A Primer on RSUs
And why you should sell them immediately
This blog only exists because I’ve become tired of explaining to everyone how RSUs work, and why selling them as soon as you can is almost always the financially correct decision.
This is going to be a lot faster paced than usual — you have been warned.
What are RSUs?
RSUs stand for Restricted Stock Units. If you work at a publicly listed company, your compensation probably includes them. In fact, if you’re at any big tech firm, RSUs likely make up a massive chunk of your pay.
But what exactly are they? RSUs are simply shares of company stock that you receive on a predetermined schedule. The reason they are “restricted” is that you cannot sell them before they vest (that is, when your company officially transfers ownership of the stock from themselves to you).
An example helps: say you work at Google and your compensation includes 1 share of Google (GOOG) every year. This means that every year, on a specific date, you get 1 actual share of Google. Once you receive that share, the “R” of RSUs vanishes.
These are now your shares. It’s exactly as if you bought them with your own money (more on this later). You can either sell them or hold them.
Why do you get RSUs?
The reason you get RSUs is pretty simple: it gives you a piece of ownership in your company. If your company does great, the value of your stock rises and you reap the benefits.
Think of it this way: your company promised to give you a specific unit of stock. If the stock price rises between that promise and the actual vesting date, you end up getting a lot more value than you initially expected.
RSUs really can be a win-win for everyone. Think of the Nvidia employees who became millionaires overnight — it wasn’t that Nvidia suddenly increased their monthly base salary. Far from it. The only reason they were able to benefit from that exponential growth is that they had unvested RSUs which ballooned to infinity.
Obviously, there’s a flip side. If your company does badly, or if the market perceives it to be doing badly, the stock price tanks and the value of your RSUs drops precipitously.
A cash bonus in disguise
The problem here is that most people do absolutely nothing when their RSUs vest. They think of them as a long-term investment and let them sit for years — hoping the value will rise.
But ask yourself this: if your company didn’t give you RSUs but instead paid you the exact cash equivalent, would you immediately use all of that money to purchase your company’s stock?
For most people, the answer is a definitive no.
Yet, that is exactly how you should think about RSUs. They are part of your compensation. They should be treated — for all intents and purposes — as a cash bonus.
There is literally no difference between your company giving you $1,000 worth of its stock versus giving you $1,000 in cash that you then use to buy the stock. If you wouldn’t buy your company’s stock today with a cash bonus, you shouldn’t hold on to your RSUs either.
But that’s not how most people operate. They hold on to them — not because they’ve done the research and concluded it’s a stellar investment, but because of a cognitive bias called the Endowment effect.
This is how Wikipedia defines it:
[It] is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it.
I offer an even simpler explanation: people are lazy. Just as they wouldn’t go out of their way to buy the stock if offered cash, they won’t go out of their way to sell the stock if they are given it automatically. Status quo bias is a real thing, and it’s the primary reason most people hoard their RSUs.
“But what about NVIDIA?!!!”
Yes, Nvidia stock grew exponentially. Yes, their employees got incredibly rich.
But ask yourself: if you were truly that bullish on Nvidia, why didn’t you buy Nvidia stock yourself? You need not be an employee of Nvidia to make that investment decision.
Hindsight is always 20/20.
Or look at an even better example: let’s say you switch jobs tomorrow and start working at Amazon. Would you hold on to your new Amazon RSUs? Shouldn’t you sell them immediately to buy Nvidia stock instead (since that’s essentially what you were choosing to do previously)?
If the stock you choose to invest in changes the exact minute you switch jobs, you are either overestimating your personal impact on the company’s stock price, or you never had a solid thesis for investing in that company in the first place.
Besides, even if you sell your RSUs on the day they vest, you are still heavily invested in your company’s future success through your unvested RSUs. This isn’t an all-or-nothing situation.
Selling your vested RSUs simply gives you the freedom to make an intentional decision about your hard-earned money — whether that means investing in bonds, index funds, or even Nvidia stock if you really want to. But at least you are making a choice.
“BUT I REALLY BELIEVE IN MY COMPANY”
Great! Now ask yourself, is your belief in your company based on a solid investment thesis, or is it based on the fact that you work there? Do you have access to information that the public doesn’t?
If not, your belief is probably based on a cognitive bias called the IKEA effect. Simply put, the IKEA effect is the tendency for people to place a disproportionately high value on things they partially created.
I know this might come across as incredibly cynical, but the fact that you work at a company does not automatically make you an expert on its stock.
Having said all of that, if you still truly believe in your company, go ahead. Hold on to your RSUs and perhaps even buy more stock with your cash bonus.
“But I don’t want to pay taxes”
You have already paid them.
As I mentioned earlier, there is literally no difference between your company giving you $1,000 worth of stock versus giving you $1,000 in cash. In both cases, the government treats that $1,000 as ordinary salary income. When your RSUs vest, your company automatically handles this by withholding a chunk of your shares(called “sell-to-cover”) to pay the income tax on your behalf.
Selling the remaining shares immediately ensures that you don’t pay a single cent in additional taxes. There is no capital gains because there was nothing to gain — you sold the shares immediately after they vested.
If you hold onto the shares and the stock price rises, you will owe capital gains tax on the profit when you eventually sell.
Worse yet, if you hold and the stock price crashes, you face a brutal double-whammy: you will have already paid hefty income taxes based on the peak value at vest, but you’ll be left holding an asset worth a fraction of that amount. While you do get a capital loss to offset other investments, you can never use that loss to get a refund on the salary income tax you already paid.
Long story short: RSUs are income. Treat them as such.
Conclusion
They say you should never put all your eggs in one basket. By holding on to your RSUs, you are doing exactly that.
Not only is your primary stream of income tied to your company, but your investment portfolio is too. If your company goes through a rough patch, you lose twice — once in your career (in the form of layoffs, frozen pay, or reduced bonuses) and once in your net worth.
Instead, break the cycle and sell your RSUs as soon as they vest. Future you will thank you