Rsu how does it work

Depending on the value of the stock at the time of vesting, your earnings could be higher than originally expected. RSUs typically do not fully vest for five years, meaning that if you leave the company before that time, you will lose your ability to claim some or all of the stock shares under your RSU plan. Both public and private companies have the right to offer RSUs as part of their employee compensation packages.

There are two basic methods for valuing RSUs: current valuation and future valuation. Current valuations are fact based, that is, based on the known current value of the stock.

Future valuations, however, are based solely on projections, that is, simply an educated guess. Here's how they work:. Current Valuation Method: Current valuation works best for companies who have recently accepted venture capital funding since the value can be based on the price per share paid by the lender.

Future Valuation Method: The future valuation method requires looking forward to what you estimate the company will be worth on a stated future date. To successfully estimate the value of the stock, you must project earnings and expenses, as well as predict potential new investments in the company. It is important to make clear to prospective employees that the valuation of the RSUs is is based solely on your estimate.

Restricted securities are common stock that become vested over time, regardless of whether they are part of an RSU or not. Restricted stock cannot be sold by the grantee until the shares are vested. In nearly all cases, the company has the right to repurchase all unvested shares if the employee leaves the company prior to becoming vested. A person with a vested interest in restricted stock is considered a company shareholder. Related: How To Start a Portfolio.

Since RSUs are a promise of stock, they don't have any actual value when you first receive them. RSUs do not pay dividends, which are regular payments that companies make to stockholders, and the only change in value is based on how your employer's stock is performing in the stock market. Once vested, they are only as valuable as the stock for that company, so they may not be as valuable as you expected when you first received them.

Another consideration is that you will owe taxes on the RSUs when they become common stock, including capital gains taxes.

It might be helpful to speak with a tax professional or financial adviser about what this could entail, as it can be a complex process. A financial adviser can also make recommendations about what to do once you are fully vested in your RSUs regarding selling or keeping the stock you receive. Another disadvantage is that the details of how RSUs are offered vary among employers, so it's helpful to learn all of the relevant information if RSUs are part of your compensation package.

For instance, some variables include:. It is helpful to ask questions about how your employer handles these variables before agreeing to a compensation package. Here is an example of how RSUs might work for an employee:. Jessica receives 1, RSUs as part of her compensation package at her new job with Shaw Pharmaceuticals. She also receives an additional RSUs as a bonus in her second year with the company that will become vested a year later. It is now nearly four years after Jessica began working at Shaw Pharmaceuticals.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money.

Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is a Restricted Stock Unit? Understanding RSUs. Special Considerations. Advantages and Disadvantages. Examples of RSUs. RSUs vs. Stock Options? Key Takeaways Restricted stock units are a form of stock-based employee compensation. RSUs are restricted during a vesting period that may last several years, during which time they cannot be sold.

Units are just like any other shares of company stock once they are vested. Unlike stock options or warrants, RSUs will always have some value based on the underlying shares. The entire value of vested RSUs must be included as ordinary income in the year of vesting for tax purposes.

Pros Incentivize employees to stay with the company Employees receive capital gain minus value of shares withheld for income taxes Minimal administrative costs.

Cons Don't provide dividends Aren't considered tangible property so employees can't pay tax before the vesting period Don't come with voting rights. Article Sources.

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. Equity in your company should be part of a balanced approach to accumulating wealth.

Consider diversifying over a few years. Then, diversify the new shares of RSUs that vest in other words, sell them and use the money to invest in other stocks. This will have minimal tax consequence. Continue to manage future RSUs and other equity compensation similarly. That typically involves having an investment portfolio that is appropriate for each major financial goal you have and an emergency savings account to cover basic needs for three to 12 months. There are multiple ways to diversify your portfolio, but some are more tax-efficient than others.

For instance, selling recently vested RSUs or recently exercised non-restricted stock options NSOs will likely have minimal tax consequence. If you hold exercised incentive stock options ISOs , it would be beneficial to sell your stock options that meet the special holding requirement i.

Stock options with a special holding requirement are taxed as long-term capital gains, and the tax rates for long-term capital gains are lower than regular income tax rates. You contribute to the plan through payroll deductions — similar to how you contribute to a company k — which then accumulates between the offer date and the purchase date.

Talk to an accountant or financial planner specializing in equity compensation if you need help diversifying your portfolio while minimizing taxes. Consider investing the proceeds from your equity compensation by funding tax-advantaged accounts, which are savings accounts that are exempt from taxes today or in the future or that offer other tax benefits.

For example, you could use the money you make to cover your ongoing cash needs to max out your k or Roth k account. Traditional k and IRA accounts provide a tax benefit upfront, while the Roth versions provide a tax benefit at withdrawal, and both provide a tax benefit while the account is growing.

If you are eligible for a health savings account HSA , consider using proceeds from your equity compensation to contribute to this. HSAs provide a tax benefit upfront and at the time of withdrawal, as long as they are used for a wide array of qualified medical expenses. But if your company offers equity compensation as part of its benefits package, participating could lead to amazing financial returns.