If you work for a privately held company, you may receive additional non-salary benefits, such as restricted stock units (RSUs). As of September 10, 2020, the following companies, which all offer RSUs to employees, are expected to have an IPO or a direct listing before the end of the year:
1. Airbnb: Remember in The Before Times when we could travel? The company is still expected to go public in 2020 despite being negatively impacted by the COVID-19 pandemic.
2. Asana: A software-as-a-service (SaaS) workplace and team collaboration tool that works kind of like a CRM is planning to go public via a direct listing.
3. DoorDash: An on-demand food delivery platform, which is scheduled to debut in the fourth quarter of 2020.
4. Palantir Technologies: A data analytics company, which is (a) named after a magical artifact from The Lord of the Rings and (b) skipping the IPO in favor of a direct listing in fall 2020.
5. Snowflake: A cloud data company that sounds like the fictional company Gryzzl from Parks and Recreation (“It’s the cloud for your cloud”).
6. Unity Technologies: A company that creates software for video game developers to build interactive, real-time 3D content.
RSUs are wonderful things that can dramatically change your life, allowing you to increase your emergency fund, pay off debt, buy a home, or help you achieve any of your other financial goals. The rules around RSUs can be difficult to understand, so it’s a good idea to educate yourself before you have to make any decisions.
How Your RSUs Work
It has become common practice for companies to use “double trigger” vesting. This means two requirements must be met before your RSUs turn into company stock:
1. A service-based requirement: You must work at the company for a certain period of time in order to pass vesting dates. For example, you may receive an initial grant of RSUs up front, with the remainder vesting monthly or quarterly over 3-to-5 years.
2. A liquidity event: This means the company goes public, either through a traditional IPO or a direct listing.
Once both conditions have been met, any vested RSUs you own will turn into actual shares. Now you have a new dilemma: What should you do with your vested shares? The answer is that it depends on the company’s rules. For example, there may be a lock-up period that dictates the number or percentage of shares that can be sold as well as when you can sell the shares.
The bottom line is that the company’s rules and your financial situation are unique, so there isn’t a one-size-fits-all approach to the handling of your shiny, new shares.
Should You Sell or Hold?
Again, the answer to this question is that it depends. Perhaps the best way to approach this is ask yourself these questions:
1. Do you need money to achieve your financial goals? If so, then you should consider selling your shares.
2. If you don’t need have an immediate need for the money, are you comfortable maintaining a potentially large portion of your net worth in the stock of your employer? If so, just be aware of the risks involved with having a concentrated position in a company that also happens to provide your salary. The share price could rise, but it could also fall. Don’t be greedy, especially if you have additional RSUs that will vest over time.
3. If you don’t need the money and you don’t want to have a concentrated position in your employer’s stock, what else would you do with the money? Reinvest it elsewhere? Donate some or all to a cause you believe in? Think about this before you take action.
Taxation of RSUs: Two Parts
I’m sure your eyes glazed over as soon as you read the phrase “taxation”. Hang in there, this next part’s not that bad. There are two taxable events you need to be aware of:
1. At vesting (taxed as earned income): Once the double trigger vesting conditions have been met, the company is required to deliver the vested shares to you. When that happens, the shares will be taxed as ordinary income. Some of the shares, typically 22%, will be withheld to cover the taxes you owe. Keep in mind you may need to have additional earnings withheld, or sell additional shares of stock, in order to cover any remaining tax liability.
2. At sale (taxed at short or long-term capital gains rates): Any remaining shares you have can be sold, if allowed by your lock-up agreement, or held. If you sell them in less than 12 months, and there’s a gain, you’ll owe tax on the gain at your ordinary income rate. If you hold the shares for greater than 12 months, and there’s a gain, you’ll owe tax at the preferred long-term rate.
Get Help
If you don’t have the time, knowledge, or inclination to deal with your RSUs, I highly recommend hiring a CPA and/or a Certified Financial Planner. These professionals can help you determine how much tax you owe on your RSUs, when you need to pay it, what to do with the windfall, and how to plan for your future.
