About RSUs and Options

Today, it’s not uncommon to jump ship on a regular basis to advance your career. Employers know this, and often, especially in corporate environments, establish inventory programs to put adhesive in employee seats.

The three most common incentives include restricted stock units (RSUs), non-qualified stock options, and employee stock purchase plans (ESPPs). These reward “sweeteners” make employees feel more connected to the company and can contribute to long-term wealth creation. However, many employees participating in the program either do not understand the tax implications or have methodologies for diversifying their stocks.

So before we wrap up our thoughts on the strategy, let’s take a look at two key elements to understand: decentralization and taxes.


For anyone who works for a US company that is a big growth stock on the S&P 500, it’s natural to look back 10 years and ask, “Why did I sell my company stock?!” This subcategory of the market has enjoyed exceptional returns over the past decade, outperforming most other asset classes. Again, why sell something this good?

First, let’s understand that the market will return to “normal” over time. For the decade to 2010, US large-cap stocks were the worst performers of all asset classes. Please understand that your company’s superior performance against its competitors and/or the market’s extraordinary demand for your stock will not last indefinitely.

Alibaba saw the market love the stock, pay a very high price for it, and achieve results that far outperformed its competitor (Amazon). Here’s a recent example where we only saw share price growth. inventory performance. In short, what ever has been is not always the case.

So when should you sell an asset? When is it most desirable (10 years of outperformance followed by high prices) or least desirable (10 years of lagging the market)? Buy low, sell high. So it will never lead the smart investor astray. Rinse off and head to the promised land.


April is a busy and emotional month in our world. After the call with CPA, the questions from our family never changed. A person participating in an equity program can point to three reasons for his consistent underpayment of RSUs, options, and ESPPs.

restricted stock units It is nothing more than a promise to give the employee a certain number of company shares at some point in the future. Given that employees may leave before the shares vest, these values ​​will be zero. Uncle Sam cannot tax shares until employees have full access to sell or carry those shares. As such, the IRS considers vesting to be a taxable event and includes 100% of the fair market value of the vested shares on the date of vesting in ordinary income. Problem: In most cases, 20% federal tax withholding is the maximum, and the taxpayer falls into a tax rate well above his 20%. Result: Withholding. Imagine how the gap between taxes paid and taxes collected will widen as more shares vest at higher valuations each year.

Non-Qualifying Stock Options work differently. There is no taxable event if the right to exercise the option is vested. Taxes will only occur when you exercise. Here’s how it works: Your company makes it possible to buy shares at today’s price (say $1) at some point in the future. That “option” to purchase will vest in one year. Once vested, the shares trade at $2 per share and you do nothing. No income or taxable events. Three years pass and he finally exercises his option when the company trades at $3 a share for him. On that day, you buy ($1) and sell ($3) shares in a single trade. A $2 “spread” is included in your regular earnings. Therefore, exercising (non-vesting) the option causes recurring income to skyrocket. Similarly, a maximum tax withholding of 20% will occur.

Employee stock ownership plan These programs allow employees to purchase company stock at a discounted price from a date in the past (sometimes two years ago). At the time of purchase, there is a difference between the discounted price paid by the employee and the current value of the stock. For example, on the ESPP date he buys shares at $100 per share. This is the price the company traded in two years before him, minus his 15% discount. On the same day, the stock is trading at $300 per share. The difference of $200 per share is considered recurring profit when the shares are later sold. If you have an ESPP purchased For at least 365 days, the profit between the fair market price of the stock when you bought it ($300 in this example) and the selling price is your long-term capital gain. If the holding period is less than his one year, the difference is a short-term capital gain (taxed at the normal income tax rate).


How do you formulate a repeatable and sober strategy with these given variables? Here are some potential strategies:

Sell ​​the RSUs when they vest. Combining cash and taxes is a sensible cash flow plan because they show up as regular income and taxes are withheld. Once granted, it already enjoys up to four years of growth (if the stock price rises). A great opportunity to win and diversify.

Consider holding your options until their expiration date before exercising. As expected, the spread between the strike price and the market value widens as the value of the company’s stock rises. However, there are no taxes along the way (as is the case with RSUs). Don’t violate the 10-year expiration date or the 90-day deadline for exercising. Regarding retirement, there are some unique planning opportunities along that front. Some options may be exercised in the year prior to retirement, although they have not reached Simply to “spread out” the recurring income (and related taxes) over two tax years. Conversely, your income may be zero in your retirement year, so it may be tax-advantageous to exercise all your options in that year.

The ESPP is one of the greatest gifts an employer can offer. why? Can you imagine the profit on an item that was priced two years ago and can be purchased today with a 15% discount? Automatic profit is built in. Advice on these includes waiting a year and a day after purchase, so all gains are inherently long term, resulting in a lower than normal tax rate.

Selling RSUs at vesting, exercising options near year 10 or retirement, and selling ESPPs at year and day 1 are all repeatable, cool and efficient from a tax and diversification perspective. target.

So how do you deal with someone who loves their company and sees no company staying on top compared to all others and suffers from a potentially lost advantage? Do you? Look at math. If left alone, more RSUs will appear, more unexercised options, and more ESPPs to buy again. Consider that what is generally right is better than what is specifically wrong.

This material does not constitute investment advice and does not endorse any particular investment or security. Please remember that all investments involve some degree of risk, including potential loss of principal invested. Indexes and benchmarks are not controlled and cannot be invested directly. Returns represent past performance, are not guarantees of future performance, and do not represent any particular investment. No investment strategy can guarantee profits or prevent losses. This information is not intended as tax advice. Treasurers do not provide tax advice. Please consult a tax professional for tax advice specific to your situation.

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