RSUs: Restricted Stock Units

Pretty soon, you’ll feel comfortable with all this stock market stuff!

I spent most of my life before now knowing nothing about the stock market or investing. However, when I graduated, I had investment thrust upon me because of RSUs: Restricted Stock Units. RSUs are a form of alternative compensation which is often included in job offers, particularly in the tech sector. They serve several purposes:

  1. Acting as a delayed bonus which you can cash out after a set period of time (known as a “vesting period”). This helps companies retain employees since if you leave before the end of the vesting period you lose out on your bonus.
  2. Forcing employees to invest in the company’s stock so they will have more motivation to do their jobs well, because if the company is doing better your stock is worth more.
  3. Serving as an alternative to increased salary when trying to piece together an acceptable offer for a new engineer (see my post on salary negotiations to learn how you can use this to your advantage).

It can sometimes be pretty confusing to figure out how RSUs work, and what RSUs should be worth to you. I’ll guide you through those thought processes in this post.

How RSUs Work

RSUs are literally a grant of employer stock. Let’s say you work for Apple (that’s stock ticker AAPL). In your offer letter, Apple either told you that you will be given a certain monetary amount (say, $10,000) and will receive that amount’s worth in shares when you start work, or they told you that you will receive a certain number of shares (77 shares is worth about $10,000 at time of writing, you can Google the current share price if you want). So when you arrive bright-eyed and bushy-tailed for your first day of work, you’ll get those shares deposited in your account. But they’re not really yours yet…

What RSUs Are Worth

RSUs are worth absolutely nothing until they vest. When shares vest, it means that those shares are finally under your complete control: you can sell them, hold them, transfer them to another account, whatever you want to do. Before they vest, they’re not really yours, they still “belong” to your employer and will vanish if you leave your job. Once shares are vested, you own real shares in your company. Vesting can occur on various schedules. That is, your stock can vest over different periods of time depending on your company’s policy. One example policy is that all your shares will vest after one year. The $10,000 in AAPL shares from our example will become yours one year after you receive them. Another example policy is partial vesting over several years, for example: one-fourth of your shares will vest every year for four years.

What To Do After They Vest

Here’s where you want to be careful not to drink the company Kool-Aid (or “Apple juice” in our example). It is important to know that you should sell your shares immediately once they vest, just like with the shares from ESPP, This ensures that you are not overly invested in a single company–your employer. Since you already depend on your employer for your income and benefits, it’s a good idea to not also invest in them by buying stock. If the company were to start failing or downsizing, being overinvested could really hurt you! Imagine losing half the value of your investments and your job all in the same day. Even if you think your company is really awesome, its past performance is not indicative of its future. Especially in a frequently-disrupted field like technology, you never know what might happen.

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