Restricted Stock Units (RSU)

Restricted Stock Units (RSUs) are a form of compensation frequently offered by companies to their employees, especially those in management or executive roles. RSUs are often used as part of an employee's overall compensation package with salary, bonuses, and other benefits.

Here's how Restricted Stock Units generally work:

  1. Granting RSUs: When a company grants RSUs to an employee, they are essentially promising to give the employee a certain number of shares of company stock at a future date. However, the actual transfer of shares occurs upon the vesting of the RSUs.
  2. Vesting Period: RSUs typically have a vesting period during which the employee must remain with the company to earn the right to the shares. Vesting periods can vary, but they often span several years. For instance, a common vesting schedule might be 25% of the RSUs vesting after the first year, with the remaining 75% vesting incrementally over the following three years.
  3. Cliff Vesting: Some RSU plans have a "cliff" vesting structure, which means that a certain percentage of RSUs vests all at once after a specified period (e.g., 1 year), and then the remaining RSUs vest incrementally over the subsequent periods.
  4. Share Delivery: Once RSUs vest, the employee is usually entitled to receive the equivalent number of company shares. These shares are typically transferred to the employee's brokerage account, where they can be sold or held.
  5. Tax Implications: RSUs have tax implications that depend on the tax laws and the company's specific RSU plan. In many cases, employees are subject to taxes when the RSUs vest, even if they haven't sold the shares yet. It is essential for employees who receive RSUs to understand their tax obligations.
  6. Stock Price at Vesting: The value of RSUs at the time of vesting depends on the company's stock price on that date. If the stock price has increased since the RSUs were granted, the employee will receive more valuable shares. If the stock price has decreased, the shares will be worth less.

It's important for employees who receive Restricted Stock Units (RSUs) to carefully review their company's RSU plan documentation, understand the vesting schedule, tax implications, and potential risks associated with holding company stock. Before making any decisions related to Restricted Stock Units, you should consult with a CERTIFIED FINANCIAL PLANNER™ professional to understand the tax implications, and make an informed decision which may significantly impact your personal financial situation.

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