GHC 19 — Restricted Stock Units: Make the Most of Yours

This is session notes for a GHC19 Session — “ Restricted Stock Units: Make the Most of Yours” held on 4th October, 2019.

Speaker: Meg Bartelt, Financial Planner, Flow Financial Planning, LLC

Flow Financial Planning is a virtual financial firm, focussed on early to mid career level tech women.

What is an RSU?

A Company’s promise to give you a share of stock in the company as soon as certain conditions are met. Most common condition is the passage of time. Meg compared having an RSU to getting a cash bonus.

What isn’t an RSU?

It is not a stock option. In a lot of ways, Meg said that RSU’s are better. You do not have to pay any money to get an RSU. With stock options, there is a strike price that you need to pay to buy the stock. But in the case of RSU’s, you just wait you get them. If the price of the stock falls, your RSU is still worth more than the stock options and by this logic Meg equated 1 RSU to around 3 to 4 stock options.

How should you think about RSUs?

Rsu’s are a kind of lumpy income. Meg advised that we don’t rely on them for any day to day or monthly expenses. You can rely on salary lot more than on RSU’s. She advised to use RSU’s for life goals like down payments, retirement or other lump sum needs. But not to rely wholly on them as they are not a guaranteed form of salary.

Lifecycle of RSU

1. Grant (no taxes)
2. Plan (no taxes)
3. Vesting (You pay taxes)
4. Selling (You might pay taxes)

Grant:

This is the phase where you “Accept” the grant. Grant document has all the information of what RSU’s mean to you. You see the vesting schedule. Your stock plan will be administered by a third party like Etrade, Shwarb, Fidelity etc. You would need to accept this to activate the grant.

Plan:

This is the phase where you understand how taxes on this work. Take time to plan if you would like to hold, sell or donate shares after they vest. If you are going to sell, make a plan on what you are going to do with the money.

Vesting:

Your company will withhold taxes (by holding some shares) to pay taxes. It is possible this is not the right amount of tax(you might have been taxed at a lower of higher bracket). This is the same as getting 1000$ bonus from money. Would you spend that money on buying that company stock? If not, Meg advises that we sell it.

Sell:

Meg broke the myth that there is no tax benefit to holding the stock.

Taxes: how do they work?

Usual withholding for RSU is around 22%, but varies based on income. Meg strongly recommended that we work with a CPA. Apart from the initial tax, if you hold on to your stock, when you do sell it at a profit, you would pay tax on that as well.

Reasons to work with a CPA

1. You might have underpaid taxes at vesting.
2. Custodians might get some of “Cost Basis” wrong and as a result you might pay more taxes.
3. If you have other stocks plan programs like ESPP, interaction of getting stocks through all these plans can cause tax complexities.

How is private different from public?

Private companies have a double trigger vesting.

#1 — Pass vesting date

#2 — Company must go public.

If you leave your job:

1. You lose all your unvested RSU’s
2. Read the grant document, they all have clauses before giving notice.

The 4 key takeaways from this event were:

1. Treat RSU’s like cash bonus, keep if you would buy
2. It is almost optimal to sell asap (better to diverse)
3. Make sure taxes are being withheld/paid correctly
4. Make a plan for the money before they vest.