What is a Restricted Stock Unit?
A restricted stock unit is a form or type of compensation that an employee receives from an employer or a company. It gets allocated as or through the business’ shares. It gets issued to the individual following a particular vesting plan and distribution schedule. This issuing ensues when the entitled employee achieves specific required goals and meets the necessary performance milestones and criteria. It may also get issued in instances or cases where they have known the employer or issuer of the restricted stock unit for a long time.
A restricted stock unit generates and proffers a rudimentary and fundamental interest that an employee may have in the stocks owned by the company. However, they must keep in mind one essential factor. It is that these options do not have any real value or significance initially. Their worth starts coming out after the completion of the vesting period.
Once the vesting period gets completed, the restricted stock units acquire a significance that has a reasonable value in the stock market. When that happens, they get considered as the income earned by the employee. Consequently, a specific portion of it gets deducted and withheld to pay the income taxes. The entitled employee receives the remaining stocks. Then, it is up to them to retain or sell them according to how their desire and discretion dictate.
What is Vesting?
In general, vesting refers to the point in time when the interests and rights that arise from legal and official ownership of a stock, share, or property gets acquired by an individual. It allows for an immediate and secured privilege of development. It typically ensues in the present time or the future.
In the case of restricted stock units, the vesting period signifies a pre-determined time required till an employee can sell the shares owned by them. Typically, companies and businesses vest this type of stock to ensure and acquire timely benefits and profits.
However, it is possible only when specific parameters and criteria get fulfilled and satisfied. They can include the surpassing of particular milestones. Other restrictions comprise the retaining of the restricted stock units for a specific duration.
The vested right gets owned by a single individual to its entire extent. No other third party can take it away from them. It stands true even when an employee gets entitled to the restricted stock units but does not receive or possess them yet.
What are the Restrictions that Prevent the Completion of the Vesting Period?
A restricted stock unit can get subjected to various types and kinds of limitations and restrictions. They prevent the vesting period from getting over and the employee from receiving the profit.
The restrictions consist of the following:
- Restrictions based on time
A company can compensate their employee with a restricted stock unit to reward them for their continued hard work and loyalty. In such cases, the restrictions based on time can unlock. It ensues when the worker decides to retain and hold their position at the establishment for a set period.
- Restrictions based on milestones
A restricted stock unit can have limitations that get it locked behind an achievement or milestone. The entitled individual must achieve the set goal to unlock the completion of the vesting period.
For example, a coordinator or employee working under the sales department must achieve a particular sales figure within a set time like a year to unlock the restricted stock units.
- Restrictions based on both time and milestone
In some cases, both milestones and time can place restrictions on the completion of the vesting period of a restricted stock unit. To remove the limitations and sell the shares or assets, the employee who owns the stocks must surpass the designated time limit and milestones set by the employing company.
What to do With a Restricted Stock Unit When it Vests?
After the completion or closure of the vesting period, an individual has the option of retaining the restricted stock units or selling them. Let us discuss the latter first.
The employee who owns the restricted stock units can sell them entirely or some of them. They can do this to gain a substantial profit. The quantity to be sold depends on various factors. If the stock prices in the market fluctuate frequently, the best course of action is to sell all of them.
Suppose the employee wishes to sell a part of the owned restricted stock units. In that case, they can filter out the ones that are expendable or useless. It depends on matters of tax efficiency. The best restricted stock units that they can sell in such instances are the ones that have caused a loss of money or are at their break-even point. The principal goal is to retain a specific amount of stocks while paying the least amount as and for taxes.
Selling the stocks helps acquire a considerable gain that the seller can use to fund other endeavors and financial goals. They can also add to emergency savings or investments or down payments as and when required.
In other cases, an individual may feel like retaining the restricted stock units even after the end or completion of the vesting period. It may be due to various reasons. The most common ones include the desire to keep a share or stake in their employing company. Nevertheless, the employees can opt for this through other means, including investments. It can be as benefits, future equity, and salary.
An employee may still wish to retain their restricted stock units. If that is so, they must limit it to a maximum of 10% to 20% of their total investable assets. It ensures that they do not take on a substantial risk s by holding too much of only one company stock.
However, if the stock prices are relatively high, holding back from selling may not be the best choice. Otherwise, the assets would lose their worth because of the market fluctuations.