Restricted Stock Units (RSUs)
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Restricted Stock Units or RSUs, are benefits an employer can pay an employee. They are shares of the company and are based on a vesting schedule. When the employee meets certain milestones, the stock shares are earned.
RSUs have no value until the employee is vested and then their value is based on the fair market value of the stock at the time. RSUs become income earned at the time they are distributed.
- Employees don’t have to pay anything to exercise the option. Once they meet the vesting requirements, they own the stock, so employees are never upside down on their investment.
- Companies can manage the earnings they report better than they could with options.
- Companies can fairly distribute shares based on the stock’s fair market value and the total promised RSUs at the time of hire.
- RSUs are taxed at the ordinary income tax rate on the date the employee receives them. This can increase an employee’s tax liabilities.
- RSUs expire in 5 to 7 years. If liquidity isn’t achieved, the RSUs could be worth nothing.
- Employees can turn in shares to cover their tax liability, but companies can’t send the IRS shares. They must send money which can hurt the IPO prospectus.
- RSUs don’t qualify for filing an 83(b) for lower tax liabilities.
- RSUs cannot be sold until a company goes public.
- Early onboarded employees gain the most benefit, but they are often the ones to leave a company early, yet hold onto the stocks, inflating the prices which decreases the number of shares the new or remaining employees get and they are the employees putting in the hard work.
- After IPO vesting can greatly increase an employee’s W-2 earnings, putting them in a higher tax bracket and costing them much more money.
RSUs have their pros and cons. Think long and hard before offering them for your company or accepting an offer as an employee with RSUs as a benefit.
If you’re unsure about the pros and cons of RSUs for your situation, contact us today and let’s discuss them together.