You remember our handsome friend Lucas, with piercing green eyes, from the Long Island house party? Last week, we had a lengthy discussion about Restricted Stock Units (RSUs). He was very interested to learn everything he could about them. He was floored when he learned that you can lose money on your RSUs.
RSUs are known as restricted stock units, but I like to refer to them as little troublemakers that can “really suck up” your money.
This sucking up of money happens in a variety of ways – grant date, share price movement, taxes, and owning lots of company shares. Here’s what you need to know.
Really Suck Up Your Money
For RSUs, when the shares vest, you own them. The number of shares you get is not always straightforward. It is a function of total equity value.
For instance, Lucas’ compensation is:
- $375,000 base salary
- $200,000 of RSUs vesting over 4 years with no cliff
Then his total comp in year 1 is $375,000 base plus 25% of $200,000 equity grant. But it’s not exactly $50K (25% x $200,000).
The value of the RSUs depends on the company share price at the time of the grant and the share price across time.
How Many Shares Would He Get at Grant?
The number of shares depends on the share price, as illustrated below.
| Equity Grant | |
|---|---|
| $200,000 | |
| Share Price @ Grant | Shares Granted |
| $5.00 | 40,000 |
| $7.50 | 26,667 |
| $10.00 | 20,000 |
| $12.50 | 16,000 |
The amount of shares can be very different, depending on the stock price.
How to Lose Money on Your RSUs
Furthermore, once the shares vest, their value depends on the stock price. There are many differences, as noted below.
| Share Price @ Grant | Shares Granted | Original Value | Value at $7.50 | Gain/(Loss) |
|---|---|---|---|---|
| $5.00 | 40,000 | $200,000 | $300,000 | $100,000 |
| $7.50 | 26,667 | $200,000 | $200,000 | $0 |
| $10.00 | 20,000 | $200,000 | $150,000 | ($50,000) |
| $12.50 | 16,000 | $200,000 | $120,000 | ($80,000) |
The outcome in valuations is vast. Lucas could get a lot of value from holding RSUs. For example, if he gets shares granted at $5.00 and the shares increase to $7.50, he gets an extra $100,000.
On the other hand the value could be lower than expected. A $7.50 share price with a $12.50 grant price is an $80,000 loss on an expected value of $200,000. In this case the RSUs “really sucked up” his money.
The Denouement
Remember, the money you get from RSUs is a function of when the RSUs were issued and the stock price across time.
And of course, you have to sell them and pay taxes to realize the value. And then you put the cash in your pocket.
These little buggers that look like free money can “really suck up” your cash in so many ways especially if you aren’t paying attention. Need help with an RSU strategy? Hit me up!