Today, we're going to discuss Restricted Stock Units (RSUs), a form of compensation used by large companies like Amazon, Apple, and Google, as well as small startups to incentivize employees to stay with the company, potentially making them quite wealthy.
RSUs are company shares given to employees, but they're called "restricted" because recipients must meet specific criteria or conditions, such as performance metrics or time spent at the company, to access them. This type of compensation became more popular after the Enron scandal. Prior to that, normal stock options were common, but fraudulent accounting practices by Enron's executives led to changes in accounting principles to close loopholes, promoting the use of RSUs.
From 2003-2005, the use of regular stock options fell by 40%, while RSUs jumped by 41%, becoming the most popular form of stock compensation. RSUs are less risky than regular stock options, where you get the opportunity to buy a given number of stocks at a certain price. Unlike stock options, RSUs don't have a set purchase price; they are awarded to you, retaining value as long as the stock price remains above zero.
RSUs benefit employers by incentivizing employees to work hard, as their wealth increases with the company's success. They also encourage loyalty by vesting over time. For example, a four-year plan of 80 RSUs worth 1.52 million dollars at Apple's current market price of 190 dollars could offer yearly amounts, such as 380k in stock, potentially doubling in value.
However, it's crucial to understand that RSUs are treated differently for tax purposes, counting towards a person's income, with part of the vesting stocks withheld for taxes. Negotiating RSU issuance is just like negotiating compensation; you may be able to negotiate higher cash salaries or more RSUs based on your needs. Employers tend to be more liberal with RSUs since they are tied to the company's success.
It's vital to balance risk and reward with RSUs, as putting all your eggs in one basket might not be wise. Consider diversifying by selling a portion of your holdings to secure your position.
In summary, RSUs are an attractive and widely used form of compensation that provides potential wealth growth and job incentives. Balancing the benefits with mindful planning and negotiation can lead to great success in your financial journey. Feel free to reach out with any questions or comments, and thank you for watching.
