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Should I Sell My Restricted Stock (RSUs)?

COVID-19 has created fear and uncertainty in our everyday lives.  Employees of large, publicly traded companies not only have to worry about keeping their jobs, they also have to worry about their stock compensation.   Employees of publicly traded companies are granted Restricted Stock Units or RSUs as a form of additional compensation on top of a paycheck.  Now more than ever, employees of publicly traded companies are asking the question, ‘should I hold or sell my RSUs? ‘

Restricted Stock Units (RSU) Definition

RSUs, by definition, are shares of company stock that are issued to employees as a form of compensation.  The shares are restricted because they vest or become available over time.  Availability of the shares is dependent on a vesting schedule or when certain milestones are met such as the company going public (IPO).  

Upside to Restricted Stock Units (RSU) 

RSUs are an added incentive for employees in addition to employee salary.  Companies issue RSUs in order to increase employee morale and also keep valuable employees at the company for a long period of time.  RSUs are different from other forms of equity stock compensation, such as stock options, because they have value unless the company stock goes to $0.  RSUs never go underwater.  

Downside to Restricted Stock Units (RSU) 

RSUs are taxed at ordinary income rates upon vesting.  The market value of your shares is what is taxed.  Taxation includes federal taxes, FICA (Social Security and Medicare taxes), state and local taxes.  The reported income is typically subject to mandatory wage withholding.  If your shares appreciate in value and you hold for longer than one year you will pay capital gains on the appreciation.  Another downside to RSUs besides taxation is that the shares are restricted until vesting.  Vesting or when the shares become available is typically based on a schedule.  The schedule is either time based, meaning shares vest over a period of time such as 3 to 5 years, or the schedule is cliff based meaning 100% of shares vest immediately.  Graded vesting is most common for employees to receive.  For example:

You are an employee of Nike (NKE).  You are granted 10,000 RSUs and each year 25% of your shares vest meaning each year 2,500 shares become available to you.

The other downside to RSUs is that unvested shares are likely to end upon your termination of employment.

Should I Hold or Sell My RSUs?

Now for the advice you’ve been waiting for!  RSUs are a great incentive for employees because it allows for greater long term growth potential in the stock.  Now that the stock market is drastically lower from all-time highs, you may be kicking yourself for not selling your RSUs at a higher price than where the shares are today.  Welcome to investing.  Hindsight is 20/20 and we don’t have a crystal ball on what the market is ultimately going to do.  But there are a few guidelines to follow on whether or not you should sell your RSUs.

Do you need cash to fund expenses, your emergency fund, or a shorter term goal?

If you need cash to fund immediate expenses or to build your emergency fund, then you should seriously consider selling your vested RSUs.  It is unknown what the stock price will do over a period of time, so if you're planning on using vested RSUs to fund a downpayment on a home within the next year, get the money in cash and sleep better at night.  RSUs are issued to employees to increase morale and retain talented workers.  That doesn’t mean you should hold vested RSUs instead of creating good financial habits by having shorter term goals set aside in more conservative type investments such as money market or high yield savings accounts.  The key to knowing whether or not to sell RSUs is to understand the amount of money needed to fund short term goals.

Compare today’s stock price versus a target price.

Your company’s stock price is likely not as a high as it was a month ago.  However, it may still be higher than the price at which the shares vested.  It is important to know what price you feel comfortable selling shares at from both a worst case and best case scenario.  If you hold 10,000 shares of your company stock and it’s current price is $20, ask yourself at what lower price would I be ok with selling at? Is it at $15 per share or $10 per share? Ask yourself at what higher price would I want to sell my shares at? When the stock reaches $30 or $40? You must realize that the shares may never hit this price.  

You may have vested RSUs in a newly publicly traded company.  If you have vested RSUs in a company like Zoom (ZM) that went public at $36 per share in 2019 and now the price is upwards of $124, you need to ask yourself how high or low do I think the stock will go and at what price (set a floor and ceiling price) would I want to sell.  If you have vested RSUs in a company such as Uber (UBER) or Lyft (LYFT), ask yourself what the true upside in holding the stock long term is and what price do I think the stock will rise to.

In order to help with analyzing best and worst case scenarios we recommend working with a fee-only financial planner that has access to estimates on the company’s projected financials.  We recommend consulting with an unbiased person(s) not associated with your company.

Review your concentration in your employer stock.

RSUs and other forms of stock compensation can increase your wealth drastically.  At the same time, as you obtain RSUs and other forms of compensation via company stock, your net worth becomes increasingly tied to your employer.  Before you know it, your net worth may consist of 70-90% of your company stock.  For reference, we never recommend that your company stock or any single investment represent more than 10% of your overall net worth.  Your net worth is represented by your total assets less your liabilities.  So do the math and figure out how much of your net worth is associated with your company.  Not only is your investment portfolio consisting of employer stock, your paycheck is as well.  Diversification, in all aspects, is essential.  You don’t owe it to your employer to hold vested RSUs for as long as possible.  You need to take care of number one - you and your family.

Financial Planning for Restricted Stock Units (RSUs)

We are Minnesota based CFP® professionals and work virtually with clients across the country.  Minnesota is home to over 50 publicly traded companies including Target, 3M, US Bank, Best Buy, Medtronic, Hormel and UnitedHealth.  No matter where you are located, it is critical to have a plan regarding your RSUs, even more so for companies that recently went through an IPO such as Uber, Lyft, Beyond Meat, Zoom, Peloton, Pinterest, Slack and Chewy.  We are here to help you and your unique situation.

Do you need an unbiased second opinion on your RSUs?
Learn more about
our services and schedule a FREE consultation with Natalie, CFP® and Dan, CFP®.

- Dan

Disclaimer:  This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

Dan Slagle
Founder, Fyooz Financial

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