Convert stock options to rsu
Although they are similar in many ways, they have huge differences that can affect ones decision about which to use, if given the choice. Many companies have shyed away from Stock Options and towards Restricted Stock Units RSU because of a change in tax reporting that requires them to expense employee stock options. Stock Options are the right to buy a specific number of shares in the future at a pre-set price grant price. In general, options vest three years from the date of the grant, and option holders have an additional seven years from the vesting date to exercise them exercise period.
Restricted Stock Units RSU are a grant of units, with each unit, once vested, equal to a share of stock. Company stock is not issued at the time of the grant. Options have value if the stock price rises above the grant price, but could have no value if the stock price is at, or below, the grant price. RSUs will always have value, whether the stock price goes up or down.
The value of your award will increase if the price goes up and decrease if it goes down. In most cases options are taxed as income at the time of exercise, regardless of whether shares are sold or held. Taxes on gains also may need to be paid upon subsequent sale of shares. Speak with a tax accountant to determine what your taxes will be. Here are the questions I usually want to find out about the employee and the company before making a recommendation:.
If the employee answers that they have a very low risk tolerance then I would never recommend them choosing options, if given the choice. This is because with an RSU, they are given the right to actual shares not the right to buy shares at a given price. Look at Merck MRK for example. These options never were worth anything. If the company had given RSUs instead, although they would be worth less than they were when granted, it would have given some return. If the employee answers that they have at least a moderate risk tolerance, the above questions would make a difference to which to choose.
Information is provided 'as is' and solely for informational purposes, not for investment purposes or advice. Understanding the differences will help you maximize the value of RSUs and prevent mistakes.
Tax planning is easier for RSUs than it is for stock options. With RSUs, you pay income taxes when the shares are delivered, which is usually at vesting. The value of the stock at vesting will be reported on your W-2 in the year when the shares are delivered to you. Your company plan may withhold taxes federal, state, local, Social Security up to the yearly maximum, and Medicare.
Some plans, at least for U. Share surrender lets you not only avoid paying taxes in cash but also helps you to diversify your stock portfolio because you use company shares instead of cash to meet your tax obligations. When this difference exists in amount of taxes you will eventually owe, you should factor it into your tax planning.
You may need to make an estimated tax payment for the quarter in which vesting occurred or at least put aside the additional taxes to pay when you file your annual return. Income and social taxes are based on the value of the shares at the time of delivery not grant , and capital gains tax applies to the eventual sale of the shares.
Available in the Schwab Equity Awards Center is the Global Tax Guide, which details the specific tax treatment in various countries throughout the world. Taxes If You Relocate: If you are a U. Many states tax RSUs if you live or work in the state during part of the vesting period, even if you don't reside in that state when the award is taxed. If you move, have your company's payroll department change tax withholding from one state to another.
Tax apportionment is similar if you move between countries during the vesting period. At share delivery after vesting, you may owe an amount of tax to your former country of residence that is commensurate with the portion of the vesting period that elapsed while you were working there. The wash sale rules in the U. If you plan on selling other company stock at a loss, ask a tax advisor whether the grant or the vesting is considered an "acquisition" that may defer recognition of the loss and carry it forward to the shares delivered at vesting.
The key date to consider in planning for RSUs is the vesting date, when you have the income hit. Time-based RSUs vest simply by the passage of time. If you are employed on the vesting date, you receive the stock. In some cases, vesting may hinge on or be accelerated by performance goals, such as achieving a certain stock price or reaching a total shareholder return on earnings-per-share targets.
Be sure you know what triggers vesting. At some pre-IPO companies, vesting depends both on length of employment and on a liquidity event i. Know what will happen if your employment ends for any reason voluntary or involuntary. Also understand what will happen if your company is acquired: Choosing what to do with the stock after it vests combines an investment decision with a tax decision.
Once RSUs vest, you must decide whether to keep it or sell it. Selling the stock almost certainly will help you diversify your portfolio: If you are regularly in possession of important confidential information about your company, you may want to consider adopting a Rule 10b trading plan to facilitate a planned sale of stock.
If you plan to retire before vesting, check the terms of the plan or grant agreement.