Curated by: Rubric Advisors
Equity Compensation
RSU 101
Everything you need to know about Restricted Stock Units, from how vesting and taxation work to strategies for managing concentration risk and optimizing after-tax proceeds.
RSU 101
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What Are RSUs?
- Restricted Stock Units are a promise from your employer to deliver shares of company stock upon vesting
- Unlike stock options, RSUs have value even if the stock price drops because there is no strike price
- RSUs are the most common form of equity compensation at large publicly traded technology companies
- You do not own any shares or receive dividends until the RSUs actually vest and settle
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Full Guide
What Are RSUs?
- Restricted Stock Units are a promise from your employer to deliver shares of company stock upon vesting
- Unlike stock options, RSUs have value even if the stock price drops because there is no strike price
- RSUs are the most common form of equity compensation at large publicly traded technology companies
- You do not own any shares or receive dividends until the RSUs actually vest and settle
How RSU Vesting Works
- RSUs typically vest over three to four years, with some companies using a one-year cliff
- Vesting schedules vary by company, with some using equal quarterly vesting and others backloading later years
- Each vesting event is treated as ordinary income equal to the number of shares times the stock price that day
- Vesting is contingent on continued employment, so unvested RSUs are forfeited upon departure
- Some companies offer refresher grants annually, creating overlapping vesting schedules over time
Tax Treatment at Vesting
- RSUs are taxed as ordinary income at the fair market value on the date they vest
- Your employer will withhold federal, state, and payroll taxes, often by selling a portion of the shares
- The default federal supplemental withholding rate is 22%, which may be insufficient for high earners
- Any shortfall between withholding and your actual tax rate must be paid at filing time or via estimated taxes
- The cost basis for future capital gains is set at the fair market value on the vesting date
Withholding Shortfall Problem
- At 22% federal withholding, employees in the 32% to 37% bracket will owe additional tax at filing
- State taxes add further liability, with California at up to 13.3% and New York City at up to 12.7% combined
- A $200,000 RSU vesting could result in a $15,000 to $30,000 shortfall depending on your tax bracket
- Set aside cash from each vest or increase estimated tax payments quarterly to avoid underpayment penalties
Selling Strategies
- Sell at vest converts RSUs immediately to cash, eliminating concentration risk and locking in the known value
- Holding for one year after vest converts future gains from ordinary income to long-term capital gains rates
- A systematic selling plan such as selling 25% per quarter balances diversification with potential upside
- Consider your total net worth allocation to company stock including unvested RSUs when deciding what to sell
- Rule of thumb: limit single-stock exposure to no more than 10% to 15% of your investable portfolio
Key Takeaways
- RSUs are taxed as ordinary income at vesting, and default withholding often does not cover your full liability
- Track your vesting schedule and plan for the cash flow impact of taxes owed at each vesting event
- Develop a written selling discipline before the shares vest to avoid emotional decision-making
- Factor in unvested RSUs as part of your overall asset allocation and concentration risk assessment
- A financial advisor can help model tax-efficient strategies for managing ongoing RSU income
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