If you work at a tech, biotech, or other large company, your compensation may include restricted stock units (RSUs). For someone working in finance, RSUs are a relatively straightforward, simple-to-manage benefit—but for executives focused on work, family, and the busyness of daily life, they can feel overwhelming.
If that’s you, we’re here to help.
Like most meaningful goals, your desired legacy won’t come to fruition on its own—it requires forethought and intentional planning. Here are four keys to crafting an estate plan that aligns with your desired outcomes:
AN OVERVIEW OF RSUS
Unlike stock options, which give you the right to buy shares, RSUs don’t require you to purchase anything. Instead, you’re awarded shares of the company once you meet certain requirements, typically triggered by a vesting schedule.
For example, say you work at Google and receive 500 RSUs over five years. After one year of employment, you receive 100 shares; then the next year, another 100 shares vest, and so on. Each time those shares vest, they’re treated as income from a tax perspective. Typically, the company withholds the taxes the same way it would from your ordinary paycheck, then you own the stock outright.
From there, if you sell the stock within a year, you’ll pay short-term capital gains tax, which matches your ordinary income tax rate. Hold the stock for more than a year, and you’ll pay long-term capital gains rates, which are typically lower.
BENEFITS OF RSUS
RSUs have become a popular form of compensation, especially in tech. For employers, issuing equity rather than cash helps preserve cash on the balance sheet, which is particularly attractive for early-stage companies.
For employees, RSUs can be a valuable wealth-building tool. If the company performs well or has a successful IPO, a few years of RSUs could translate into substantial wealth creation.
PUBLIC VS. PRIVATE COMPANIES
How you can use RSUs depends on whether your employer is a public or private company.
- For public companies, vesting typically depends only on your length of employment. After your shares vest, you can sell them.
- For private companies, vesting typically requires a “double trigger”—duration of employment and the company going public (either via IPO or acquisition). Until then, you can’t sell your shares. In some cases, you might sell internally at the company’s valuation, but typically it’s best to wait for that second trigger before selling.
THE RISKS OF RSUS
Continuing your hypothetical Google employment, let’s say that every year, they award you 200 shares. The stock price does well, you believe in the company, and so you never sell. Five years later, you have 1,000 shares of Google trading at $700 each, or $700,000 worth of Google stock. That’s a lot, especially for one company in your portfolio.
We often ask clients: if you didn’t work here, would you take your paycheck and buy only this stock? If the answer is no, you likely have what we call concentration risk, where you have an outsized portion of one stock in your portfolio.
This creates two problems:
- Idiosyncratic risk: If too much of your wealth is tied to one company and that stock falls, your portfolio will follow.
- Tax headaches: The longer you hold your shares without selling, the larger your unrealized gains may become. Then when you finally decide to sell (maybe to diversify or generate cash), you could end up with a large tax bill because you “purchased” the stock at a significantly lower price.
MANAGING RSUS STRATEGICALLY
So, what do you do to avoid these risks? There are several options.
- Proactive management: You can sell your shares as soon as the stock vests. This is typically what we recommend, as it allows you to diversify without much tax impact (the gain from one day to the next being minimal).
If a client doesn’t want to sell because they love the company and they’re confident about the stock, we’ll help them strike a happy medium and sell maybe half, diversifying the rest into similar companies.
- Reactive management: If you’ve already let shares accumulate, there are several reactive ways to manage the tax burden, like strategic liquidations and traditional tax-loss harvesting.
While we’re advocates of diversification, we also have clients with high concentrations of single stocks that have been positive drivers for their portfolio. So each situation is unique, and it’s wise to partner with an expert who can help you make the best decisions for you.
YOUR NEXT STEPS
RSUs can be a powerful way to build wealth, but they require intentional strategies to help you avoid risk and maximize your returns. If you’d like our help optimizing your portfolio, we’d be happy to meet with you—we’ve worked with many executives and high-net-worth families to help them streamline their investments and capitalize on opportunities.