- January 17, 2022
- Posted by: Virg Cristobal
- Category: Equity Compensation
What are Restricted Stock Units?
A restricted stock unit also referred to as RSU is a type of compensation issued by an employer or company to an employee in the form of that company’s shares. They are issued to employees through a vesting plan and distribution schedule after an employee has achieved a certain required performance milestone, which could also mean a length of time.
A restricted stock unit are assigned a fair market value and once they are vested, there considered income. (Vesting is simply a legal term meaning to give or earn a right to present or future payment, asset, or benefit.)
Why do companies give restricted stock units?
An RSU may be issued to employees as an incentive to stay with the company for long-term and perform well. If the employee and the company does well, the employee’s shares increase in value.
What to do with restricted stock units?
Utilizing an RSU allows the employee to gain full rights and ownership to the value of the units. They are a great option for those that want to be invested in the company they work for, more than as simply just an employee.
RSU or Stock Options?
Stock options are only valuable if the market value of the stock is higher than the grant price at some point in the vesting period. RSUs are pure gain as the employees don’t actually pay for them themselves. In stock options, the employees may be paying more for the shares than they could actually sell them for. A stock option lets the employee purchase equity in a company at a determined price within a certain window of time.
There’s no obligation but it could be an incentive and benefit long-term. An RSU are a slightly simpler stock option in that there’s no transaction or stock pricing involved. Instead, the company agrees to give an employee stock in the company once a certain requirement is fulfilled. These stock options may be awarded for performance requirements or once the employee has reached a certain length of time being with company. An RSU can be actual shares or cash equivalent based on what the stock is worth at the time.
What happens if an employee leaves the company?
If an employee leaves the company before the vesting date of the restricted stock shares that have not been invested. There are exceptions, however, depending on the terms of the employment agreement. This is definitely something to discuss with your employer should the occurrence happen.
How RSUs are used
These stocks are restricted during a vesting. The could last for several years during which they cannot be sold. They are like any other shares of company stock once they are invested but unlike stock options or warrants, RSUs will have some value based on underlying shares. The value of the vested share must be included as ordinary income in the year of vesting for tax purposes.
Does your company provide restricted stock units? Not too sure what to do with them? Planning on moving companies, leaving, or wondering what happens if you stick around? Give Chrome Advisors a call today. We are the experts in wealth management and financial planning and can help you make informed decisions on what to do with RSUs and how they can benefit you and your family in the future.
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