:
Time-based (e.g. you must stay at the company for a certain amount of time)
Milestone-based (e.g. your company must IPO or be acquired)
A combination of the two (most RSUs issued at privately held companies have both a time-based and liquidation condition)
When you meet these restrictions, which should be outlined in your RSU grant, your RSUs vest and you receive your shares.
When can I sell my RSU stock?
If your company is public, you can usually sell your RSUs as soon as you meet the criteria and get your shares, as long as you comply with your company’s trading policy. With some companies, for example, you’re only allowed to trade stock during certain times of the year.
If your company is private, you’ll need to wait for a liquidity event (like an acquisition or IPO) or, if your company approves, find a willing buyer.
When thinking about whether to sell your RSUs, it’s a good idea to consider things like:
How much you’ll be taxed
Your company’s trading policy
How you think the stock will perform in the future
Your cash-flow needs
How diverse you want your portfolio to be
What happens to my RSU stock if I leave the company?
If you leave your company, you generally get to keep your vested shares that are awarded as a result of the RSUs unless your time-vested shares expire before other conditions (like a liquidation event) are met. You’ll usually lose any shares that aren’t time-tested.
How are RSUs taxed?
Unlike ISOs (where you usually don’t pay taxes until you sell your shares) and NSOs (where you pay taxes both when you purchase and sell your shares), with RSUs, you usually have to pay ordinary income tax on their market value when the shares are delivered, which is usually as soon as they vest. Your company may allow you to sell a portion of your vested shares to cover the taxes. Then, you can choose whether to hold the remaining shares or sell them right away.
When you sell, you may also need to pay capital gains tax on the increase between the price you sell at and the fair market value of the shares when you vested. How long you hold the shares usually determines whether you will pay short term or long term capital gains tax. If you sell right after your shares vest, you probably won’t experience again and may not have to pay additional tax.
Employee Stock Purchase Plan (ESPP)
What Is an Employee Stock Purchase Plan?
An employee stock purchase plan (ESPP) is a company-run program in which participating employees can purchase company stock at a discounted price. Employees contribute to the plan through payroll deductions which build up between the offering date and the purchase date. At the purchase date, the company uses the employee’s accumulated fundsto purchase stock in the company on behalf of the participating employees.
Understanding Employee Stock Purchase Plans (ESPP)
With employee stock purchase plans, the discount rate on company shares depends on the specific plan but can be as much as 15% lower than the market price. ESPPs may have a “look back” provision allowing the plan to use a historical closing price of the stock. This price may be either the price of the stock offering date or the purchase date – often whichever figure is lower.
KEY TAKEAWAYS:
RSU:
Your company gives the stock to you and you do not pay for it.
Your company will say you will receive n number of shares at this price over n years.
You will get the stock per the schedule.
The price will be what they told you, in the beginning, no matter where the price goes (up or down)
Since you are getting RSU for free, it is considered income and the company will sell a portion of the shares to pay for income tax.
You will pay an additional tax if you sell above the purchase price.
ESPP:
You buy the stock with your money.
You pay through your payroll deduction throughout say 3 months, 6 months, etc (depends on the company plan)
At the end of each period (again depends on the company plan), your company will buy stocks for you using the money deducted so far.
The price will be a lower price on the first day or the last day of the period – a 15% discount (depends. some companies give 5%).
If your stock price is rising, you make a great return every period.
If the price is falling, you will still make at least a 15% return when you get the stock end of the offering period.
You have an option to either sell immediately or hold for the longer term.
The tax you will pay when you sell depends on the discount and the sale price.
With both ESPP and RSU, you can only sell during the open window.
Which one is better? I don’t think we can compare this.
If your company has ESPP, participate in it since you will make at least a 15% return in 6 months. Where can you get a 15% return in 6 months or less?
If your company offers you RSU for free, why would you not want to have it? It is free anyway.
If you have any question, please don’t be hesitate to contact Flex Tax and Consulting Group
