At most tech companies, Restricted Stock Units (RSUs) are a big part of the overall compensation. Typically a set amount of stock is given over a four year period, and the stock will vest every quarter, sometimes only after the first year. Since it’s not unusual for this stock to amount to six figures over the four year period, it’s worth thinking about the best way to handle it – should you sell it as soon as it vests or keep it as stock?
While a lot of decisions in the financial world are not straightforward, this one is simple for almost everyone: Sell your RSUs as soon as they vest.
Same Risk As Buying the Stock
Most people would agree that buying a large amount of a single stock is riskier than investing in a diversified portfolio such as an index fund. So if you earned $100,000 last year and suddenly announced to your friends that you were investing $25,000 of it in Apple stock, they would probably be surprised at such a bold investment. Of course, there are plenty of more volatile stocks to invest in compared with Apple, but having such a large position tied up in a single company would be foolish, and your friends might try to convince you to at least spread out the $25k into several different stocks, thereby reducing your risk.
What if instead of earning $100k in a year, you instead earned $75k and were given $25k in Apple stock as part of working at Apple. In each case, the compensation is the same – a total of $100k. Yet, why are you a fool for investing the $25k in the first scenario but not the other? The end result is exactly the same – $75k in cash, $25k in Apple stock.
At this point, logically it doesn’t matter where the cash or stock came from, you have the same risk of holding a large portion of your wealth in a single company. In other words, holding a stock that was given to you is exactly the same as purchasing that stock with money that was given to you. If you wouldn’t take the risk of buying that stock today, you also shouldn’t take the risk of holding that stock. So, whenever you received a stock grant worth $x, ask yourself, “Would I buy $x of this stock if someone gave me $x?” If the answer is no, just sell it.
In fact, this is true for any stock that you own. If you wouldn’t buy a stock that you own today, you should sell it and invest elsewhere. You should always make a decision based on the present and predicted future, not on the past. It doesn’t matter if you have lost money on a stock, you are only concerned with whether it will increase in the future, and more importantly, if that is the best place to invest it.
Already over invested
Most people don’t realize they are already over-invested in their employer. Remember that 4 year vesting period of RSUs? It might take 4 years of vesting, but you are invested in it from the beginning. Let’s say that Apple stock was at $100/share when you joined. Your shares are granted based on this starting point, so that by the time you vest another chunk in 3 years, you’ve effectively been investing shares that entire time. It might have gone up to $150/share or down to $50/share by that time, but you receive it based on the grant date, not the vest date. Not much you can do about this of course, since you can’t sell before you vest, but it’s another reason to sell as soon as you do vest to reduce your over exposure to that single stock.
What About Taxes?
Up to this point, we haven’t mentioned anything about taxes. And that’s because the tax situation effectively doesn’t change whether you sell or keep your stock. You will have to pay taxes when you receive the stock, and on the gains of the stock. If you sell right away, there will be essentially no gains. And if you keep the stock, you will pay tax on the gains when you sell – exactly the same taxes that would you pay if you bought the stock and held it. So there are no tax advantages to holding a stock grant.
Just Sell it
I know it can be really tempting to hold onto the stock grant. Since the stock is from your employer, it’s easy to feel a sense of loyalty or confidence in the company. But loyalty to a company is usually not to your advantage. And a company will not be more successful because you happen to be working there. For companies that are large enough to be public with RSU grants, a typical employee is not likely to even have more perspective on the success of the company. Rather, it just becomes overconfidence, which leads to bad decisions such as holding onto stock. Just sell it, you’ll be better off.