What should I do with my RSUs?

Maybe your first-year vesting cliff is about to arrive, and you’re wondering what to do with a sizeable bundle of Restricted Stock Units that are about to transfer to your ownership. Or maybe you’ve been at the same company for the last decade and mostly forgotten about the RSU stock that has stacked up in your equity account. When selling company shares in the San Francisco Bay area, I’ve found that many tech workers are left guessing and second-guessing themselves. This leaves people often selling shares at random or simply ignoring their equity. Over the last 18 months, it’s resulted in many folks watching as their RSUs plummeted in value. They’re left thinking, is there a different way of doing this?

Today, I’d like to offer a few ways of strategically navigating the sale of your shares. I hope to provide you with a mental rubric for answering the question, ‘How and when should I sell my RSUs?’

Before moving forward, it’s essential to recognize that selling vested RSUs is fundamentally risk mitigation. And so, the first question is not whether you should sell shares, but rather how much risk are you comfortable with, and how much risk can you afford? Many people don’t seriously consider selling their shares until after their company stock has taken its first significant dive because they haven’t yet experienced the potential downside of taking risks. Coupled with this is the fact that up until 2022, most tech stocks felt like a free ride upward. Until the Nasdaq plummeted with post-Covid economic changes, it didn’t appear reasonable to sell. Up until 2022, we had experienced all the upside of risk without the downside. But that doesn’t mean it wasn’t there.

However, I’m surprised by how often financial planners will recommend to all their clients that they sell all their RSUs. Sometimes, this is the correct answer. But I think this conversation deserves nuance. Whether navigating thousands, hundreds of thousands, or especially millions of dollars, managing your RSUs is one of your most important financial decisions. So, let’s have a strategy.

I want to outline four of my favorite ways of thinking through a sale plan and one of my least favorites. Often, the most robust plans will layer elements of one or two methods.

Percentage of Pay Method

In the first RSU sale strategy, you choose to retain a dollar amount of vesting equity determined as a percentage of your base salary.

By way of example, let’s say you choose to keep 10% of your base compensation in the form of RSUs. You’re a software engineer making $250k and have +/-$100k of RSUs vesting annually. Using the percentage method, you keep $25k worth of vesting shares ($6.25k/quarter) and sell the remainder as shares vest within the trading window. In practice, this means logging into your equity custodian’s portal, noting the current value of all shares that have vested over the last three months, and selling anything above your target holding amount.

Of course, by using the percentage of pay method, you’ll end up selling more shares when the stock price is high and less when the stock price is low. This strategy makes for a measured way of participating in the company's success while mitigating risk.

This method generates two potential weaknesses derived from the undefined holding period for any shares you choose not to sell. First, if the stock price craters and doesn’t return to your target threshold, you could sell nothing on the way down as it doesn’t hit your percentage threshold.

The second potential weakness of this method is the indefinite nature of holding more and more vesting stock. If you spend half a decade at a company and the stock does well, you could still have a sizable portion of your net worth in the stock simply because you hold on to 10% of your base yearly. We’ll tackle these two potential weaknesses in a moment.

Waiting on The Stock Price

I want to pause to share my least favorite sales strategy: planning to sell shares according to stock price movement. I prefer the percentage-of-pay method instead of selling shares based on your company's current stock price. We know the stock price will fluctuate due to real and perceived changes in the company's business, current earnings, future earnings, news, and non-news. In my experience, the ‘waiting on a stock price’ strategy generates inaction. When the stock price falls, people want to hold shares until they return to an arbitrary number. When the stock is climbing, people tend to hold shares as FOMO takes over. Either way, people do not seem to sell shares strategically but rather in exuberance or frustration after a few sleepless nights.

 Defined Holding Period Method

One way of mitigating the inherent weaknesses of the Percentage of Pay method is by implementing a defined holding period. Alternatively, it can be used as a stand-alone strategy. Using this method, you determine how long you will retain your shares at the outset of the RSU’s vesting period. This limits long-term risk by creating time limits.

This system is nicely coupled with the Percentage of Pay method. Using our original example, our engineer holds 10% of their base pay in RSUs as they vest, with a commitment to keep shares for three years. After those three years, past shares are sold regardless of the current stock price. This is a deliberate choice to retain risk and tie your future financial success to your company’s, while the sale plan ensures you will ultimately divest.

Note that the time horizon could be longer or shorter than three years. Typically, I don’t recommend that it is between 5-12 months as, with a rising stock price, this can unnecessarily trigger additional tax by selling shares before they qualify for long-term capital gains.

 Percentage of Granted Equity Method

In the Percentage of Granted Equity method, you sell shares based on the total number of granted shares rather than a percentage of income. As RSUs vest, you consider their value and the value of your other current holdings. For example, if you’ve received 100,000 shares in ISO Grant A, 60,000 RSUs in Grant B, and 40,000 RSU shares in Grant C, you would consider the entirety of the 200,000 shares rather than just your 100,000 RSUs when developing a sales strategy. A 20% annual divestment strategy would include selling 40,000 shares regardless of stock price or compensation percentage. As new grants are received, the number of shares earmarked for sale is adjusted.

This is often my preferred strategy for those who joined a company pre-IPO and now, post-liquidity, find themselves with RSUs vesting while they hold considerable exercised or unexercised NSOs or ISOs.  Often, in these cases, even selling 100% of RSUs vesting each quarter isn’t sufficient to diversify out of the inherent risk that accompanies holding so much of one company's shares.

It’s also worth noting that selling recently vested shares is usually the most tax-efficient choice if the company stock has risen markedly above the value of your other shares. RSUs are fully taxable as ordinary income when they vest, so you don’t receive any preferential tax treatment on their current value by holding them for a year. Of course, if they gain additional value, you will be taxed on their growth, along with all the other shares you own.

 Percentage Of Net Worth Method

The final strategy for consideration is the Percentage of Net Worth Method, in which you choose to cap your acquisition of company stock at a set level. For example, an engineer could choose a 20% net worth ownership level. With a hypothetical net worth of $1M, no shares would be sold until the total value of the accumulated vested stock rose above $200k. Once it does, additional vesting shares are sold.

To implement this strategy, one more decision needs to be addressed. Will those original shares be held indefinitely, regardless of gain or loss in value, or is there a trigger point (i.e., 50% of net worth, three years, etc.) when those shares are sold? For someone who effectively can retire on their investments outside of their company equity, the choice to hold significant company stock indefinitely may be the right decision for them. They can afford the risk and want to participate in potential upside. In other cases, creating a commitment to a sale plan is indispensable.

At the core of the “Net Worth Method” is how much one can afford to lose. Are your finances robustly on track regardless of whether the retained shares gain or lose value? Or would a 50% loss of value be life-altering? This often becomes more than a theoretical process. We’ve seen the decisions of clients to sell or hold significant shares of Pinterest, Apple, Coinbase, Asana, and many other companies have a life-altering effect on their financial futures in a matter of a few months.

 Don’t Forget About Taxes

One last word on the topic of taxes. When your RSUs vest, a portion is immediately sold, and the proceeds are delivered to the IRS to cover the incurred income tax; this appears on your paycheck and within your stock plan account. Companies often automatically withhold 22% of your shares on the Federal level. If your marginal tax bracket is higher, it is if you’re single and your total comp is more than $95k or married and more than $190k, you owe additional tax. This 22% withholding creates an under-withholding issue. If you find yourself in the 35% or 37% tax bracket, you could end up owing another 15% of the value of your shares at the time of exercise.

We hope this article has engendered an interest in thoughtfully structuring a sale plan for your RSUs and other equity holdings. If you want a thought partner to navigate this with, reach out. We’re here to help.