Understanding Your Restricted Stock Units

WRITTEN BY: Gideon Drucker, CFP® AIF® ECA

If you work at a large public company, particularly in tech or consumer goods, you’ve likely been granted Restricted Stock Units (RSUs) as part of your compensation package. Being on the receiving end of Restricted Stock Units is a wonderful thing as they can play a huge role in the accumulation of wealth & ultimately towards dreams of financial independence. 

This is why it’s so important for you to understand how RSUs work, how they’re taxed, and what your options are upon their vesting so you can make the best decision for your future when you receive them. 

RSUs are not...

They are not stock options. ❌

Unlike stock “options”, there is no action step you must take to own the shares: you do not need to “exercise” your RSU to move them from the company’s ledger to yours. Also, unlike stock options, you don’t have to pay to buy the shares upon vesting, you simply receive the value of the shares on the pre-determined vesting date.  

🧮

What are RSUs, then?

RSUs are a company’s promise to compensate you with company stock if you are either still working at the company on the date of vest (Time Based RSU) or if you satisfy certain performance metrics (Performance RSU) by the date of vest. 

Put another way, as long as you are employed at the time of the RSU vesting date, or satisfy the performance metric if they are performance RSU, you will receive the shares. 

How common are RSUs?

Once you reach a certain career point, RSUs become a common & significant part of your overall compensation because they can be reasonably relied to vest and turn into actual shares in the years to come. 

For example, a client of ours at Amazon might receive a $300,000 base salary, a 20% bonus, and 900 RSU ($189,000 current value) vesting over the next 4 years. 

Of course, the value of the RSU will fluctuate based on the value of the stock and it only actually matters on the day of vest. However, it’s reasonable to consider those shares as part of your total compensation from Amazon (especially because if you were to consider another job offer, those unvested RSU count as real money that you would be “leaving on the table”).

For most of our clients, who are in their late 30’s and 40’s, we factor in future RSU grants into their financial plan because they’ve been receiving them for years and it’s simply a built-in part of their compensation structure; not including new RSU grants in the future just wouldn’t make sense. 

How do you get RSUs?

What conditions are often tied to this equity compensation incentive?

• Minimum length of employment – The most common form of RSUs we see are time based  RSUs where you must work at the company for a certain amount of time from the RSU grant date to receive the full allotment of shares. Oftentimes, this is a 4-year vesting schedule with a 1-year cliff. This would mean that 25% of your RSU vest one year after they were granted, and the rest of them vest proportionately every month/quarter over the next 3 years. This means that at the end of 4 years, if you are still working at the company, you would have received all of your shares.
• Performance benchmarks – Performing up to certain benchmark. This criterion is company/role specific, but you can receive RSUs that vest upon the company, your team, or the stock price clearing certain performance hurtles. 

RSU in Public vs. Private Companies

If you receive RSU from a public company, these are immediately liquid because you can turn around and sell the shares in the open market. These tend to be a lot more flexible and you, as the employee, immediately have options! This is what we’ve been talking about throughout the article. 

If you have an RSU from a private company, you will most likely have to wait for an IPO or a change in control in order to monetize your shares. Because they are not publicly traded, you will find the value of a private company’s shares based on a 409A valuation which typically happens annually.  

Single Trigger RSU vs. Double Trigger RSU

Throughout this article, we are talking about Single Trigger RSU; this simply means that as soon as the RSU vest, they are converted to shares and you can immediately sell them. Time is the only criterion. This is how RSUs work at publicly traded companies! 

On the other hand, a Double Trigger RSU, involves a time-based schedule for the shares to vest AND require an exit event for the company (like an IPO or acquisition) for you to fully own the shares. Private companies typically offer Double Trigger vesting because, just logically, SOMETHING needs to happen in order for those shares to become, for a lack of a better word, “real”. 

Because most of our clients work at large publicly traded companies that offer Single Trigger RSU, that’s what we’re writing about throughout the article.

RSU as Compensation 

Let’s say, for example, you make $500k in base salary, $75k in bonus, and received a grant of 1,000 RSUs vesting over 4 years. Assuming you put in the time and energy required to hold your position, you don’t have to “pay” anything to obtain this base salary, and you don’t have to “pay” anything to obtain these RSU shares when the time comes; they are simply deposited into your account on the day (or to be more technical- within 30 days) they vest. 

I always tell clients to think of their RSU as if their company is giving them an extra cash bonus and they’re taking that bonus and going out and buying as much company stock as they can buy with it; that’s, effectively, what happens on the day RSU vest and turn into stock. 

Why do I emphasize that RSUs are a form of compensation rather than stock options? 🤔 Well, for one, because the moment your stock vests, you could sell the shares, receive the proceeds in cash, and do whatever you’d like with the funds. Now, whether you should hold or sell the RSU is a strategy conversation that we’ll dive into later.  

The point I am making here is that RSUs are intrinsically valuable. There is no cost attached to your RSUs so you’re always in the “money” when you receive them. Just like your salary or bonus, there’s never a situation where your RSUs aren’t worth something. The only scenario in which this would happen is that the company goes out of business entirely; this is not something we're worried about in the short term with companies like Google, Facebook, Walmart, Spotify, Amazon etc.

You can compare this to stock options: if you have the option to buy your company stock at $40 per share, and the current market price is $35 per share… then your options are effectively worthless because you’d be better off just buying your company stock on the open market just like anyone else. 😐 In that case you would never choose to exercise, and all of your ISOs would be hypothetical. 

With incentive stock options, if you don’t exercise, you never actually get those shares! It's for this reason, that within the industry, RSUs are estimated to be worth 3-4 stock options on average. While most people don't have the choice of being granted RSU or ISO's, this is something to keep in mind.

How are RSUs taxed?

From a tax standpoint 🧾 as well, it also makes sense to think of your RSUs as “salary” and not as stock options because upon vesting, you become responsible for paying income tax on the RSU. For example, you make $300k in base salary and you have 100 RSUs that will vest in the current calendar year.  When tax time comes around, your taxable income will be $300k plus the market value of your 100 vesting RSUs on the vesting date. This is because your vested RSUs just stack on top of your other W2 income. Again, think of RSUs as a cash bonus that you’re going out and buying company stock with…you would be paying income tax on the bonus!

So, if the stock is worth $50 per share and you have 100 shares vesting, you are receiving $50,000 in value. Therefore, $50,000 will be added to your total income for the year. This also means that this fair market value ($50,000) on the day of vest becomes your cost basis for the shares you own. 

If you sell the shares immediately, you’d be selling shares worth $50,000. Since your cost basis is $50,000, you don’t owe any additional taxes beyond the shares themselves. However, if you hold onto the shares for 5 years and the shares go up in value, you are now worth $80,000. If you then you sell, you will be responsible for paying capital gains tax on the $30,000 gain. 

How do you pay income tax on RSUs?

There are different ways of paying the income tax on RSUs when they vest. 

• Automatically - Most companies set up “sell to cover” which allows you to pay the taxes automatically from the number of shares you receive.
• Quarterly - You can pay quarterly tax estimates.
• Annually - Or you can pay the taxes come tax time

What happens, with taxes, when you sell the stock? 

Because you are responsible for the taxes as soon as the RSUs vest, deciding to sell the accumulated stock is NOT a tax decision, it is a cash flow & investment decision. 

After all, you’re paying ordinary income tax on the vested shares either way! 

So, what happens next?

If you sell the stock immediately upon it vesting, then there are very little capital gains (or losses)  because you did not hold the stock long enough for the stock to appreciate (or depreciate) before selling.

Once RSU vests, it turns into actual stock that you own in the exact same way that you own any other stock that you bought on the open market. Additionally, just like any other stock that you own, you will generally pay capital gains tax when you sell it relative to its price at the time you “bought” it; which, in this case, when the stock vests. 

If you hold the stock for greater than 1 year, your gain will be taxed at lower capital gains rate. If you’ve held the stock for less than 1 year, then it will be at higher ordinary income rates. 

Are RSUs Double-Taxed? Understanding and Avoiding Errors 

RSUs are NOT double taxed. However, there are two reasons why sometimes it might feel like they are. 

If you pay ordinary income tax on the shares at vesting (IE: when you receive them) and then you pay capital gains tax on the shares when you sell them, this might seem like double tax. Don’t panic! It’s the same thing that happens with any other stock you sell; it just FEELS like the same tax transaction! 

The second reason is that you want to make sure that your brokerage is reporting the vested RSU correctly to the IRS.  Sometimes, the tax forms that go to the IRS from the brokerage company will show a cost basis of $0, rather than the actual cost basis of your shares. 

If this happens, when you get ready to sell the shares, you’ll owe shares on the gains. You also will be responsible for income taxes that wasn’t reported correctly but that you already paid taxes on. So, you want to double check the forms that the brokerage is sending to you come tax time!

What should you do with your RSU when they vest? 

I’ve seen prospective clients do just about everything possible with vested company stock...

👉 I had a respective client at Google tell me that every time their RSUs vest and their trading window opens up, they sell ALL of it immediately and then move that money to their savings account.

When I asked why, they said: “Not sure, started doing it a few years back and kind of just got used to it”.

👉 I’ve also spoken with a young woman who has built up over $1mm in Facebook stock over the years; at this point, one company stock makes up over 90% of her family’s net worth, and she hasn’t sold a dime! She prefaced by saying that she knows that she probably should sell but hasn’t been able to pull the trigger!

I could keep going, but the point is, I would say the common thread in all of these RSU stories is that a lot of these decisions are made through inertia. They haven’t put together a full financial plan that incorporates their company stock into the mix, so they’re not really sure what to do; the seemingly “easiest” and most comfortable path becomes what they end up doing.

Ok, so how do we want to start thinking about your RSU once they’ve vested? 

My starting point is always this: There are two fundamental reasons to sell company stock that we’ve accumulated through vested RSUs:

1. Cash flow
2. Diversification

We can put this another way…selling from a position of need or a position of optionality.

Let’s start with the first reason: cash flow. If you have a substantial amount of company stock, whether in the form of RSUs that have vested, ISOs, and employee stock purchase plan purchases, plus you also have some credit card debt hanging over your head or a lacking emergency fund, then company stock can and should be thought of as a godsend.

Before we can focus as extensively as we want on the planning aspect: investing, retirement planning and tax coordination... we NEED to make sure there are no creaks in the floorboards. High-interest credit card debt, a lack of emergency savings or not having a down payment for a home purchase you want to make in 2 years all qualify!

A lot of our clients have that all covered though. They have an emergency fund already established and they have no outstanding credit card debt. Why should THEY be selling their accumulated company equity? 

If company stock is making up a disproportionate amount of your net worth (I hesitate to give a specific percentage here because this is totally family-specific), it might make sense to sell your stock and then re-invest in a more diversified and broad compilation of capital assets (Go to chapter 7 of my book, How To Avoid HENRY Syndrome, for a deeper conversation about investing in equities & about WHY we don’t want to have so much of our money in any one company stock!)

It's all about taking some risk off the table. While we might think your company is going to do well and grow forever, we don’t know that; things happen. Any company can go belly-up, lose 80% of its value in a year & never truly recover, etc. But what can happen to one individual company is almost definitely never going to happen to the market as a whole. 

Moving money from one company stock to an allocation that has 2,000 company stocks means eliminating concentration risk and understanding that you’re putting yourself on the side of the 7-9% historical return that the stock market has achieved over the last 100 years. 

It’s not an all-or-nothing proposition. We have clients that have maintained large positions in their company stock because they’re bullish in its prospects. They not only understand the risk, but they also have adequate diversified assets already driving the plan. The company stock is still a relatively smaller “riskier” play with a higher upside.   

Editor's Note: This blog has been updated with current information as of March 12, 2025