Many haven’t heard of Restricted Stock Units and don’t fully understand the value of them. If you work for a corporation that trades publicly or privately held, this is something you need to understand prior to going into salary negotiations. Understanding how they work and why they are important is critical to maximize your earning potential.
Restricted Stock Units (RSU’s): This is a stock grant your company gives you, but the stock is “restricted” until it vests. There are a few variations of this. In this article we will walk through an example of how my employer uses RSU’s.
Each year, based off the level you are within the company, my employer gives you a grant of restricted stock units. On the day of the grant, let’s say they grant you $10,000 of stock. This means you will have $10,000 of restricted or “unvested” stock units.
Unvested stock means you have the money in your account, but you don’t have access to the stock yet. Your company is saying they owe you X number of shares, but you have to wait till the vesting date.
What is vesting? Your company will have a vesting schedule. For my company, we vest 25% each year for 4 years till you are 100% vested.
What does that mean? Examples with real numbers always make things easier.
This means each year you will receive 25% of your $10,000, or $2,500. You will have access to this money at that point. You can sell, or continue holding on to the stock. The last thing to point out here is that your stock could have gone up or down since your grand. So, for this example, let’s say your grant happened when the stock was selling for $100 per share. This means you were granted 100 shares ($10,000 in value).
If at your first year 25% vesting date your companies shares are worth $110, then you vest $2,750. Of that, $2,500 is the principle of your stock and $250 is realized gains.
Why RSU’s Are Great
There are good and bad things about RSU’s. The good thing is if your companies stock continues to increase in value. In that case you should experience large gains in your RSU’s each time you get a vest.
Another great thing is after you have been with the company for multiple years. The first year you vest, you only receive 25% based off the vesting schedule outlined above by my company; however, year 3, you vest 25% from year 1 and 25% from year 2. Year 4 you will vest 25% from year 1, 25% from year 2, and 25% from year 3. You can see how these compound on top of each other.
Year 5 is the most fun. In year 5, you vest 25% from year 1, 25% from year 2, 25% from year 3 and 25% from year 4. If you are able to increase your overall RSU grant each year, things only get even better.
The Downsides of RSU’s
The bad thing is you have to wait for the vesting before you receive the stock and can do anything with it.
For example, if your company is like mine, I have to work for four years before I will see my restricted stock units vest 100%. If you plan on being with your employer for a long period of time, then there is nothing you have to worry about. If you plan to bounce companies or have an entrepreneurial itch, try to negotiate your total comp elsewhere.
- Understanding what Restricted Stock Units (RSU’s) and why they are important is critical to salary negotiations.
- Ask and understand your companies vesting schedule.
- Be sure your long term plan with the company aligns to your RSU’s. If you don’t plan to be with a company long, negotiate total compensation elsewhere. You won’t want to have a large part of your comp being RSU’s.