Your restricted stock units (RSUs) are vesting or, at least, nearing their vesting date. This is exciting — but now what? Selling any kind of asset can be stressful. Naturally, you want to make the right decision to realize as much value as possible and avoid missteps that can subject you to unnecessary penalties/taxes or simply missed profit.
There are several factors to weigh collectively. First, let’s make sure everyone’s on the same page and answer a fundamental question.
Companies typically use RSUs to incentivize and retain key employees. As the name implies, this form of equity compensation has limitations though. They don’t shed the “restricted” moniker until certain conditions are met, whether they be time-based or performance-based milestones (or a combination of the two).
Your shares may vest (become unrestricted) over a specific time frame and cadence or once an IPO, acquisition, or other liquidity event occurs. Consequently, you can’t trade unvested RSUs before that vesting trigger; you’re tied to their vesting schedule.
For example, your publicly traded employer grants you 4,000 RSUs as part of your compensation package. These RSUs follow a four-year graded vesting period, where 25% of the units vest each year (1,000 annually). Once shares vest, you typically have the right to sell your shares (lookout for company enforced periods where they restrict employees from selling shares).
However, let’s view this situation through a different lens and assume the company is currently a privately held startup. There’s likely a second condition to vesting — a liquidity event. In other words, employees of private companies often have to meet a time requirement AND wait for their employers to go public, be acquired, or hold a tender offer to sell their shares. These are known as double-trigger RSUs.
With this understanding, let’s walk through some factors you should consider when deciding to sell your RSUs, starting with tax treatment.
Contrary to the popular misconception, there’s no tax benefit to holding RSUs. When RSUs vest, they’re treated as ordinary income in the related tax year. This cannot be avoided. The growth or decline in value from the vesting price can have tax impact via short-term or long-term capital gain, but the base tax treatment remains constant.
Revisiting our above example of an employee with RSUs from a publicly traded employer. assume your employer’s share price is at $50 on your first annual vesting date; they would be worth $50,000 (1,000 shares x $50 share price). Even if you didn’t sell immediately, this amount would be subject to federal, state, Social Security, Medicare, and possibly local taxes in that year.
It’s also important to recognize that because of the ordinary income tax treatment, your company may withhold a portion of your vested shares to cover the associated tax liability just like they do for other mandatory supplemental wage withholding protocols. As a result, employees may owe additional taxes if their liability is greater than these tax withholdings. Working with a tax professional to ensure proper withholding or estimated tax payments are made is recommended.
Once your shares vest, they operate like common stock. Your cost basis is their fair market value (FMV) on the vesting date ($50 per share in our example). If you sell your shares right away, it’s fair to estimate that you’ll owe little to no capital gains taxes. If you wait to sell, any deviation in price would be recognized as a capital gain or loss for tax purposes as opposed to ordinary income.
Selling upon vesting tends to minimize tax complexity and concentration or market risk, while holding shares could allow for value appreciation, with the caveat that shares may also fall or stagnate.
Do you have a plan for your RSUs? Like any investment in your portfolio, RSUs should align with your financial goals.
Some people use vested RSUs to cover near-term liquidity needs or a sizable purchase — like a house, car, wedding, or travel. That said, relying on a single stock to help fund an impending expense is risky. If your shares have vested and you need the funds soon, consider liquidating your holdings and parking the proceeds in a safer, less volatile investment.
In turn, you lessen the likelihood you will find yourself in the unenviable position of being short on cash and unable to afford your goal if your company share price dips.
RSUs can certainly help you reach significant life milestones like retirement. However, staking your long-term plans on the success of your company alone (or any individual stock for that matter) would be an aggressive and risky strategy. Price appreciation isn’t guaranteed.
Instead, your investments should follow a calculated financial plan that incorporates various factors, including your risk tolerance and investment horizon. It is often more prudent to sell your RSUs as they vest and allocate the proceeds to a diversified selection of assets.
Speaking of diversification, RSUs should be viewed in a broader context, specifically, as one component of a well-balanced portfolio. While it’s normal to want skin in the game, we recommend allocating no more than 10% of your net worth to your company — which, for most employees, is already the sole source of income and benefits.
Otherwise, you may face concentration risk and tie your financial well-being too closely to your company’s stock performance. In short, if your company struggles, so would you.
When deciding whether to sell your RSUs, it’s easy to overlook a simple yet critical variable: company performance. While it may seem intuitive, if you don’t like the short or long-term outlook of your company, you shouldn’t be holding shares.
But sometimes it’s not that easy to be impartial. Try to remove your affiliation from the equation and scrutinize it as if you were researching a new investment. Look for any red flags, such as declining market share, financial instability, or adverse industry developments. Think of it this way — if you were to receive a $50,000 cash bonus today, would you invest it all in your company stock? Because that’s effectively what you’re doing by holding RSUs as they vest.
On the other hand, if you see potential in your company’s future — formative strategic plans, a strong product pipeline, or impending market expansion — then maintaining a stake in your company could be fruitful. Still, our prevailing recommendation remains constant: any single stock position larger than 10% of your portfolio is likely overconcentrated.
To evaluate your company objectively, it’s imperative to be mindful of behavioral biases, too. For instance, confirmation bias is the tendency to value information that reinforces our existing beliefs and views while ignoring information that contradicts them. Similarly, people often unintentionally overvalue their possessions simply because they own them, regardless of actual market value. This is known as the endowment effect. This is where having an advisor on your side can be extra beneficial to navigate the natural biases to ensure you are making the most of your opportunity.
Past performance does not guarantee future results. Nevertheless, it’s worthwhile to analyze the trends and movements of your company’s stock price. Price alone won’t determine whether it’s wise to hold or sell, but we can glean pertinent information from a simple assessment.
How has the stock performed in the last year? How about the last simple Was it stagnant? Is it trending upward or downward? Most importantly, regardless of the answers to the previous series of questions, why? Your answer should aid your decision.
Watch out for biases in this assessment as well. Anchoring is a common psychological bias in financial decision-making where people fixate on the first piece of information they receive — such as the stock price of RSUs on their grant date. This initial price can subconsciously become a reference point and influence your expectations and decisions about selling, regardless of current market conditions or company performance.
Don’t play the waiting game simply because you dislike the value of the shares now compared to their value on your RSU grant date. Explore all the forces at play.
No business exists in a vacuum. The broader industry, market, and economy are each variables in the valuation of your company’s shares. While it’s true that a long-term outlook can help mitigate short-term volatility, a single company (as opposed to a diverse portfolio of assets) can look very different five years from now.
Consider how near-term market conditions could influence your shares, whether that’s inflation and interest rates or industry trends and regulatory changes.
Part of the beauty of vested RSUs is that these shares are yours — you can do with them what you please. That’s what makes them an effective employee compensation package and retention strategy. With this in mind, before you decide to sell your shares, determine whether these alternative paths are more applicable to your situation.
Ordinarily, you would elect to hold your shares for one of three reasons:
Just as no one can predict the future, no one can predict the optimal time to buy or sell shares. The same principle applies to RSUs. One way to mitigate market timing risk is to gradually offload your holdings.
We often see this when someone who has built up a large position in a company via RSUs or other equity compensation starts working with a financial advisor who embraces diversification like Plancorp. We happily work to set up a planned offload over a set amount of time to gradually diversify. We also help to remain mindful of tax rates and their impact on your tax bill if you choose to gradually sell shares over time.
RSUs can make for a nice payday, but the goal should be to maximize their value in the scope of your broader financial plan. So, when deciding whether to sell or hold your shares, review each of the above factors together, not in isolation.
To help ensure you make the right decision, consider working with your financial advisor or a tax professional. Check out our advisor interview guide for more details on what to ask.
If you’d like what working with a fiduciary wealth manager would look like, we’d love to talk to you! Schedule some time with a member of our team to make the most of your equity compensation.