Liberating Restricted Stock Units: The RSU Conundrum
We often have clients who come to us with a significant amount of vested and/or unvested company stock they received as part of their compensation package or those who will be receiving substantial amounts over their career. They all have the same question: “What to do with my RSUs?”
Before evaluating the various options available, it’s best to start with the basics – what are RSUs?
Restricted Stock Units are company shares granted as part of a compensation package. When granted, they are unvested (your employer still owns the shares, but they’ve been allocated to you if you meet the criteria laid out). Over a period of time, which varies between companies, they become vested (transfer of ownership from employer to you).
RSUs can be issued by private and public companies. This article focuses on RSUs issued by publicly quoted companies issuing tradeable shares.
Back to the question: “What to do with my RSUs?” The simple answer is to follow your Financial Plan. Always follow your Financial Plan.
Answering the question in your Financial Plan is a bit more complicated. What to do will depend on your personal circumstances and financial goals and often puts you in one of two groups:
- You have accumulated a lot of vested stock with a significant amount of unrealized gain and continue to receive RSUs
- You are on the front-end of RSUs vesting
Each group will typically require a different strategy on how to approach their RSUs. Tanager encourages clients to think about RSUs like a cash bonus – would you invest 100% of your bonus in your company’s stock if you received cash instead of stock? The answer is probably “No”!
Group 1 – I have a lot of vested RSUs with significant gains
There are a few critical questions for the Group 1 to answer:
- How big is the unrealized gain?
- What is the gain in both USD and GBP terms?
- Do you already have a diversified portfolio outside of the vested stock?
- Did you accumulate the stock because you didn’t know how to diversify or feel comfortable self-directing an investment portfolio?
- What are your financial goals? For example:
- are you retiring soon?
- trying to fund children’s future education?
- buying a new or second home?
- are you planning to make gifts to family or charities?
Answering the above will provide some clarity. Assuming you feel uncomfortable with a significant amount of company stock (providing concentration risk in investment terms) and you do not need the funds immediately, Group 1’s diversification strategy is more complicated.
Selling all your company stock may result in a large gain and resulting high Capital Gains Tax (CGT) charge. Given the interaction between US and UK tax it is often best to sell down concentrated stock positions over a period of tax years. Whilst you retain some of the concentrated stock it makes sense to utilize a completion strategy and include the holding in your household asset allocation in the interim, reducing it as a percentage of your portfolio over a period of time.
Such a strategy will also need to include an understanding of your overall liquidity, mid to long-term financial goals, CGT tolerance, and general risk profile and tolerance of loss. It can often be several tax years before you’re fully divested and invested in accordance with your ideal risk level and desired asset allocation.
Group 2 – I have no vested RSUs, but my RSUs will soon begin to vest
This group benefits from planning pre-RSU vests. The biggest question for this group to answer is:
- If this was a cash bonus, would I invest everything into my employer’s stock every year?
If the answer to the above is no, then the focus should be on immediately selling the vested stock and adhering to your Financial Plan rather than worrying too much about any CGT that may occur through the sale.
The more significant issue for Group 2 is ensuring a diversification strategy is followed, and how much, if any, company stock should be part of your overall asset allocation.
How can I divest appropriately?
The answer to this question varies on your company and your position. Many companies allow you to enroll in auto-sale allowing the stock to be automatically sold upon vest. If not, you will need to manually sell immediately or when your company’s trade window is open.
Suppose you are a director or higher-level executive of a public company and can access material nonpublic information (MNPI). In that case, you may have to utilize a 10b5-1 Plan or a Stock Trading Plan (a topic for another day) to sell regularly vested shares at target prices.
Naturally, your specific approach will depend on your unique set of circumstances. In our opinion the most important thing is to have a Financial Plan in place built around your specific goals and objectives that lays out your strategy for investing your household’s hard earned assets. There are no one size fits all solutions especially when factoring in US and UK tax, planning and investment complexities.
Tanager Wealth Management has developed specific expertise in advising American employees of global firms on how to manage their RSUs. Please do contact our financial advisors for a no obligation conversation to discuss.