how to value restricted stock units

Broadly speaking, the value of an RSU is a product of the following inputs:

• The stock price at the Valuation Date;
• The expected volatility of the stock price through the vesting period;
• The taxes payable upon vesting;
• The likelihood of the RSUs vesting; and
• The time value of money.

Full Answer

What are restricted share units?

• Stock Value = $20 per share
• RSU Value (when vested) = $20 per share
• Taxable income (when vested): $20 x 1000 = $20,000

How to account for restricted stock units?

• Incentivize employees to stay with the company
• Employees receive capital gain minus value of shares withheld for income taxes
• Minimal administrative costs

What to do when your restricted stock units vest?

They include:

• Your stock may not increase in value sufficiently to reward employees.
• RSUs are not always a sufficient incentive to attract the right talent.
• RSUs are priced at the time their stock becomes vested, and therefore, their ultimate value is unknown at the time the RSU plan is created.

What is the taxation of restricted stock units?

Those plans generally have tax consequences at the date of exercise or sale, whereas restricted stock usually becomes taxable upon the completion of the vesting schedule. For restricted stock plans, the entire amount of the vested stock must be counted as ordinary income in the year of vesting.

How are RSUs distributed?

RSUs are issued through a vesting plan and are distributed after completing a specified number of years of service. Upon vesting, the RSU holder receives shares from the company (or cash equivalents) which are able to be held or sold at their discretion. Kevin is a manager for a publically-traded oil and gas company.

Does an employee pay taxes on an RSU?

The employee receiving an RSU (i.e. the holder) does not incur any taxes when the RSU is initially granted. Instead, RSUs are considered to be income upon vesting, and a portion of the shares (or cash equivalents) may be withheld to pay income taxes.

Is the stock price stable?

Most stock prices are not stable – their price may increase or decrease between the valuation date and the vesting date. Fortunately, CBV’s are able to implement various notional hedging strategies that eliminate the price risk between the valuation date and the vesting date.

Is the stock price at the valuation date a baseline value?

Therefore, the stock price at the Valuation Date may serve as a baseline value for the RSU. Of course, there are other factors that may materially increase or decrease this baseline value. Most stock prices are not stable – their price may increase or decrease between the valuation date and the vesting date.

What is restricted stock unit?

What are restricted stock units? Restricted stock units are a type of compensation in which a company gradually transfers shares to an employee. Depending on the performance of the company, restricted stock units can fluctuate in value. From a company’s perspective, restricted stock units can help employee retention by incentivizing employees ...

Why are restricted stock units important?

From a company’s perspective, restricted stock units can help employee retention by incenti vizing employees to stay with the company long-term. For employees, restricted stock units can help to share in some of the upside associated with a company’s success , occasionally producing very substantial income.

How long do RSUs last?

RSUs are restricted during a vesting period that may last several years , during which time they cannot be sold. Once vested, the RSUs are just like any other shares of company stock. Unlike stock options or warrants which may expire worthless, RSUs will always have some value based on the underlying shares.

What is an RSU in stock?

RSUs give an employee interest in company stock but they have no tangible value until vesting is complete. The restricted stock units are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares is withheld to pay income taxes. The employee receives the remaining shares ...

What is an RSU in a company?

RSUs give an employee an incentive to stay with a company long term and help it perform well so that their shares increase in value. If an employee decides to hold their shares until they receive the full vested allocation, and the company's stock rises, the employee receives the capital gain minus the value of the shares withheld for income taxes and the amount due in capital gains taxes .

How many RSUs does Madeline receive?

Suppose Madeline receives a job offer. Because the company thinks Madeline's skill set is valuable and hopes she remains a long-term employee, it offers her 1,000 RSUs as part of her compensation, in addition to a salary and benefits.

Can an RSU vote before vesting?

RSUs aren't eligible for the Internal Revenue Code (IRC) 83 (b) Election , which allows an employee to pay tax before vesting, as the Internal Revenue Service (IRS) doesn't consider them tangible property. RSUs don't have voting rights until actual shares get issued to an employee at vesting. If an employee leaves before the conclusion ...

What is restricted stock unit?

Restricted stock units (RSU) are a form of stock-based compensation used to reward employees. RSUs will vest at some point in the future and, unlike stock options, will have some value upon vesting unless the underlying company stock becomes worthless. RSUs can be an important part of your client’s compensation package.

What happens to a vested RSU at retirement?

At retirement, any vested RSUs are yours to do with as you wish. If you have unvested RSUs, it will depend on the plan and the company’s policies. If you stand to lose RSUs with significant value, it may pay for you to continue working until the RSUs vest.

What should financial advisors do with RSUs?

Financial advisors working with clients who receive part of their compensation as RSUs should advise their clients regarding the best use of the stock. It is wise to think of the RSUs as a cash bonus; the decision is whether to “buy” company stock or invest it elsewhere to diversify.

Why are RSUs important?

RSUs can be an important component of a client’s overall compensation package. A financial advisor can provide much-needed advice as to how to best handle what is essentially a bonus payment.

Should a client take stock in taxable accounts?

The client should take into account all other shares of company stock held in taxable and retirement accounts. If the employer’s stock is a steady performer, the employee may be tempted to hold the stock—after all, there was no cost to obtain the shares.

Is it risky to hold a concentrated stock?

Any concentrated stock holding is risky, but when it’s your own company’s stock, you run an elevated risk if the company falls on hard times. If an employee loses their job with the company, it may be a result of the value of the stock from the RSUs and any other shares losing significant value.

Do you have voting rights on RSUs?

Holders have no voting rights nor do they receive any dividends paid while they hold the RSUs. Some companies will pay dividend equivalents on the RSUs. Companies can let dividends accrue and use these funds to cover some of the taxes due at vesting.

What is restricted stock unit?

Restricted stock units (RSUs) are a way your employer can grant you company shares. RSUs are nearly always worth something, even if the stock price drops dramatically. RSUs must vest before you can receive the underlying shares. Job termination usually stops vesting.

Why is a grant restricted?

The grant is "restricted" because it is subject to a vesting schedule, which can be based on length of employment or on performance goals, and because it is governed by other limits on transfers or sales that your company can impose. You typically receive the shares after the vesting date.

How are RSUs taxed?

With RSUs, you are taxed when the shares are delivered, which is almost always at vesting. Your taxable income is the market value of the shares at vesting. You have compensation income subject to federal and employment tax (Social Security and Medicare) and any state and local tax. That income is subject to mandatory supplemental wage withholding. Withholding taxes, which for U.S. employees appear on Form W-2 along with the income, include the following: 1 federal income tax at the flat supplemental wage rate, unless your company uses your W-4 rate 2 Social Security (up to the yearly maximum) and Medicare 3 state and local taxes, when applicable

How long does a vesting schedule last?

Example: You are granted 5,000 RSUs. Your graded vesting schedule spans four years, and 25% of the grant vests each year.

Is a RSU worth anything?

Unlike stock options, which can go "underwater" and lose all practical value with a falling stock price, RSUs are almost always worth something, even if the stock price drops dramatically.

Why are RSUs preferred over restricted stock?

First, because no shares are issued until the time for delivery, the use of a mere bookkeeping entry for the units eliminates administrative costs related to holding shares in custody, proxy voting, and canceling outstanding shares if employment ends before vesting. Second, RSUs eliminate the possibility that you might unwisely choose to make the Section 83 (b) election for restricted stock, which is not available for RSUs. Also, depending on the structure of the RSU plan, the company avoids paying cash dividends during the vesting period (see a related FAQ ).

Why are RSUs considered stock grants?

RSUs are considered a "full value" stock grant because the grant is worth the full value of the shares at the time of vesting. Therefore, unlike stock options, RSUs can never be underwater and will always result in some income for you, unless somehow the stock price drops to $0. (For more comparisons of restricted stock/RSUs to stock options, ...

Can a company use RSUs for tax purposes?

Until companies started to use restricted stock and RSUs for broad-based grants (often instead of or in combination with stock options), RSUs were mostly used internationally for tax purposes. Now, however, companies widely use RSUs in the United States as well.

Do RSUs have voting rights?

Consequently, unlike recipients of restricted stock, holders of RSUs have no shareholder voting rights and do not receive any dividends that the company may pay to its shareholders. However, when a company pays dividends on outstanding shares of stock, it can choose to also pay dividend equivalents on RSUs.

Do restricted stock vestings expire?

As long as you continue to work at your company, you will not forfeit your grant, and it will not expire. The principal traits of restricted stock include the following: At grant, restrictions on sale and the risk of forfeiture exist until you meet vesting goals of employment length or performance targets, or the vesting accelerates upon ...

Is restricted stock a sibling?

While restricted stock and RSUs are siblings, they differ in a few important ways that can affect your financial planning. The best starting point is a brief overview of restricted stock and a comparison of the differences.

Can RSUs be cancelled?

Moreover, the RSUs can be easily canceled if your performance-vesting goal is not met. For overseas employees, RSUs prevent hassles in countries where restricted stock is taxed at grant and the taxation may not be delayed until vesting. (See the Global Tax Guide for the tax treatment of RSUs in many different countries.)

What is restricted stock unit?

A Restricted Stock Unit is a grant valued in terms of company stock, but company stock is not issued at the time of the grant. After the recipient of a unit satisfies the vesting requirement, the company distributes shares, or the cash equivalent of the number of shares used to value the unit. Depending on plan rules, the participant ...

What happens when restricted stock units vest?

When Restricted Stock Units vest, the employee receives the shares of company stock or the cash equivalent (depending on the company’s plan rules) without restriction. Your company may allow or require you to defer receipt of the shares or cash equivalent (also depending on the company’s plan rules) until a later date.

Do you have to pay statutory minimum taxes when vesting?

In these circumstances, the employee must pay statutory minimum taxes as determined by their employer at vesting, but payment of all other taxes can be deferred until the time of distribution, when the employee actually takes receipt of the shares or cash equivalent (depending on the company’s plan rules).

Do restricted stock units have to be taxed?

Under normal federal income tax rules, an employee receiving Restricted Stock Units is not taxed at the time of the grant. Instead, the employee is taxed at vesting (when the restrictions lapse) unless the employee chooses to defer receipt of the cash or shares. In these circumstances, the employee must pay statutory minimum taxes as determined by ...

What is restricted stock?

Restricted stock is, by definition, a stock that has been granted to an executive that is nontransferable and subject to forfeiture under certain conditions, such as termination of employment or failure to meet either corporate or personal performance benchmarks.

How much does Sam have to report in vesting?

Sam will have to report a whopping $900,000 of the stock balance as ordinary income in the year of vesting, while Alex reports nothing unless the shares are sold, which would then be eligible for capital gains treatment.

What is Section 83 B?

Section 83 (b) Election. Shareholders of restricted stock are allowed to report the fair market value of their shares as ordinary income on the date that they are granted, instead of when they become vested if they so desire. 2  The capital gains treatment still applies, but it begins at the time of grant.

What are the advantages of stock compensation?

This type of compensation has two advantages: It reduces the amount of cash that employers must dole out, and also serves as an incentive for employee productivity. There are many types of stock compensation, and each has its own set of rules and regulations.

What is the rule for insider trading?

Although there are some exceptions, most-restricted stock is granted to executives who are considered to have "insider" knowledge of a corporation, thus making it subject to the insider trading regulations under SEC Rule 144. 1  Failure to adhere to these regulations can also result in forfeiture.

Can you deliver stock until vesting and forfeiture requirements have been satisfied?

Therefore, the shares of stock cannot be delivered until vesting and forfeiture requirements have been satisfied and release is granted. Some RSU plans allow the employee to decide within certain limits exactly when to receive the shares, which can assist in tax planning.

Is there a forfeiture risk in Section 83 B?

Unfortunately, there is a substantial risk of forfeiture associated with the Section 83 (b) election that goes above and beyond the standard forfeiture risks inherent in all restricted stock plans.

How are restricted stock shares taxed?

Restricted stockholders pay tax on the capital gain or loss represented by the difference between the stock’s price on the date it vests and the date it is sold. In addition, restricted stock is taxable as ordinary income in the year it vests. This is the opposite of stock options, which are taxed when the employee exercises their option, not when they are vested. 2 

What is restricted stock forfeiture?

An executive may have to forfeit restricted stock if he leaves the company, fails to meet corporate or personal performance goals, or runs afoul of SEC trading restrictions. The SEC regulations that govern the trading of restricted stock are outlined under SEC Rule 144, which describes the registration and public trading ...

What is restricted share?

Restricted shares provide an employee with a stake in their company, but they have no tangible value before they vest. Vesting gives employees rights to employer-provided assets over time, giving the employees an incentive to perform well and remain with a company.

When did restricted stock become popular?

The restricted stock units are assigned a fair market value at the time of their vesting. Restricted stock became more popular in the mid-2000s as companies were required to expense stock option grants.

Is restricted stock taxable?

In addition, restricted stock is taxable as ordinary income in the year it vests. This is the opposite of stock options, which are taxed when the employee exercises their option, not when they are vested. 2 .

Can restricted stock be redeemed for cash?

Generally, an RSU represents stock, but in some cases, an employee can elect to receive the cash value of the RSU in lieu of a stock award. This is not the case for restricted stock awards, which cannot be redeemed for cash.

Do RSUs have voting rights?

Since RSUs are not actually stocks, but only a right to the promised stock, they carry no voting rights. An RSU must be exercised in order to receive the stock. An RSU that is converted to a stock carries the standard voting rights for the class of stock issued. A restricted stock award is similar to an RSU in a number of ways, ...

What Is A Restricted Stock Unit (Rsu)?

Understanding Restricted Stock Units

Special Considerations

Advantages and Disadvantages of RSUs

• Advantages
  RSUs provide an incentive for employees to stay with a company for the long term and help it perform well so that their shares increase in value. If an employee decides to hold their shares until they receive the full vested allocation and the company's stock rises, the employee receive…
• Disadvantages
  RSUs don't provide dividends because actual shares aren't allocated.6 But an employer may pay dividend equivalents that can be moved into an escrow account to help offset withholding taxes, or be reinvested through the purchase of additional shares. The taxation of restricted stocks is g…

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Examples of RSUs