So you were awarded restricted stock units — aka RSUs — in your company. Congratulations! Now that you’ve got them, you might be wondering what that even means — what they are, why they’re important, how they might impact your long-term plan for building wealth. But stress not! Here’s what you need to know about this new dimension of your professional future.

What is an RSU?

RSUs, or restricted stock units, are a type of equity compensation that many public and private companies offer their employees. Essentially, they’re a promise from your employer that you will receive shares of company stock in the future. They can be service-based, meaning you’ll receive them after a certain period of time with the company, or performance-based, meaning you’ll receive them once specific conditions or goals are met, or both. RSUs are offered as part of an employment compensation package, as incentive, but also to offer you a concrete stake in your company’s future — as a shareholder, rather than just an employee.

Why are RSUs important?

Equity compensation is complicated and can get very confusing. With a zillion acronyms — ISOs, NSOs, SARs, RSAs, RSUs — there’s a reason people call it “equity alphabet soup.” But today, it also comprises more than 30% of the average employee’s net worth. Equity compensation is also becoming more and more important to prospective employees in the decision-making process.

The Ellevest Private Wealth team wants to help you feel comfortable negotiating this arena, so you know how you might be able to use that alphabet soup to help grow and diversify your wealth over time.

I got an RSU grant. What do I need to know about the grant?

When you get an RSU grant, you’ll typically receive a full set of reward documents. These will include:

• A grant date: The day RSUs are offered
• A vesting date: The date RSUs will be delivered — this will be an important date for tax purposes
• The quantity or amount of RSUs granted
• Vesting requirements: What the company requires before the RSUs can be granted (this is that “time-based, performance-based, or both” part)
• An expiration date: The date your RSU agreement expires
• A distribution schedule: When actual payments will be made to you (your company will have a plan for this)
• Distribution / settlement details: These identify whether your grant, when vested, is stock-settled (most common) or cash-settled
• Any special or additional rules set forth by your employer in case of employee departure, disability, or death

What if I was awarded RSAs, not RSUs?

Both restricted stock units (RSUs) and restricted stock awards (RSAs) are grants valued in terms of a company’s stock. But there are several important distinctions between RSUs and RSAs:

1. You receive RSA shares on the same day they’re granted. RSUs may be granted at a later date (time-based, performance-based, etc).
2. RSAs immediately grant you shareholder status with voting rights.
3. You purchase RSAs on the grant date at a specified cost: fair market value (FMV), at a discount, or at no cost. (RSUs are not purchased.)
4. You legally own RSA shares from the moment they’re granted, but they may still be subject to restrictions, including a vesting schedule. Vesting requirements for RSAs are usually time-based and only really become relevant when someone’s trying to determine whether the company can buy back an employee’s shares if they leave or are fired.
5. With RSAs, because you’re technically buying stock, you pay no taxes when the award is made. (RSUs, as explained above, are taxed at their fair market value as part of your total income the year they’re delivered.)
6. That said, RSAs are also eligible for 83(b) elections. (RSUs are not.) The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives you the option to pay taxes on the stock’s fair market value the day it’s granted, to avoid paying taxes later, once the shares vest. (If and when you sell RSA shares, they’re still subject to capital gains taxes.) You might take an 83(b) election if you expect the fair market value of the stock to increase over time — in other words, if you expect your company to grow in value. Talk to your tax professional for a plan that’s right for you.

What actually happens when my shares vest?

When, exactly, your shares vest will depend on those vesting requirements: how long you’ve been with the company (time- or service-based), whether certain events happen — a company hits a milestone or you hit personal performance metrics — or a combination of both.

When they vest, your RSUs will be assigned a fair market value, aka what they’re worth that day. At this point, that amount is considered part of your compensation. They will be reported on your W-2 the year the shares are delivered to you, and you’ll pay income taxes on them.

Next, you’ll receive the remaining shares (in the case your company holds back any stock to pay taxes), they’ll show up in your stock account, and you can hold or sell them at your discretion. (One thing to note: Your company may have policies around trading restrictions — blackout periods, trading windows, etc — so familiarize yourself with those before you make any moves.)

Ugh, wait — taxes on RSUs?

Equity is a part of your total compensation, which means that, just like your paycheck, it’s taxable. RSUs are taxed at ordinary income rates; again, just like any paycheck, your company may withhold a portion of your RSUs for income taxes so you don’t have to pay taxes on the shares out of pocket later (this kind of tax withholding is also known as “share surrender”).

Once your RSUs vest, if you choose to sell some (or all) of your shares, you’ll be looking at a capital gains tax on the difference between the fair market value when they vested and the price you sell them for (whether short-term or long-term depends on how long you held the shares).

How much of my stock should I keep? How much should I sell?

Whether you should sell (any or all of) your company stock will depend on a host of factors, including your company trading policy, your tax profile, your cash-flow needs, your view of the stock long-term, and your broader investment portfolio. But, once the stock is vested, if you haven’t sold at least some of your shares, you might find yourself with what’s called a concentrated stock position. This means that a significant chunk of your net worth is tied up in a single company’s equity. At Ellevest, we’d say you have a “concentrated” stock position if you have more than 10% of your total investment portfolio in a single stock or company.

Unfortunately, as we learned in the global financial crisis of 2007–2008, the market can change swiftly. One study from J.P. Morgan found that, since their peak in 1980, 40% of all Russell 3000 companies have lost at least 70% of their value — permanently. That number is even higher among innovative companies in industries like tech and biotech. If your company’s share value drops significantly, and you have a concentrated position, your portfolio would really suffer.

If the idea of reducing your concentrated stock position doesn’t thrill you, you’re not alone. Whether you believe the stock will keep climbing, or you have an emotional attachment to the company (understandable, since you helped build it), or you’d just rather not pay the taxes, plenty of investors feel the same way.

The good news is, there’s a way to be thoughtful about selling. At Ellevest, we help clients do this over the course of multiple years, in a tax-efficient way. For example, a hypothetical client may have losses in other positions that they can sell, and then use the losses to offset gains in the concentrated position. Or we might work with another hypothetical client to create a tax budget — they might be willing to realize around $100,000 in gains each year and then go from there.

If you don’t need the proceeds from a sale, another strategy might be to create a donor-advised fund, which lets you donate stock, get an immediate (typically same-year) tax benefit, and then make grants to charitable organizations from the fund over time.

Know your worth

Navigating the world of equity compensation can be daunting, but it’s important to know as much as possible about any assets you’ve been granted (or have the option to purchase). This compensation can have a significant impact on your long-term planning, when it comes to your portfolio, but also when you’re negotiating for your next job. Equity, whether vested or unvested, represents an increasing share of an employee’s net worth, and your total worth should be involved in every professional conversation.

If you’ve got an RSU or RSA grant and don’t know where to start, it’s time to get your financial team in place. At Ellevest, our Private Wealth team has helped women at companies all over the country navigate positions like this. We’ve been there before, and we can support you as you make your way through it now.

Click here to contact an Ellevest financial advisor in your area.