RSU Planning/Strategy
Having/creating a plan for your RSUs improves your decision making
Developing a Strategic Plan For Your RSUs
Like most things in life, having a well thought out plan for your RSUs helps ensure you consider all (or at least the most important) factors, make better decisions, and minimize regret. You plan is unique -- to you, to your financial resources/needs/goals, to your company dynamics, and more. But the process to create a plan is generally somewhat straight forward:
Create a financial plan (if not done already). This gives you a well-considered "roadmap" for your financial life and goals. Your stock-comp can/may play an important role in this (depending on your situation), but your stock comp is an input to your financial plan (not vice versa)
Consider how your RSUs tie into/impact your financial plan. What is the current and potential future value of your RSUs, what are your financial resources and goals, and how can the value of your RSUs help you achieve your goals?
What are the key decisions you need to make?
Do you need to make any choices Pre-IPO (e.g. single-trigger RSUs with the option of net or cash settlement)? And if you have choices, what are the the investment considerations and tax consequences of the decision?
How can/should you handle your RSUs during a liquidity event (if you have choices)?
Post-IPO, what is your plan for vesting RSUs?
How Do Your RSUs Tie Into/Impact Your Financial Plan?
The value of your RSUs may be a tiny fraction of your overall net worth, or a larger percentage. The former would obviously impact your financial plan a lot less than the latter -> but tying your RSUs to your financial plan and goals should be the first step in your decisioning.
How to specifically "include your RSUs in your financial plan" can vary a bit, but every financial plan should seek to connect your life goals and your finances, taking stock of where you are today (i.e. financial resources and situation) and where you want to go (i.e. financial and life goals). Breaking that down:
(1) What is your current financial situation ("where are you today")
Understanding your current assets/liabilities and income/expense/savings rates are critical inputs for making decisions regarding your RSUs. Every situation is different, but generally:
The larger your net worth is relative to the value of your RSUs -> the more risk you can "afford" to take (and vice-versa)
The larger your savings rate is relative to the value of your RSUs -> the more risk you can "afford" to take (and vice-versa)
(2) What are your financial and life goals ("where do you want to go")
Connecting your RSUs to your financial goals is likely the most important of these two factors. As RSUs increase in value, they presumably will become a larger percentage of your total net worth. This is a good thing (i.e. your company's value is increasing, creating value for you via your RSUs), but as the number becomes larger, so does your concentration risk.
For example, we've seen situations where an individual desired to take investment risk -> but it wasn't in best service of their financial plan. The alternative (e.g. what most individuals do; selling 100% of RSUs when they vest) reduced their households risk profile and allowed them to achieve a higher portion of their financial goals with greater confidence.
Said another way, your financial plan (and especially your financial/life goals) is your north star. And as such, you first need to consider "what impact would doing X have in helping me achieve my goals, versus doing Y". Every situation is different, and it's hard to make generalized statements for this item. But if doing one thing can materially (or significantly) change your progress towards your life goals and reduce your risk -> you need to strongly consider doing that (or more of that; it's rarely a binary choice), even if the investment and/or tax-optimization signals may suggest the opposite.
You Typically Have One Key Decision to Make With RSUs
With RSUs, there is no exercise decision to make. When the shares vest (single- or double-trigger), it triggers a taxable event and you have now vest/own shares. That leaves you with one key decision to make: when your RSUs vest, do you sell the shares or keep some (or all)?
In most situations, the recommendation is to sell most/all of your RSUs when they vest
Reducing concentration risk and diversification. Most tech companies decline in value post IPO (link to data), so holding your company stock has considerable risk.
You "own" far more company stock that you likely are considering. You presumably have significant RSUs that will vest in the future, and also receive periodic RSUs refreshes. Even though these vest in the future, as long as you are with--and plan to stay with--the company, you implicitly have a very significant investment in the company (and thus significant concentration risk) already via this future vesting. Not selling the RSUs when they vest increases that risk.
No tax benefits to holding RSUs. Believing there are benefits to holding RSUs post-vesting is a common misconception. To be clear, there are NO tax benefits to holding your RSUs after they vest.
There are typically only two exceptions to the above:
(1) If you have single-trigger RSUs at a pre-IPO company. In the uncommon situation where your Pre-IPO company grants single-trigger RSUs, the decision on your path forward may be more complex. In these cases, most companies offer employees a choice between (1) cash settlement (paying the withholding taxes out of pocket), or (2) net settlement (the company "buys" some of your RSUs to cover the withholding taxes). This choice can typically be reframed as "do you want to buy shares of your company at the current FMV". In many situations, due to the amount of exposure you already have to the company, you would answer this as "no" and thus opt for net settlement. But there can be cases where your financial resources, financial plan, risk tolerance, concentration risk, and opinion of the company point you towards a "Yes" -> in which case you may want to opt for cash settlement
(2) If you very strongly believe in the company and have significant financial resources. If your financial resources, financial plan, risk tolerance, concentration risk, and opinion of the company all line up -> then a case can be made for keeping/not selling your RSUs after they vest. This approach is implicitly you deciding "In addition to the investment exposure I already have to the company, I really want more". This is rarely the right choice, but if you have the right financial resources and very strongly believe in the company -- it can make sense.
What would you do with $100,000 if you inherited it today? We encourage many individuals to ponder this question for a few moments. If your answer isn't "invest some in my company's stock" (and in our experience it practically never is) -> then that's a pretty good sign that you should be selling 100% of your RSUs when they vest.
Business and Life Events Also Impact Pros/Cons of Exercising or Selling
Outside of your company stage, business and life events can also have a significant impact on your RSUs. For example, if you leave your company, you get divorced, or your company is acquired -> all can/do have major impacts on your equity compensation. We cover these items in depth on separate pages. For quick access:
Tools to Help You Assess Investment Risk/Reward
We sound like a broken record, but your priority when decisioning should be (1) financial plan impact; (2) investment risk/reward; then (3) tax optimization. Some tools and data to help you assess the investment risk/reward (when you have a choice) are:
A Simple (But Powerful) Way to Value Your Company. Once you've developed some estimates of what you think your company could be worth in various scenarios (and the probability of each scenario), it becomes a key input in helping you frame the risk/reward. Some key data to help you during this process:
Developing Your Divestment/Sale Plan (For Publicly Traded Companies). If your company is publicly traded and you have considerable concentrated holdings in the company, thoughtfully considering the different ways to manage your concentration risk and divest of your holdings is key to minimizing your regret
RSU Taxation & Strategies
How RSU Taxation Works. An overview of how RSU taxation works
RSU Tax Strategies. A guide to different RSU tax strategies that may apply, depending on your situation and plan
Income Tax Strategies. A guide to 9 different income tax strategies that may apply (given RSU vesting triggers income taxes), depending on your situation and plan
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