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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I would say one more reason to sell them ASAP is that you are tying up more of your income in one basket. You get paid from that company in the form of your paycheck as well as having stock in the same company? The last thing you would want is getting laid off because the company is not doing well and have a ton of your money tied up in their stock if the company is heading in the wrong way.
Another thing to think about. You can easily become emotionally tied to the stock since you work there and think that you have “inside information” on the company’s progress and future.
Personally, we try not to have any money tied up in our company’s personal stock and usually recommend others to make sure it is a very small amount. One of my family had this option in their 401k (to invest money into their company stock). She got to participate in the IPO (went well) but then when things changed, the stock took a dive as the company started to reorganize. Luckily, she had only put about 1% into that.
Great article and something more people should definitely pay attention to!
Yes, I agree people often think that because the part of the company they work for is doing well, the company must be doing well. But it’s hard-if not impossible-to know, especially if you’re not an executive. Employees of Enron thought their company was doing great until one day they found out it was all a house of cards. You just never know, and you’re better off protecting yourself by reducing risk and selling those shares.
I don’t have RSU’s but I am definitely a fan of selling them immediately. This way you lock in the “profit” and don’t tie your future to the whims of a single company. I think a lot of the folks at Enron would feel the same way if they had to do it all over again.
Exactly! I’ve seen too many companies go under-and good companies that survived have their stock price never reach 2008 highs. If people didn’t lock in gains as they went along, then they lost out on the money (along with possibly their jobs!)
Great topic! I’ve never owned restricted shares before, but I would also agree with you. You already generate a substantial (if not all) of your income from the company. There’s no reason to put even more risk by holding onto the stock. I feel the same way about stock options and other equity awards too. It’s all part of your compensation package and there’s no reason to put so much of your net worth in one company.
I don’t know if companies have rules regarding this (I know they do for C-Level executives), but I would even consider shorting the stock as soon as I received the RSUs to “lock in the gains”.
So true! I do believe there are different rules for higher level executives, but they can still arrange to sell the shares. They just might need permission to do so, and may have to time the sale so it can’t be based on insider knowledge.
I get RSUs every year and do the sell immediately tact. I’m of the school of thought that you should never invest in the company you work for unless your an owner. Otherwise as others have mentioned you end up with a concentrated risk equal to your income plus the RSU in your employer. In my case unless I’m a named executive my company can’t see I sell the RSU due to privacy laws.
In my case I’m also an insider trader status, so I can only sell in small windows throughout the year. That increases my holding risk further. As such I sell immediately.
You did miss one con. Many of the big brokerage houses record the cost of the RSU as 0 dollars. It can become difficult to look back and find the vesting price for tax purposes years later.
Thanks for the con that I missed! You’re right about that, I always wondered why they don’t report a real cost basis. It seems to me like they should have that information recorded correctly.
I receive both RSUs and Stock Options as part of my equity package. I sell RSUs right away but keep vested stock options over the 10 year period. It’s been an amazing vehicle for accumulating wealth.
I’m squarely in the “sell immediately” camp for the same reasons mentioned above. Keeping them feels like having too many eggs in one basket given that I already rely on the company for my income. Additionally, even though I sell immediately upon vesting, I still have plenty of “skin in the game” in terms of stock price changes via the unvested shares. Assuming I’m still with the company on the next vest date, I will continue to benefit from, or conversely be hurt by, stock price increases/decreases.
Great point! I’ve found the same thing, since stock vests in batches (typically) you have plenty of unvested stock to keep you invested in having the share price of your company increase.