More than half of your salary is paid in stock; if you don’t manage it properly, you might become bankrupt in a matter of days.

When you’re paid in stock, it’s all fun and games until the market falls; discover how to safeguard and safely handle your unexpected wealth.

This article is for anybody who receives RSUs as a form of payment. It is intended for informational purposes and does not constitute legal or tax advice.

1. How To Get Paid With Stocks in Public Companies 101

Employees in the tech industry earn a significant amount of stock and income. This stock has a cash value depending on the stock market price in public corporations. On the other hand, restricted Stock Units (RSUs) are not cash equivalents, which must be understood.

Why?

Your business has rules on when and how you can receive shares. What’s less evident is that your company may impose further limitations on when you may sell. It makes it practically hard to pay out when you want to in certain circumstances. That is why it is critical to understand how RSUs function and prepare ahead of time how to handle them.

To begin, let’s look at how RSU compensation works in public companies:

You Receive Your Offer: The company pledges to pay you a certain number of shares over four years. It is known as a stock grant, and it implies you’ve been given shares in the future if you satisfy all of the company’s requirements. Your stock award will be expressed in dollars, such as $100,000. The number of shares you obtain is calculated by dividing $100,000 (your grant value) by the stock price at the moment you join.

You Don’t Obtain Stock Immediately: A “vesting schedule” governs how your stock is distributed to you.

You Await Cliffs: A vesting cliff occurs when a part of your pledged shares is lawfully transferred. It usually happens on the anniversary of your wedding. You won’t receive any shares if you quit your employment before the cliff date. Only the stock on which you’ve achieved certain milestones is kept.

RSU for Refreshers: Most prominent tech firms provide “refreshers,” which are stock-based incentives. Each bonus RSU award is treated as a separate grant with its vesting timeline.

Most significant tech businesses use trade blackouts to prevent insider trading,

Restrictions on Selling: Even if the RSUs you vest become legally “yours,” you can only sell them within a “trading window” while working at the firm. You’ll be allowed to sell once every 90 days in most circumstances. Companies place severe restrictions on all workers’ sales to prevent insider trading.

Several Taxes: RSUs are taxed as income the first time they vest. If you don’t sell them straight away, you can be subject to an extra capital gains tax on any stock appreciation.

Why Are RSUs So Popular?

Companies nowadays want to pay in stock because it helps them manage expenditures and compete for people — many workers sign up for jobs based on the stock’s future, and RSU compensation is considered a perk. RSU pay is a notion that dates back to the early 2000s. In 2003, Microsoft chose to transition from paying in options to providing workers RSUs due to changes in accounting regulations. By May of the following year, two-thirds of IT enterprises had followed likewise.

Why It’s Difficult to Sell Your RSUs?

Because defining what is private and what isn’t can be difficult, IT businesses have opted to consider all staff insiders. When an employee uses secret knowledge to purchase or sell shares for profit, this is known as insider trading. It makes stock trading very difficult as an employee since you can only sell if and when the employer authorizes it. Often, this has negative consequences, such as being unable to sell while the market is collapsing. Businesses fear insider trading sanctions imposed by the government because they are costly and generate a lot of negative publicity.

2. Various Public Companies’ RSU Negotiations

Every six months, companies compare wages. They typically get inventive in how stock compensation is structured since there is so much at risk in getting the finest personnel and a limited budget to employ. You could see the same total quantity of shares, say $100,000, being offered. However, you may obtain it sooner or earn more shares at certain firms.

Is this a little perplexing?

It’s done on purpose. Companies seek to make it harder for employees to compare pay because it strengthens their capacity to compete for talent.

Grants Aren’t All the Same

The number of shares you get is determined when you join the organization. It works like this:

• A grant of $100,000 is awarded to you.
• The corporation splits your $100,000 grant by the current stock price.
• That is the number of shares you will get!

What Does It Imply for You?

Because the number of shares is calculated by dividing the total value by the stock price, if you join a firm while its shares are trading cheap, you will obtain more shares (often a lot more). Many computer workers, particularly those in higher positions, may arrange their career moves to coincide with stock values.

On the other hand, you will get much fewer shares if you join when the stock market is flourishing and overpriced.

The best way to maximize your RSUs is by timing your job change with stock prices.

Stock Prices Are Determined in a Non-intuitive Manner

Upon starting new employment, you’ll get RSUs based on a 30-day moving average of the stock price. It implies that they’ll take the stock’s price over 30 days before the date of your offer letter. Competent tech workers keep tabs on the stock prices of the firms they’re interested in and move on when the stock price drops. One must have tremendous confidence in the stock price recovering after joining for this technique to succeed, which requires further research into stock movements and knowledge of the company’s structure.

Offers Are Designed To Be Difficult To Understand

When it comes to RSUs, companies arrange their compensation to make it difficult for you as a candidate to evaluate job offers.

Here are a few compensation models from 2021:

Facebook 

One year cliff to vest 25%, then a quarterly vest, refresher, and sign-on bonus are often paid as RSUs.

Assume that your job offer includes a $100,000 stock grant. You’ll have to wait a year to obtain 25%, or $25,000, of the money. Then, every quarter, you’ll be given a piece of the remaining stock. Furthermore, you may be eligible for stock bonuses known as “refreshers.” For a job well done, a refresher is a new stock reward. Refreshers will vest on a new timetable when you receive your stock award.

Google

Frequently provides a “front-loaded” vest with a 40% vest first year.

Assume that your job offer includes a $100,000 stock grant. You’ll have to wait a year to obtain 25%, or $25,000, of the money. Then, every quarter, you’ll be given a piece of the remaining stock. Furthermore, you may be eligible for stock bonuses known as “refreshers.” For a job well done, a refresher is a new stock reward. Refreshers will vest on a new timetable when you receive your stock award.

Amazon 

5% in the first year, 15% in the second year, and 40% in the third and fourth years.

While Amazon’s overall compensation is comparable to other corporations, the stock is heavily weighted. It implies that in the first two years, you will get relatively few RSUs. Statistically, the majority of Amazon customers depart after 2.3 years. Based on it, you may be missing out on many potential equity gains compared to Google or Facebook.

Netflix and Tesla

Candidates may decide how much of their salary goes toward stock options.

While RSUs provide you the right to acquire an unlimited number of shares at any time in the future, stock options give you the right to buy a fixed number of shares at a specific price in the future. Imagine the current share price is $100, and you get 50 options. Even if the price rises to $400 in a year, you may still purchase up to 50 shares of stock for $100. Options may be profitable, but you must first spend money to gain money.

Snapchat

With a three or four-year vesting timeline, candidates have the option.

Tax benefits might be gained if you plan when you buy shares.

Lyft and Stripe

The pricing is recalculated every year.

Most grants have a four-year lock-in period for their share price. Every year, the share price of Lyft and Stripe resets. It implies that you will lose out on that gain if the stock price increases significantly. RSUs might be discounted if you anticipate the company will appreciate a great deal.

How Do You Compare Offers?

If you’re comparing compensation across various organizations, you should consider yourself an investor rather than an employee. Assume that you’re investing $100,000 or more of your own money into a single stock – because, in reality, you are.

Is It a Good Time To Join Right Now?

Take a look at the stock’s average price over the previous 30 days. Consider if you’re receiving a fair bargain and how confident you are in the price continuing to rise.

How Long Until the Stock Vests?

Evaluate how long it will require you to attain vesting vs. how long you want to remain at a company in the long run. Take a look at how long the typical employee has been with the company as a benchmark.

Is It Clear to You How This Business Produces Money?

An intelligent investor is familiar with the company’s business plan, its competitors, its product range, and its key personnel. Whether you join is critical, but it’s much more crucial to assist you in deciding when to keep and when to sell your shares.

Is There a Particular Blackout in Effect for You?

In other cases, stockholders may not be able to sell their shares at all. As a result, you must consider the risk of keeping the stock for years. You’re more likely to experience this if you’re working on a highly secret project or in a position like finance.

3. Investing in RSUs: What You Need To Know

Here’s what you need to know to consider RSUs as an investment.

Recognize the Risks

RSUs account for more than half of many tech workers’ salaries, yet the firm they work for owns more than 90% of their wealth. It immediately exposes you to several risks.

RSUs account for more than half of many tech workers’ salaries, yet the firm they work for owns more than 90% of their wealth. It immediately exposes you to several risks.

Risk of Concentration

Over-exposure occurs when more than 10% of your assets are invested in the same product. What makes it so wrong?

What you’re taught in tech: A concentrated ownership holding may give significant rewards if a business succeeds well. Many people own large quantities of stock in the corporation since it has performed very well.

What occurs in the real world: No matter how well-managed a business is or how well it has done in the past, its performance may alter in the future. Just ask Lyft workers how their fortunes shrank dramatically during COVID.

Employees at Lyft lost 200 % of their equity within a month in 2020. They couldn’t sell their shares for most of that period and had to watch it plummet.

Even if a catastrophe does not occur, your investment will almost certainly lose value over time. A 2017 study presented in the Journal of Financial Economics reveals that for the period from 1983-2006:

• Nearly two out of every five stocks lost money (39% )
• Around a fifth have seen their value drop by at least 75% (18.5% )
• Nearly two-thirds of equities (64 %) underperformed the Russell 3000 Index, representing roughly 98 % of the investable U.S. equity market.
• Only 25% of equities were accountable for all of the market’s gains.

Risk of Liquidity

You can’t sell your shares anytime you want; in fact, most tech businesses have trading windows that are strictly enforced. For example, you can only sell for four days per quarter on Facebook. It signifies that if you have an overly focused portfolio, you won’t respond to market declines in real-time.

Risk to the Company

Your money and your career are both dependent on the success of one company’s shares. If your firm experiences layoffs, like Airbnb, did in 2020, it would very certainly be financially disastrous for you as a concentrated investor. Even something as basic as a disappointing quarter for the firm might have a cascading negative impact on your wealth.

The following is how it goes:

Year 1 Loss	Year 2 Gain Required to Break Even
-40%	66.7%
-30%	42.9%
-20%	25.0%
-10%	11.1%
-5%	5.3%

4. Is It Better To Sell or Keep Your Stock?

With all of these risks in mind, it’s evident that you need to be in charge of your actions, whether you sell or hold. Your risk tolerance and the long-term financial objectives you’re aiming for are also important considerations.

Before you sell, consider these six factors:

Taxes: If not properly prepared, the selling of RSUs might result in a large tax bill.

Risk Tolerance: Think about how much money you’re willing to lose if the stock drops.

Financial Position: Consider diversifying if RSUs make up more than 10% of your portfolio.

Emotional Attachment: Using analytics and statistics, assess the company rationally.

FOMO: A psychological bias is known as “fear of missing out” might impair your judgment.

Comfort: It may seem to be safe to invest in what you know. Learn all there is to know about your choices.

Planning is the first step in selling all or any of your RSUs. Discuss the risks and rewards with your companion or family if you’re the leader of your home.

Your risk tolerance is a straightforward response to the question, “How much can you afford to lose?” Don’t gamble with money you can’t afford to lose in part or totally.

A Quick Sale

Trying to sell straight immediately might be enticing, but it can rapidly become a nuisance.

Pros

You’d be shielded from the stock’s potential downturn instantly.

Cons:

Remember that you can only sell when the company permits it (“trading windows”), and they might be pretty brief. They aren’t always mentioned in advance since they coincide with quarterly earnings calls. Having to regularly adjust the date of your sales and prepare a new tax schedule for each new vesting award can quickly become overwhelming.

To achieve a higher price on your shares, you may have to wait three months if an earnings call goes poorly.

10b5-1 Trading Strategy

A 10b5-1 plan requires you to notify your intention to sell your shares ahead of time. The government allows you to dodge insider trading laws and sell at any time, even if the firm doesn’t ordinarily allow it, in exchange for formulating a plan.

Pros

Regular selling decreases concentration and market risk, two of the most challenging obstacles for any tech employee to overcome. Candor, for example, can automate sales, taxes, and diversification. According to Stanford research, these approaches may result in 6% higher returns on average.

Cons

You must plan ahead of time how your stock will be sold.

For the last two decades, executives have relied on 10b5-1 trading strategies. They’re the most efficient way to handle RSUs.

Hedging Techniques

Other hedging options are available to the expert investor (read: don’t do this at home unless you have a financial adviser). These are sometimes used in conjunction with a 10b5-1 trading strategy to reduce risk.

Types of Hedging Strategies

Here are the hedging techniques you can learn and compare:

Protective Puts

You make a price floor at put options’ strike prices by purchasing put options on your concentrated position.

Pros

While providing downside protection, it also allows full participation in the stock’s potential gain.

Cons

Purchase of puts is a one-time cost; it provides neither liquidity nor diversification.

Covered Calls

You may sell or “write” call options on the concentrated position.

Pros

Up to the strike price, full participation in appreciation; income from option sales can be utilized to boost returns or diversify portfolios.

Cons

There is no price protection, no participation in price increase over the strike price, and exercise (called stock) may result in capital gains.

Zero-premium Collars

Selling calls and purchasing puts at the same time establishing a price ceiling and floor.

Pros

There is no upfront cost; full appreciation participation is up to the call strike price and complete downside protection below the put strike price.

Cons

Until the put-trike price is achieved, there is no participation in the above-given strike price, no liquidity or diversification, or downside risk.

Prepaid Variable Forward Sales

The number of shares supplied depends on the stock’s future price. The investor gets a predetermined cash payment in return for the future delivery of a variable number of shares.

Pros 

The stock has immediate liquidity, downside protection, and some upward potential, and the voter retains voting rights and dividends until the stock is delivered.

Cons

The stock proceeds are discounted from their current market value, resulting in unusual tax consequences.

5. Tax Tactics You Should Consider

The majority of tech workers aren’t given enough information about their tax responsibilities. So, what was the outcome? The IRS has given you a nasty surprise. It’s crucial to understand how your redemptions are withheld and taxed to prevent writing an extensive check on tax filing day.

Here’s a basic rundown:

You are guaranteed equity in the form of a grant when you start your work, but you don’t own any equity; therefore, you aren’t taxed.

You get ownership of a portion of your shares and tax it as income when you vest.

The tax upon vesting is calculated as follows: Number of Shares Vesting * Share Price = Income Taxed in the Current Year.

For supplementary pay income, most employers do not withhold taxes according to your W-4 rate but rather utilize the flat IRS rate. As a result, you will spend more tax at the end of the year. For 2021, the rate is 22% for supplementary salaries up to $1 million and 37% for wages beyond $1 million.

The following are the income tax rates for 2021:

Federal Income Tax	Salary
Brackets	Single Filers	Married, filled Jointly
37%	$523,601 and above	$628,301 and above
35%	$209,426 – $523,600	$418,851 – $628,300
32%	$164,926 – $209,425	$329,851 – $418,850
24%	$86,376 – $164,925	$172,751 – $329,850
22%	$40,526 – $86,375	$81,051 – $172,750

If you don’t sell your stock right away and it appreciates, you’ll have to pay capital gains tax on the increase. If you sell within a year, you’ll have to pay “short-term capital gains,” which may tax up to 35% more. If you hold for more than a year, you’ll be liable to long-term capital gains, which are smaller.

The tax is calculated as follows: (Sales Price – Vesting Price) * Capital gain = Number of Shares (or loss)

The following are the long-term capital gains tax rates for 2021:

Long-Term Capital Gains	Salary
Tax Rates	Single Filers	Married, filled Jointly
20%	$445,851	$501,601
15%	$40,401 – $445,850	$80,0001 – $501,600
0%	0 – $40,000	$0 – $80,000

How to Save Money on Taxes

RSUs are treated as extra income by most enterprises, which is a little-known fact. As a result, they withhold much less tax, and tech workers often owe the IRS large sums of money.

First, see whether you’re going to owe any taxes. Here’s a quick method to figure it out on your own:

1. Examine your total year-to-date earnings from all sources. Your employment income is shown at the bottom of your most recent pay stub. Include your partner’s income as well if you’re filing jointly.

2. See where your income fits inside the IRS income tax brackets for the current year.

3. Multiply your vested RSUs’ gross value by the tax rate from #2. Subtract the amount your employer has already withheld. Apply the same logic to state taxes.

Next, make a budget for any debt you may have:

Retain More or Save Cash 

You can adjust your tax deductions by contacting your HR representative. It will only affect your withholdings in the future, so you may still owe taxes for the first quarter.

Maximize Deductible Donations 

Use an RSU management tool like Candor to sell your RSUs in a tax-efficient manner. Automated strategies can also aid diversification into different assets.

Maximize Deductible Donations

The earnings from the selling of RSUs can be used to max out tax-deferred accounts, such as a 401k, and balance your tax bill if you keep RSUs to avoid paying taxes on the gains (in addition to diversifying your investment portfolio).

Donor-Advised Funds

Donating to charity can help you offset a significant percentage of your RSU taxes. DAFs or Donor-Advised Funds allow you to set up a fund with a certain amount to gift over some time. What’s the catch? You may deduct it from your taxes in the first year if you choose to. Many businesses, such as Daffy, are in this market and can make this a straightforward procedure.

Deduction Bunching 

If you have a significant number of RSUs that will vest in a given year, consider bundling deductions to offset some of the revenue. Mortgage interest, medical costs, and charitable contributions are all possible deductions.

Deduction bunching refers to the practice of cramming as many deductions as possible into a single tax year. It’s done to save money on taxes that year.

Defer Using Options Hedging 

You can wager on the stock price movement using option calls or collars and deduct any realized gains from your taxes. If you need to maintain your company shares or postpone your tax liability to a more optimistic year, this strategy can be helpful. However, it is unquestionably dangerous.

6. When You Quit Your Job, What Happens Next?

All limitations on trading your stock are abolished as soon as you depart, and you can begin trading it whenever you choose. In most cases, if you leave your organization before your RSUs vest, you will lose the RSUs that have not yet vested. Only the stock that has already vested is yours.

When you leave unwillingly (which is an excellent talk for “being fired”) or if you have mitigating life circumstances, things become a little more tricky. Companies have increasingly established more sophisticated rules, particularly in the event of death. If you died while working at a huge tech business, your family would benefit from accelerated vesting. Google is well-known for paying half of your income to your family for a decade.

If you’re interested in how organizations often cope with extenuating situations, the National Association of Stock Plan Professionals (NASPP) 2019 Domestic Stock Plan Design Survey uncovered some of the most prevalent trends:

Termination Due to Misconduct: All rewards that have not yet been vested are forfeited by 98% 

Termination Without Reason (Involuntary): All rewards that have not yet been vested are forfeited by 64% 

Disability: There are no forfeited awards, and vesting for unvested awards is accelerated by 47%

Death: There are no forfeited awards, and for unvested rewards, vesting is accelerated by 59%Retirement: All awards that have not yet been vested are void by 36%