Selling Restricted Share Units — A Selling Strategy

Restricted stock units (RSUs) are an equity remuneration granted to employees. The transfer of ownership of the restricted stock units is contingent upon the recipient’s fulfilment of specified requirements.

Restricted stock units can be a valuable tool for companies to attract the right talent and align their interests in the company’s future. For employees, this non-monetary form of compensation/incentive can turn out to be a significant reward. However, employees must carefully understand its tax implications and vesting requirements to form a selling strategy that will benefit them. You’ll understand as you keep reading.

How are RSUs and Stock Options different?

Restricted stock units (RSU) and stock options are the most typical types of equity compensation in the corporate world. However, when accepting equity compensation, you must know the difference, which will determine when and how you can sell them.

The significant difference between the two is how they’re granted. Stock options provide you with the right, but not the obligation, to buy a firm’s shares before a specified date and at a specific price. It is absolutely up to you whether you want to purchase the shares. In contrast, RSUs are granted shares that don’t require you to buy them. If you’ve been given RSUs, you will get the shares automatically after the vesting time for RSUs has expired.

Another major difference between the two is how they’re taxed. Stock options are taxed only when they are exercised or sold. On the other hand, after RSUs have vested, they are treated as income, and a part of the shares must be withheld to cover income tax obligations. The employee is then given the option to sell the remaining shares.

When to sell?

Selling RSUs is different from selling common stocks. You must choose whether to keep or sell the RSUs and the best timing to do so. Therefore, it is best to have an RSU selling strategy for this.

Strategy 1 — Sell 100% when it vests.

The most popular tactic is to sell RSUs immediately once they vest. It’s also the approach that other financial experts recommend the most.

Pros:

• RSUs are fully taxed upon vesting. Selling everything once it vests assure you enough money to pay your taxes.
• You can put all the money to use, be it paying debts, buying a new house, investing, etc.
• It will lower the danger of holding an excessive amount of company shares.

Cons:

• You may miss on gains if your company outperforms the market.
• This strategy needs the plan to use the proceeds efficiently.

Strategy 2 — Sell 80%, retain 20%

Save 20% and sell the rest of the RSUs. The 80–20 rule can be an excellent thumb rule for selling RSUs.

Pros:

• 80% can help you cover taxes and put the money to use somewhere else, while 20% protects your stake in the business to benefit if the company outperforms.

Cons:

• If you often get grants from an employer, you might be at risk of investing too much in one business.

Strategy 3 — Sell 50% or less, retain 50% or more

You can sell half of the RSUs or just enough to cover taxes. One should think long and hard about whether or not it is in their best interest to leave fifty per cent or more of their vested RSUs on the table.

This RSU selling method is easy, risky, and has great profit potential. Nevertheless, this tactic is only viable if the number of RSUs you’re getting is negligibly small compared to the size of your entire balance sheet.

Pros:

• You’re in a place to gain a lot if the company stock does well.

Cons:

• The danger of being unduly vested in a single business increases if you only sell half or less.
• There will be less money available for you to use in other areas.

Strategy 4 — Don’t sell at vesting.

Most employers prefer that you sell at least sufficient RSUs to pay your taxes. Since you’ll need to find another means to pay the tax payment on your vesting RSUs, it may not even be a good idea not to sell any RSUs at vest.

Pros:

• All in with your company, which can reap significant profits if it does well.

Cons:

• Your portfolio will be severely affected if the company doesn’t do well.
• Find some way to pay withheld taxes on vested RSUs.
• You can’t use any of this money towards other things.

What do we suggest?

We reviewed all four strategies to sell RSU and provided enough pros and cons to help you understand what may fit your situation. However, the two strategies we prefer the most are strategies #1 and #2. Due to the unique and individualized nature of your equity pay, Insiders and employees who own RSUs need a selling strategy for these awards that is similarly individualized.

Use Eqvista’s helpful tools to follow the value of the firm’s shares while getting a list of all the different kinds of shares the business has issued. We simplify various tasks, including managing cap tables, tracking share issuance, and doing financial analysis. Want to know more about how we can assist? Call us right away!