My good friend Mikaela and I were chatting over a nice matcha tea – deep green colors, slightly sweet and refreshing taste, with a boost of wonderful energy in a very famous tea shop in midtown Manhattan. Our conversations covered many topics – outdoor adventures, art, and of course finance. She wanted to know, “What’s the best strategy for RSUs?”
Framework Overview
There are many different techniques you can use with RSUs and the best approach is to develop a system that best fits your needs. We will go over a framework that covers three different strategies.
The First RSU Strategy
The first approach is to sell all of your RSUs on the day of vest. With this method, you only pay withholding tax on your vested RSUs. Moreover, you take on no share price risk because you no longer own the shares. When you don’t own shares you don’t have to worry about selling based stock price fluctuations or short term or long term capital gains taxes.
With this game plan, you have cash on hand to do what you want with it – invest in a portfolio of securities, pay down debt, or whatever you desire.
The Very Aggressive Approach
On the other end of the spectrum, you don’t sell a single RSU. Your outcome is hitched to the company performance. You can make a lot of money, a little money, or lose a substantial amount.
A lot of tech employees end up with very large amounts of company stock – 7 figures! When this happens, some of these individuals become very anxious about share price swings. In addition, there are only several open trading windows throughout the year when these employees can sell off some of their fortune.
For example, let’s say your company stock reaches an all time high during the first week of June, but you have to wait for the open trading window in August to sell shares. How often will you check the stock price? Will you be able to sleep over the next 2 months?
Also, with such a large position, you must keep an eye out for short term and long term capital gains taxes. Which shares vested when? What shares should you sell?
The RSU System
The RSU system (the best strategy for RSUs) lies in between the two strategies mentioned above. You sit down and develop a technique to sell a certain percentage of RSUs every time they vest. This amount is specific to you based on your desired outcome and system you want to develop.
Furthermore, there is an additional step with this system. For the shares that you own, you can develop instructions to sell them once the shares reach a certain price level.
For instance, the additional step has upside and downside approaches. Let’s say the shares of ABC are at $100 per share. With the upside approach you can develop guidelines to sell some shares once they reach $120.
Great strategy! But what if the shares never reach $120. Worse, what if they lose a lot of value and trade at $50 and you never sell a single share? This brings us to the downside technique.
The downside strategy is the opposite. For example, you create instructions to sell your shares at $80. If the outcome of the share price isn’t favorable and the price sinks from $100 to $80, you sell shares at $80 and limit your loss.
What’s the Best Strategy for RSUs?
As you scale up your system, you will feel more confident, better understand your tax implications, and have cash to redeploy to other areas of your life. Remember, you can develop the best strategy for RSUs according to your desires, wants, and fears. It’s truly bespoke and created just for you.
Questions on how to set it up? Let’s chat!