Do you work for a public company? Your RSUs are probably worth waaaay less when they vest nowadays than you thought they would be just six months ago.
And more relevant to this particular blog post: worth less than when you were granted those RSUs.
A friend of mine who works for Google pointed out an aspect of RSU behavior that I’d never thought of before. He said (technically, wrote):
I feel like for me there is a mental anchoring on grant vs. vest price for some reason. The desire to not go net negative. Even though that’s sort of illogical. [emphasis added]
Thank you, smart and self-aware friend!
And lest I be too one-sided because everything is doom and gloom nowadays: sometimes RSUs vest at a price way higher than the grant price. Then vesting day is a very very very nice day, indeed. It’s just that right now we’re experiencing the opposite, and vesting day is very very sad.
That RSU Money (at Grant) Was Never Yours.
I’m here to say something that perhaps the last few months have made painfully clear to you:
The price at grant is almost meaningless.
It’s meaningful in that it influences the number of RSUs you’ll be granted. If your company wants to give you $100k worth of RSUs and the stock is worth $200, they’ll grant you 500 RSUs.
If the stock is worth $100, they’ll have to grant you 1000 RSUs. (Which by the way, is a silver lining of a tanking stock price: the number of RSUs you’re granted will likely go up.)
But the dollars you’ll actually get depends on two things:
- the number of RSUs vesting (which you know), and
- the price of the stock (which you can’t)
Well…you see my point. I hope.
Maybe now, going forward, we can all be Much Clearer about what money is yours when you have a job, what money isn’t:
- A salary is yours.
- A bonus…well, that depends on how it’s structured.
- RSU income? Nope.
A client recently told me about a new job offer she received. The company offered her “total comp of $500k yearly,” with this detail: $230k base, and $270k worth of RSUs vesting each year for 4 years.
I appreciate that she broke it out between “base” and “RSUs,” because her total comp absolutely is not $500k per year. It’s $230k plus whatever her RSUs happen to be worth at the time of vest. Maybe that’s more than $270k. Maybe it’s less.
One nice thing about RSUs (as opposed to stock options) is that, as long as the company doesn’t go bankrupt, they’re always worth something. And some money (which is what you’ll get from RSUs) is better than no money (which is what you should depend on from RSUs), when your RSUs vest.
How, Then, Should You Plan with Your RSU Money?
When you’re at a private company, I’m sure you’ve heard the rule that you should assume your stock compensation is worth nothing until you can actually sell it (through a tender offer, secondary market, IPO, etc.).
Well, the advice is not quite that extreme in a public company, but it rhymes. It’s reasonable to assume your stock compensation will be worth something, but assuming it’ll be worth a particular dollar amount is not helpful and possibly sets you up for big disappointment.
That’s why with RSUs,
it’s smart to fit your ongoing living expenses into your (predictable) salary and use (unpredictable) RSU income only to fund one-time expenses or to leapfrog closer to a goal.
Maybe you want to use your RSU money (after paying the full tax liability on it, not just the 22% your company probably withholds for federal taxes) to take a great vacation! To remodel your kitchen!
Or set it aside as savings to leapfrog closer to financial independence! A home downpayment! Paying off a debt!
Do not use your RSU income to buy a bigger home than your salary can make the monthly payments for, or to permanently ratchet up your living expenses that your salary can’t cover.
Regardless of the Price, Should You Hold Your RSUs?
The perennial question for RSUs, regardless of anything else going on, is: Should I hold or sell them when they vest?
The logical framework for making this decision simply does. not. change. when the stock price changes.
If you get a $40k RSU vest, it’s like getting a $40k cash bonus. Would you go right out and use a $40k cash bonus to buy company stock? If not, then you should sell your RSUs. It is logically, financially, and tax-ically the same.
Now imagine your company stock prices drops by 75%. Now those saaaaame RSUs are worth $10k when they vest, whereas just a few months ago they were worth $40k. It is still the case that this is the same as getting a $10k cash bonus and going out and buying $10k worth of company stock. If you wouldn’t do that with a cash bonus, then you need to sell the RSUs.
You could think of this as just a great example of Expectations vs. Reality. Your grant price = Expectations. Your vest price = Reality.
- If Reality (vest price) > Expectations (grant price), Joy!
- If Reality (vest price) < Expectation (grant price), Sadness.
Can we relinquish our expectations a bit and be happier for it?
Have you realized that the way you’re treating your RSU income is no longer working for you? Reach out and schedule a free consultation or send us an email.
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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.