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Understanding RSUs: A Guide to Restricted Stock Unit Compensation

08.24.2020 by admin // 1 Comment

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Restricted Stock Unit compensation (RSUs) is a popular way of giving company equity to employees at tech startups and large public companies. When you hear about how much money people at tech companies make it’s often because they have equity as part of their compensation package. When looking at your compensation package don’t just look at the salary. Also understand what your benefits are worth including your RSU package. Often we look at benefits like health insurance and retirement options like the 401(k) company match. But, what about equity compensation? Equity compensation is a perk companies use to give you an ownership stake in the company. This includes RSUs, ESPP and employee stock options.

If you don’t have RSU compensation today, you are missing out. If your company offers RSU packages as one of their benefits, negotiate for RSU compensation during your next merit raise cycle or during your next promotion. Or, apply to companies that offer Restricted Stock Units as part of their compensation package. Learn below what RSUs are, what RSUs are worth to you, when you get RSUs, RSU tax considerations and the drawbacks of RSUs.

What Are RSUs or Restricted Stock Units?

RSUs, or Restricted Stock Units, are a form of compensation offered by employers to employees. They are company shares that are restricted, meaning that you can’t sell them right away. Instead, you will be given shares that vest over time. When you accept RSUs, they will come with a vesting schedule. Often, you’ll see vesting schedules that span 3+ years. This schedule will show how many shares will vest on which dates. Typically, there will be one day per year and each of those days will be a year apart. On that date you are given those shares at the price of the stock that day. They have no tangible value until the vesting date. If you leave the company before the vesting date that means you walk away from this future compensation.

What Is RSU Compensation Worth to You?

The value of your RSU package depend on a few things: the number of shares offered, how well the stock is projected to do and the vesting schedule.

How Much Are Your RSUs Are Worth When Granted?

To understand the current dollar amount of your restricted stock options multiply the number of RSUs by the stock price the day it is granted. When considering a job offer with RSUs, they may provide a dollar amount for RSUs. If you are provided a dollar amount, that means your RSU package will originally be worth that amount no matter what the stock price is. The day the RSU package is granted, you’ll know how many shares equate to that dollar amount.

How Well Do You Think The Stock Will Perform?

Consider how well you think the stock will perform during your vesting schedule. Is it a growth stock or value stock? Here, I’ll compare a growth stock (Amazon) to a value stock (Cisco). On January 1, 2019 Amazon stock was worth $1718.73. In comparison, Cisco was trading at $47.29. On August 21, 2020 Amazon traded at $3,284.72 a share and Cisco traded at $42.25 a share. That is a huge difference! If you had accepted a job offer at Amazon your RSUs are worth almost double! If you accepted the job offer at Cisco your RSUs actually decreased in value. Even with the quarterly dividend of $0.35 a share, your RSUs are still worth less. Note, this is one example of past results, and this doesn’t mean either of these stocks will perform similarly in the future.

When comparing compensation packages at two companies, don’t only look at what the RSU package is worth at that moment in time. Consider how you think the stock will perform over the next few years. The lower RSU package may end up being worth more money.

Amount of Time For All Of Your RSUs to Vest

Know how long it will take for your RSUs to fully vest. How long do you have to stay with the company to get the full RSU package? Do you intend to stay with the company for that amount of time?

When Do You Get Restricted Stock Units?

Typically companies offer RSUs at time of employment. Other opportunities to get RSUs include promotions. Similar to annual merit increases, some companies have annual equity awards. Once a year they give RSUs out to select employees. If you’re unsure if your company offers RSUs, go to your internal benefits page and see if it’s one of the benefits listed. You can also ask your manager or HR business partner. When you’re talking to them, ask them the criteria for getting RSUs. It can never hurt to ask.

Do I get RSU Money Right Away?

Usually you don’t get RSU money right away. RSUs typically have a vesting period. A vesting period is a period of time before the shares are owned by the employee. If you leave the company before the end of the vesting period you’ll walk away from those shares.

Cliff Vesting – after a certain amount of time has passed you will receive 100% of the shares all at once. For example, say you are granted 30 shares. 3 years later you get 30 shares all at once. The date you get all of your shares depends on what is in your RSU agreement.

Graded Vesting – you will receive smaller chunks of your RSUs more frequently. For example, say you are granted 30 shares in January 2021. In graded vesting you could get 10 shares in January 2022, 10 shares in January 2023 and 10 shares in January 2024. The dates you receive the small chunks of RSUs depend on what is in your RSU agreement.

Hybrid of Cliff and Graded Vesting – You receive a certain amount at once, and then smaller amounts at regular intervals following that. The dates you receive a certain amount all at once and the dates following depend on what is in your RSU agreement.

How are RSUs Taxed?

RSUs will not be taxed when you first receive them. But, they will be taxed upon vesting. This is because you were given RSUs at $0 and they converted to the value of the company stock when they vest. Even if the stock goes down the very next day, you will be taxed at the total fair market value of your stock grant on the grant date.

When you sell your RSUs your taxes will be calculated based on the strike price. The strike price is the price of the shares when they become vested. Upon vesting, this is when you get to decide if you want to keep the shares or sell them. Whether you decide to keep or sell the shares, you will get taxed upon the shares vesting.

To avoid getting hit with a huge tax bill your company may have an option to sell RSUs at time of vesting to cover taxes. Additional tax withholding options include same day, net shares settlement, sell to cover and cash.

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What Happens if my RSUs go Down in Price After They Vest?

If RSUs go down in price after they vest they will be treated like any other stock that is currently showing a loss. Nothing will actually happen until you sell and the price can continue to go up or down. If you sell at a price that’s below the RSU stock price it will be considered either a short term or long term loss on your taxes pending when you sell.

Do I Have to do Anything When I Get Confirmation I was Awarded RSUs?

Sometimes you do have to do take an action when you get confirmation that you were awarded RSUs. Just because you’ve been told you are getting RSUs doesn’t mean there are no actions on your part. Sometimes you need to accept the RSUs by a certain date or you actually won’t get them! The written confirmation that you get awarding you RSUs should detail out any instructions or next steps you have to take. Make sure you read this written confirmation thoroughly. When you accept the RSUs make sure you know what you are signing, it’s not only about making sure you click accept. Sometimes what you are signing contains a non-compete.

What Are The Drawbacks of RSU Compensation Packages?

Non-Compete Clauses

When you are accepting your Restricted Stock Unit grant, do you know what you are signing? You may be signing a non-compete. If you’ve already signed a non-compete for your employer this agreement may be nothing new. Be aware of what you are signing before you sign. After you sign print a copy for your records in case it’s hard to find after the fact.

Leaving the Company

Restricted Stock Units are designed to incentivize employees to stay at a company. Of course, you can still give your notice that you’re leaving at any time when you have unvested RSUs. However, you’re now putting in notice knowing that you’re leaving money on the table. With vesting, you won’t get the full amount of your award until the vesting schedule is complete (usually 3-4 years). If you get RSU awards every year, that can quickly grow to a sizable amount you’re walking away from. If you leave the company you will forfeit your unvested shares. Any shares that have vested that you haven’t yet sold you will continue to keep.

If you are looking to leave your company, don’t forget to negotiate the amount of unvested RSUs you’d be leaving on the table as part of your negotiation for your new compensation package.

High Risk, High Reward at Startups

Early stage or start-up companies (pre-funding or even after series A) tend to have the valuation of shares as quite low. The opportunity for appreciation is the highest, but there is also a chance your RSUs end up being worth $0.

Ability to Sell RSU Shares Once They Vest

If you work for a publicly traded company you should be able to sell your shares upon the RSUs vesting. If your company is private though, they may have restrictions on when you can sell the equity you’ve been awarded at the company. When you are awarded RSUs, read the terms and what the terms outline for selling vested shares to avoid any surprises.

For quick answers to all Frequently Asked Questions about Restricted Stock Units Fidelity has a FAQ guide that is pretty helpful.

2023 Passive Income Opportunities: 10 Ideas to Boost Your Earnings

05.17.2020 by admin // 2 Comments

Ways to make passive income, passive income ideas 2020, passive income 2020, top 10 passive income investments

Passive income is a great way to earn money without having to actively work for it. Whether you’re looking to supplement your current income or achieve financial freedom, there are many opportunities to earn passive income in 2023. From earning interest through high yield savings accounts to participating in Employee Stock Purchase Plans (ESPP), the options are endless. Below are the best passive income ideas for 2023, each with the potential to help you boost your earnings.

Use A Cash Back or Rewards Credit Card

One very easy way to start a passive income stream is to get a cash back or rewards credit card. This doesn’t mean spending additional money. What it does mean is to generate dollars, or rewards points, from the money you are spending anyways. If you need extra cash in your pocket, choose a rewards credit card that allows you to redeem points for cash. If you don’t need the cash, the credit card can help reduce your spending because you can now use points to buy things. Instead of spending more money, save the money you would have spent.

Put Your Emergency Fund and Savings In A High Yield Savings Account

Every dollar you save, whether for investing or for an emergency fund, should be generating additional income for you. Any money you have saved for an emergency fund or for investing later should be held in a high yield savings account. While the high yield interest rates don’t yet match inflation rates, most interest rates are now at or above 3.30% APY. Not sure where to put your money? Nerd Wallet shares the top 10 best high yield savings accounts.

Buy Short Term Treasury Bills

A Treasury bill, also known as a T-bill, is a short-term debt obligation issued by the U.S. government. Treasury bills have different maturity time frames including 3 month, 6 months, 9 months, a year and longer fixed timeframes. Treasury bills are considered some of the safest investments because they are backed by the U.S. government. Short term treasury bills are easy to buy are now above 4.30% APY.

Open Up A New Bank Account And Get A Signup Bonus

Bank bonuses have finally started returning. Usually there are conditions like a minimum deposit amount, setting up direct deposit or holding the money in the account for a set amount of time. Make sure you understand the terms and conditions when deciding what new accounts to open. Money Crasher’s has a list of 31 bonuses banks are running now, with bonuses up to $300!

Open Up A Certificate of Deposit

A CD (certificate of deposit) locks up your money for a set period of time but guarantees a return. If you’re just starting out and have fully funded your emergency fund a 12 or 18 month CD is a good place to start (assuming the rates are higher than a high yield savings account). It’s good investment to start with as you get to learn about illiquid investments but you know when you’ll be able to take the money out and it won’t be held for long. Don’t have a preferred bank? Here are the best rates for CDs right now.

Invest in the Stock Market

Stocks are a way to build wealth passively. Stocks are a type of investment that represents ownership in a company. Investors buy stocks that they think will go up in value over time. Investors don’t make (or lose) money until they sell the stocks they buy. There is no guarantee that the stocks investors buy will go up in value. This is true in any market, although it is more often talked about when there is a lot of market volatility. Don’t worry if you only have a little amount of money to invest. You can open up a trading account on Robinhood with $0 and can buy fractional shares of a company. Starting June 9th you can buy fractional shares of top companies on Charles Schwab with as little as $5. If you’ve never invested in the stock market before learn how to start investing.

Invest in Dividend Stocks

Dividend stocks are stocks that offer a discretionary distribution of profits. When researching stocks you’ll know if a stock is a dividend stock if you see a yield greater than 0. Dividends are paid out on a monthly, quarterly or yearly basis. Investors need to own the stock on the ex-dividend date in order to receive the dividend payment. Stocks that pay dividends typically provide stability to a stock portfolio but do not outperform high quality growth stocks according to Investopedia.

Invest in Real Estate Investment Trusts (REITS)

Think of a REIT like a mutual fund for real estate. REITs is a type of company that allows investors to pool their money to invest in real estate. In order to be considered a REIT, the company is required to pay out at least 90% of their taxable income back to their investors. That is what usually makes REITs a great investment to generate passive income. It’s important to be aware that in these tough times tenants may not be able to pay rent so before you invest in a REIT know who their top tenants are and what risks they may have in their portfolio. Already several retailers have announced bankruptcies such as J.Crew and Neiman Marcus. Investors should understand if the REIT they are investing in has exposure to these businesses or other retailers that may be at the brink of bankruptcy. Learn more about investing in REITs here.

Participate In An Employee Stock Purchase Plan (ESPP)

ESPP is a benefit offered by some publicly traded companies to their employees. ESPP is the ability to purchase company stock through payroll deductions at a discounted rate.

The effort required is minimal and requires enrolling in ESPP and selling the shares to realize gains (or losses). You have a guaranteed return if you sell the day you receive the shares. If you decide to hold the shares for longer, and the shares increase in value, it will help you accumulate wealth. Companies can offer a maximum discount of 15% on company shares. With current savings accounts interest rates at best at 1.3% APY, and average stock returns at 5-7% a year, but not guaranteed, this is a great deal.

Participate In A 401(k) Company Match

A 401(k) company match isn’t money you’ll be able to touch until you retire, but it’s another way to generate income without extra effort. 401(k) plans are retirement savings plans sponsored by employers that allows employees to contribute to their retirement savings pre-tax. Many employers also offer to match or partially match employee contributions. Learn more about 401(k) plans including tax benefits, employee company match and accelerating funding your retirement.

Invest in Startups

According to Fortune, while the number of U.S companies continues to grow, the number of U.S. companies that are traded on stock exchanges has plunged 45% since peaking 20 years ago. Additionally, new companies have been completely disrupting traditional business models but many of these companies aren’t yet public. If you only invest in public companies, you are limiting your investment options more so than previous generations.

Additional Ways to Increase Your Income

Often you’ll see blogging, investing in real estate and flipping items on eBay referred to passive income streams. Yes, these are all ways to make more money. However, all of these options require a lot more time and effort to see the payoff. Becoming a landlord isn’t just buying the real estate, getting a tenant and collecting a check. A passive income stream is truly a set it and forget it. If you’re willing to put in more effort, learn about how to make money fast with a side hustle.

What are ways passive income ideas you’ve used in 2023?

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How to Generate Passive Income

01.20.2020 by admin // 6 Comments

Generating passive income isn’t always the easiest to start, but it’s a great way to help you build wealth. It’s important to note that most income isn’t passive income. This is because most income requires someone giving their time and effort to generate the income. So, what exactly is passive income and how can you generate passive income?

What Is Passive Income?

Before we get started on how to build a passive income stream, what is passive income? Passive income is income that requires little or no effort to earn, maintain and grow that income. Passive income examples include dividends from dividend stocks, interest from high yield savings account and dividends from REITs.

There are additional activities that sometimes are considered passive income but do require more time and effort. The amount you make driving for Uber depends on how many hours or how many trips you drive for Uber. Flipping items on eBay require some time to find the items, post and price the items and then ship the items once sold. Becoming a landlord takes time to identify the right property, get the right contacts, find a renter and then both maintain the house and the relationship with the renter.

There are other activities which require upfront work but can turn into passive income. A good example is blogging or creating your own e-book. It takes quite a bit of work up front but eventually you can turn it into passive income. What are ways you’ve found to generate passive income streams?

See Also: How to Start Investing

How to Create Passive Income With No Money

Many passive income streams require money to get started. You put your money in a high yield savings account for example and every month you’ll automatically earn interest. In order to invest, you need to have money. What if you want to create a passive income with no money today? Passive income ideas with little money include selling stuff you own that you don’t use or get a cash back or rewards credit card. If these aren’t options for you, you can still start a passive income stream. However, you’ll need to put in a bit more effort to get a little extra money to get started. Starting a side hustle is the best option here.

Sell Stuff You Own That You Don’t Use

Do you have household items, clothing or other stuff you don’t use lying around? Make additional cash by selling it on Poshmark, eBay, OfferUp or another site online. Will you make as much as you originally paid for it? Likely not if you paid full price. But, if you have no use for it anymore you might as well get some cash for it and use that cash to start a passive income stream.

Get A Cash Back or Rewards Credit Card

One very easy way to start a passive income stream is to get a cash back or rewards credit card. This doesn’t mean spending additional money. What it does mean is to generate dollars, or rewards points, from the money you are spending anyways. Putting every purchase on a credit card will also help track your expenses. Sometimes with cash it’s harder to remember where exactly you spent the money. This approach won’t put actual cash in your pocket. Instead, it’ll either help reduce your spending because you can now use points to buy things or it’ll help reduce your credit card bill with cash back. Instead of spending more money, save the money you would have spent.

Make More Money Than You Spend

It takes money to make money passively. The more money you have, the more money you can make through passive income streams. Luckily you don’t need a lot of money to start building a passive income stream. Whether you increase your income or cut your spending it doesn’t matter, but you need to start saving money to build a passive income stream. Even if you only have enough money to generate $1 of passive income, it’s something. It’ll slowly grow over time, and grow quicker as you save more money to put toward your passive investments.

There are two ways to get the money to start a passive income stream. You can start making more money or start spending less money. You can make more money through advancing your career or a side hustle and eventually through your passive investments.

The other way to get enough money to generate a passive income stream is to spend less money and be smart with your spending. Ultimately you need to do a combination of both but your top focus should be earning more money. Eventually you’ll reach a point where you can’t save any more money whereas with making money the sky is the limit. It is much easier to save money to invest when you have a higher salary.

Put Your Savings in a High Yield Savings Account

The easiest way to start building a passive income stream is to put your cash in a high yield savings account. Every dollar you save, whether for investing or for an emergency fund, should be generating additional income for you. Any money you have saved for an emergency fund or for investing later should be held in a high yield savings account. Most of the online only banks tend to have higher interest rates (such as Marcus by Goldman Sachs and Ally Bank). Right now the highest interest rates are around 1.7% APY (annual percent yield). This means if you put $100 in the account in 12 months you will have made $1.70 in interest. Not sure where to put your money? Nerd Wallet shares the top 10 best high yield savings accounts.

Look for Sign Up Bonuses at Banks

Sometimes banks run promotions where you can make $100 by signing up for a checking account or savings account! Usually there are conditions like a minimum deposit amount, setting up direct deposit or holding the money in the account for a set amount of time. Money Crasher’s has a list of 31 bonuses banks are running now, with bonuses up to $300!

Invest in Passive Investments

Once you have some money to invest, you can start investing in different types of passive investments. The least amount of effort required for building a passive income stream is to select an investment with a guaranteed return. However, those options with the lowest risk and lowest effort also tend to be the lowest yielding.

There are many different types of passive investments. Passive investment examples include Certificates of Deposit, Stocks, Dividend Stocks, Mutual Funds, ETFs, Crowdfunded REITs, Private Companies and more. Stay tuned for part 2 where I go into detail about the different types of passive investments!

If you’re ready to start generating passive income, check out the ultimate list of passive income ideas to get started.