RSA vs RSU : The Difference Between Restricted Stock Awards and Restricted Stock Units
If you’ve ever been offered a mid to high level position in a company you’ve likely heard of restricted stock awards and restricted stock units. But what is the difference between an RSA and an RSU?
What is a Restricted Stock Award?
If you have an RSA or restricted stock award, you own the right to purchase shares of your company’s stock at a set price, often a cheaper price than a regular investor would pay. Alternately, you own the right to claim a set number of shares for free.
Most of the time, you are granted an RSA when you are offered a job. RSAs are often used to sweeten employment offers for highly sought after employees, especially in startups and other situations where the employer can’t pay as highly as competitors.
New employees usually can’t do anything with their RSAs for a while, however. There is usually a laundry list of things that have to happen before they can make the purchase and take control of the stock. Most of the time, the employee will need to have been with the company for a set number of years and meet certain performance requirements.
The one confusing thing about restricted stock awards is that even though you usually have to wait to buy the stock, it technically belongs to you when you are granted the RSA. You’re not paying to own the stock, rather you’re paying to take control of it i.e. move it to other accounts, sell it ect.
This subtle distinction is important in that you do have voting rights from the beginning like any other stock holder. It also means you have a few different options for how you’d like to pay taxes on any growth in the RSA stock.
What is a Restricted Stock Unit?
A RSU is simpler than an RSA. It’s basically just a promise from your employer to give you a set number of shares of the company stock at a future date. An RSU is not stock and it’s not stock options. Again, it’s just a promise from your company to give you a certain number of shares at a future date. Like an RSA, you usually have to stay for a certain number of years and meet specific performance bench marks. Once you do, however, the stock is yours.
The RSU does not cost the employee anything. They do not have to pay to take control of the stock like they often do with an RSA. They also don’t own the stock until it’s handed over to them and once they own it there are no restrictions for what they can do with it.
Companies that offer RSUs are usually bigger and more successful. Their goal with the RSU offering is not only to acquire top notch employees, but to get them to stay and work hard. The harder these top tier employees work, the logic goes, the more their RSU will be worth when they get it.
RSA vs RSU: What Happens to Unvested Stock if You Leave Before Vesting?
If you leave a job before the shares of your RSA or RSU are fully vested, things can get a little complicated.
With an RSA, the company has the right to repurchase any unvested shares. If they choose to do this they will typically pay you the same price you paid for them. So along with your last paycheck you might also expect a check for your unvested RSA shares.
When you leave before your RSU is vested, your unvested shares are forfeit, plain and simple.
What Do I Need to Do With My RSU or RSA?
RSAs and RSUs are far from simple. Even when they understand the rules around them, a lot of people are at a loss for what they actually need to do to make sure they are managing their investment correctly.
For both the RSA and RSU, the first thing you need to is figure out which one you have by looking at your original offer letter. Then, figure out the vesting schedule and whether there are any vesting requirements besides time. Keep documentation on these things handy and think about setting reminders for yourself for when the stock starts vesting.
For an RSA, when shares start vesting you’ll need to decide if you want to go ahead and pay to assume control of them or not. If you think the stock price will go up soon or in the future, then you might choose to buy the shares and hold onto them either for a short time or for the long run. If you think the company is headed in a direction that if won’t recover from, you might choose not to buy the shares. Then, once you have control of the stock you’ll need to decide whether to hold it or sell.
With an RSU, the only decision you really need to make when your shares vest is whether you want to keep them or sell them. Again, this depends on what you think the price of the stock is likely to do. Holding vested RSU stock is like holding any stock, it all depends on the market and the company in question.
What If I Want to Sell the Stock?
Some people will choose to sell the stock they gain through an RSA or RSU because they don’t believe it will go up in value. Others choose to sell for allocation reasons. Sometimes it isn’t a good idea for company stock to make up too large of a percentage of your portfolio. That’s putting a lot of eggs in one basket, especially if you still work at the company.
Many people who are trying to get a handle on what to do with their restricted stock, end up consulting a certified financial planner or financial advisor. RSAs and RSUs are complicated and a professional can help you understand your options and how to make sure you’re taking full advantage of your investment.
It’s worth noting, however, that companies often contract with brokerage firms to handle buying and selling of restricted stock. So an outside financial advisor or CFP might not be able to help you do this. To find out if this is the case, you might want to start by asking around in your company about how the process works where you are.
Still, if you haven’t been in touch with your financial planner or advisor it might be a good time to contact that person. Or, if you don’t have a financial planner or advisor, you might consider finding one in your area who can help you work through your situation.
David Wilson is a Certified Financial Planner® and Accredited Investment Fiduciary Analyst® at Vector Financial Solutions and the author of this blog. He has spent the last 30 years helping people in the greater San Diego area accomplish their financial goals and envision their best financial future. Call 760-741-3159 or email to get touch.
David Wilson, writer at Financial Truths, is also a financial advisor and Certified Financial Planner® and Accredited Investment Fiduciary Analyst® at Vector Financial Solutions, Inc. Vector Financial Solutions is located at 139 E. 3rd Ave., Escondido, CA 92025 and by phone at 760-741-3159.
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