If you ask the question “Should I sell my restricted stock units (RSU’s)?” the most common answer you will get is “Yes, of course.” And in most cases, it would be the right answer.
However, the follow-up question is “When should I do this?” and to answer that, there are certain strategies that you should keep in mind before you make the decision.
Before we get into that, it’s good to know a bit more about these instruments, if you aren’t too sure about the facts.
What Are Restricted Stock Units?
If you have funded a start-up company, or the company you work for has asked you to participate in an employee stock benefit plan, or you have purchased stock in a private placement, you would have received RSU’s. They could also be part of a compensation package offered to employees.
Restricted stock units are stocks that give the holder rights to a present/future payment, benefit or asset, deferred over a specified time or fulfillment of certain conditions. This is known as “vesting” and the value of the asset/benefit can only be accrued on achieving the milestones specified by the entity that grants them. Vesting schedules may be time based where they remain restricted for a certain specified period of time.
They may also be milestone or performance based, where the employer specifies the milestones or performance markers that must be achieved to release the restrictions. Some RSU’s combine both time and milestone restrictions and may be termed “hybrid” type. Want to learn more about restricted stock units? Then visit here.
The term “restricted” means that while employees may hold RSU’s, the stocks don’t have a real value until the vesting period and distribution schedule conditions are met.
When vesting is complete, the stocks are valued at market rates, and considered to be income. A portion of the RSU’s are withheld by the employer/granter to pay the income tax and the rest are available to either keep or sell according to the wishes of the stockholder.
RSU’s never lose their value unlike normal stock options and warrants, even if the company’s stock prices fall.
The advantages of RSU’s include:
● They are an incentive to promote company loyalty
● They encourage better performance
● Administration costs are very low for employers in tracking and recording
● They allow companies to delay issuing shares due to the vesting period conditions, preventing share dilution
● Holding on to RSU’s till full allocation/vesting can get capital gains minus income tax liability deductions (provided the company’s stock values have gained)
On the flip side:
● No divided payments are available till they’re converted to stocks
● You don’t gain voting rights till actual shares are allocated
● Employees may be forced to remain with the company if they want their full allocations
● They’re not available for financial assistance in an emergency
● They will affect your taxable income on vesting and could bump you into the next tax bracket if you’re on the borderline now
Selling Restricted Stock Units
Before you can actually sell your RSU’s there are certain mandatory steps to be followed. However, in all other ways, selling them is similar to the buying and selling on the regular stock market. Selling RSU’s is generally not a problem, because companies that offer them are publicly traded stocks. Your company may also have a regular tie-up with a well-established brokerage firm that can assist you with the formalities.
The sale of RSU’s by the seller (the company’s officers in this instance) is governed by the Securities and Exchange Commission (SEC) rules, Section 144. All other sellers only have to comply with the vesting period.
From the date that the shares are fully vested, you will have to hold them for at least six months and this period usually extends to a full year in companies that fall under the SEC Act of 1934.
The company must also have fulfilled reporting obligations and provided status reports about its financial and other aspects regularly. Otherwise the RSU’s issued by it cannot be transacted and you cannot sell your units.
There are restrictions on the amount of stock that can be sold within three-month periods. The stock legend must be removed so that the stocks are freed for trading.
The SEC requires filing of certain notices for selling of more than 5000 shares.
When Should You Sell Your RSU’s?
Typically, financial advisors recommend that you sell your RSU’s as soon as they vest. The amount you receive can become a part of a better-diversified investment portfolio. If your net worth consists of more than 10% of your company’s shares, it could be an investment risk. That is why it’s important to diversify your investment portfolio as much as possible as soon as you can.
RSU’s attract capital gains tax only if you hold on to the stocks beyond the vesting date and it appreciates in value when it comes up for sale. The profit you make is taxed. This is the main reason why many people prefer to sell their RSU’s immediately upon vesting.
However, in real terms, if you have a greater appetite for financial risk you could hold on to them for a longer time. Another reason to hold on to RSU’s is if you have a strong faith and belief in the company, its future and potential growth trajectory.
If the RSU’s are not a big part of your financial wealth or portfolio, you can decide to defer the sale for a certain period after the stocks have vested.
You can plan to sell in batches after the vesting schedule is completed, based on your short, medium and long term financial goals. Many companies offer graded vesting schedules with specified intervals between vesting dates.
Work with your financial advisor to evaluate the tax impact of selling the RSU’s.
If your company is undergoing major changes such as IPO, there may be lock-in periods on sales of all stocks, even if your vesting period is complete.
From both legal and tax viewpoints, selling RSU’s could be a complex process. It’s important to consult a legal-financial expert to get the right advice on when and how to monetize your RSU’s. This will keep you on the right side of the law and also ensure compliance with tax regulations and minimize your liabilities.