5 Biggest Mistakes Tech Employees Make With Their Restricted Stock Units (RSUs)

Working for a major tech company comes with a lot of benefits, but one of the most common can also be the most confusing – Restricted Stock Units. Back in the old days (pre-2007), up and coming tech businesses would...

Working for a major tech company comes with a lot of benefits, but one of the most common can also be the most confusing – Restricted Stock Units.

Back in the old days (pre-2007), up and coming tech businesses would offer their employees stock options as a way of enticing them to join (since they couldn’t afford to pay more up front). However, these days, many of them are using RSUs instead of options, which can make the process a little more challenging if you don’t understand them.

Today we’re going to help clarify some things so that you don’t make these common mistakes when dealing with your RSUs. The goal is to earn a profit, not put yourself in a financial bind. Here’s what to avoid.

#1 Not Diversifying Your Stocks

When it comes to the stock market, the phrase “don’t put all of your eggs in one basket” is probably the best advice to take. Thus, you have to make sure that you’re diversifying all of your stocks and investments, including those that are given to you by your company.

As soon as your RSUs vest, you should think about selling them. While it’s a good idea to keep some stock in your company, you don’t want to keep too much, even if things are looking up for the future. Most investment analysts would suggest having about 5-10% of your total portfolio in one business, so if it’s more than that, be sure to sell.

Diversifying your stocks is all about building wealth and protecting yourself for the long term. Don’t think that your company will take it personally, either – it’s standard practice, and it’s a smart way to invest. Not doing so could cost you a lot of money in the end.

#2 Not Planning for Taxes

Depending on how your RSUs are set up, your company should be paying the taxes on the earnings you get from them. Because RSUs are considered ordinary income (like your salary and bonus) you have to pay income taxes in the year the RSUs vest.

If your company isn’t paying this for you (usually by taking it out of your paycheck), you have to do so on your own. Thus, it’s always a good idea to understand what they are going to be worth and either paying it out of the earnings directly or saving up the amount from your paycheck so that you can reinvest them immediately without losing anything.

Fortunately, because you are on a vesting schedule, it shouldn’t be too hard to come up with a figure before they go live. Also, even if your company does pay the taxes for you, it’s nice to know how much you will be getting as net profit.

The other thing to remember about taxes is that you have to pay capital gains taxes on stocks if they appreciate in value. Thus, if your RSUs vested at $30 a share and you sell them a year later at $60 a share, you have to pay long-term capital gains taxes on those earnings, which will likely be 15-20%.  If you sell the stocks before the one year mark, you’ll owe short-term capital gains taxes on the additional profit.

If you sell your RSUs immediately upon vesting, you’ll only have to pay income taxes not capital gains.  

#3 Relying on the Money for Expenses and Cash Flow

Because RSUs are vested (meaning that they don’t go live until a particular date), you can’t do anything with them until that happens. As such, you never want to assume that you’ll be making consistent income with your RSUs. Instead, treat them like a yearly or quarterly bonus (depending on your vesting schedule), and don’t rely on them for expenses.

The reason we say this is that you never know what the market is going to look like when they vest. You could be looking at a fat paycheck, or they could have lost value, making them much less viable for you. In either case, treat all RSUs (and stocks in general) as extra money, not part of your monthly budget.

#4 Not Understanding Them Fully

If you’re not familiar with stocks and how they work, now is the time to familiarize yourself with all of the ins and outs of this process before your RSUs vest. Here are some basics to help you get started.

RSUs are not stocks – instead, they are a promise of stock made by the company to you. For example, you may get 1000 RSUs as a signing bonus, but that doesn’t mean you can do anything with them. There is a vesting schedule (when they go live), and most companies spread it out over a few years. You may get 450 after year one, then 250 on year two, and so on.

You don’t have to exercise them – stock options are still given out to employees, and they operate much differently than RSUs. You have the option of buying (exercising) the stock at a particular price. With RSUs, once they vest, they’re yours no matter what.

#5 Leaving Before They Vest

Finally, if you leave the company before the RSUs vest, then you lose them all. Make sure that you understand your vesting schedule beforehand so that you can determine if it’s worth it to stick around for more RSUs or if leaving is financially viable.

Bottom Line

When talking about RSUs, make sure that you discuss your options with your employer. Also, be sure that you take the time to learn as much as you can about any particulars regarding them or other parts of the stock market. Don’t get caught in a bad situation just because you assumed something or didn’t realize how they worked.