I was reading a post over on Bogleheads the other day about someone who had just received their first set of golden handcuffs in the form of Restricted Stock Units, or RSU’s for short.
In that post people were discussing the pros and cons to selling them as they vested. I have RSU’s from my company, so this is always a topic I’m interested in. So if your company puts you in golden handcuffs through the form of a bunch of RSU, what should you do? Should you sell immediately as they vest or hang onto them for the long haul?
What Are Restricted Stock Units, And Should You Sell As Vested Or Keep Them?
Full disclosure – I sell immediately as they vest. Stay tuned for my reasons!
Wait, what are Restricted Stock Units anyway?
If you already know the answer to this question, scroll down to the next section for the pros and cons. But if you’re scratching your head, I’ll give you a brief explanation and some resources to learn more. Essentially they’re stock that your company gives you as part of your compensation, but you don’t own it yet.
You also can’t sell it immediately. The stock will vest, or be available to you, over a period of time defined by your company. The purpose of RSU’s is to give you a stake in the overall performance of your company, and also acts as a way of retaining good employees. Usually it will be three, five, or more years until you can sell all the stock granted to you. Sometimes it vests over time (say, 1/5 the amount every year for 5 years) and sometimes it vests all at once (100% after 3 years, for example).
Sometimes as a condition of receiving RSU’s you need to sign a certain agreement with your company, where you may sign away certain rights or pledge not to do something (like take off for a direct competitor). Check out this article on Investopedia to learn more.
So after these stock units vest you can technically do whatever you want with them. Keep them, sell them, donate them – they’re all yours. Or are they? Check out the arguments for keeping RSU’s below for a time when the decision may not be your own.
Arguments for Keeping RSU’s
Some people passionately believe that even after their stock units vest, they should hang on to them. Usually the “pros” to keeping them include:
- Earning more. If I don’t sell them, the stock will continue to go up and I’ll eventually have even more money than if I sell them today!
- Losing Less. The stock has gone down and it will eventually go back up – I need to keep them until they make me money/don’t lose money/the price goes back to where it used to be
- Big Brother is Watching. My company frowns upon people who sell their stock. They’re seen as “not loyal” to the company. So I need to keep them after they vest
So those are the arguments for keeping RSU’s after they vest. What about the argument against doing so?
Arguments for Selling RSU’s
If you do a quick search on “keeping RSU’s after they vest” you’ll find a multitude of articles telling you not to do that – like this one from Wealthfront, this one from CNBC, and this from the Finance Buff. What are the arguments for selling your RSU’s as they vest?
- The stock might not go up. It may go down, or your company may go bankrupt-making all stock worthless (see: Kodak, Enron, Worldcom, Lehman Brothers et. all). By selling as soon as they vest you remove the risk of tying more of your financial future to one companies well-being
- You didn’t lose anything. Lets say the stock was at $100 per share when you received the stock units, but now it’s at $50 per share. You may feel like you “lost” $50 per share and should hold the stock until its $100 again. Well you didn’t actually lose anything-you didn’t pay for the shares in the first place. Don’t count on it coming back up. My old company had stock that was at $100 per share before the financial crisis and today-8 years later-it’s at less than $50. You may be waiting for a looooong time
- It might not align with your investment strategy or goals. Keeping extra in stock (especially the stock of a single company) increases the risk in your portfolio. Do you have other goals, like paying off your mortgage, getting out of debt, saving for your kids college? Better to sell off your RSU’s and deploy that capital where you really want to use it
- It’s taxing. And by taxing I mean that you need to pay the taxes on your RSU’s when they vest, not when you sell them. So you can be hit with a big tax bill on stock units when you didn’t see a dime in your checkbook. Your company may pay the taxes automatically, but it may be up to you.
So, what side are you on?
You can probably already tell from the above lists, but I’m firmly in the “sell as soon as they vest” camp. Heck, I don’t even have company stock in my 401k because I don’t want the risk of tying my financial future to the health of a single company.
I know that 88% of companies in the Fortune 500 from 1955 don’t exist anymore. The world changes fast, some companies don’t change with it, and they go under-or their stock performance drags. I have other goals that I’d prefer to put my funds towards, like paying off my mortgage in 5 years and sending my kids to college. So I sell and deploy those funds elsewhere.
I’m confident my company will continue to do well, but prefer to hedge my bets by not tying a large portion of my net worth and my entire income in one place. This strategy has cost me money over the years, yes, but it works for me.
What pros – or cons – did I miss above? Do you get RSU’s and what do you do with them? Let me know in the comments.
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