When I first saw "Restricted Stock Units" or RSUs in my compensation package, I felt like "I had made it", because it made me feel important. I never bothered to understand how it worked beyond figuring out when I actually got the stocks. Then when I got my first vest, and I saw a lesser number of stocks in my account than I expected, I panicked. Did some googling, spoke to some people who said, "it's all good - it is expected and your company will handle the taxes". So I went back to daily life and never looked back. Eventually I realized there are nuances to RSUs to understand so that I could make the best out of them.
In this blog, I want to talk about the basics...keywords, the process of how it works and what happens at every stage. We will look at the most common scenario - the RSU grant is from a US listed company, which means we now are dealing with "foreign assets". That made me feel even more important!!!
Any stock/equity based component in our compensation is a way incentivizing an employee to stick around and make them feel accountable for the company's success.
What are RSUs? And have they always been around? And what happened to "ESOPs"?
When I was starting my career, "ESOPs" or Employee stock options were a big deal. ESOPs essentially gave employees an option to buy shares at a later date at a discounted rate. I started hearing about Restricted Stock Units or RSUs (being awarded in India) around 2008-09. ESOPs are still around, usually given in startups and early stage companies, or in companies which are eventually planning to get listed in the stock markets.
RSUs are easier to understand than ESOPs. Think of your company/employer as a big pie, and the pie is divided into many slices. Each slice represents a share of the company. Now, with RSUs, your employer is committing to give you some of those pie slices, but you have to wait for a certain period, or achieve certain milestones before you can get them. When you achieve those milestones or the time period has lapsed, the RSUs "vest" i.e. instead of seeing RSUs in your account, you will actually see shares of your company. As long as the RSUs are unvested, they are "Restricted" i.e. you really cannot do anything with them other than stare at your account statement and feel good about what is coming to you.
How/When do I get RSUs?
Well, it really depends on your employer's policy in India. Some employers do not give equity-based compensation in India even though they are listed in some stock exchange abroad citing adminstrative fees and processes as a reason. But several employers do include them in their compensation package. While I have heard of some companies including them regardless of level or job role, many of the employers in India offer RSUs only above a certain level . This incidentally is why I mentioned that the first time I got RSUs, I felt that "I had made it"!!!
As to when can we get RSUs
RSUs may be negotitated as part of a new job offer. It is usually offered as a "replacement grant" if You already have RSUs which have not vested in your current employer. Sometimes it is offered as part of a joining bonus, except that the bonus will come to you in a staggered manner.
RSUs are also awarded as part of the appraisal/bonus cycle. Several companies in India include RSUs as part of the continuous performance cycle. It is also part of retention bonus programs, where high performers are given large RSU bonuses, which hopefully incentivizes them to stick around longer to get the RSU to vest.
What does "vest" mean?
I (really, really ) want to make a bad joke about Lux Cozee Banians, i will stop myself from doing so.
Before you can get the shares, you have to wait for a certain period or achieve specific milestones. This waiting period is called "vesting." It's like a test of loyalty – your company wants to make sure you stick around and contribute to its growth.
Companies may offer two types of vesting, or a combination of both depending on the awards:
Cliff Vesting: Imagine yourself hanging onto a cliff, waiting to receive your reward. That's pretty much how cliff vesting works. You won't receive any shares until you've reached a specific milestone, usually a certain number of years working with the company. Once that day arrives, you'll get your entire batch of RSUs in one go. This can be the case when RSUs are offered as part of a "Replacement grant" or "retention bonus"
Graded Vesting: Graded vesting is like climbing a ladder, one step at a time. Instead of getting all your shares at once, you receive them gradually over a period. Each year, or each quarter, a portion of your RSUs will "vest," meaning you'll get your hands on those shares. It's a more incremental approach compared to cliff vesting. In other words, you will likely have some unvested RSUs with you all the time, which will make you want to keep hanging around indefinitely!
Okay, so I have RSUs. Now what?
First, activate your RSU/investment account that your employer provides. I say this because I know several people who never did this till the very end of their job tenure and then struggled with credentials and setting up access. This investment account is usually with a firm like Schwab, Etrade or Fidelity. Credentials will be sent by your finance or compensation team if you have grants. Make sure you activate the account and remember your updated credentials
Second, update all the account related information. You need to update a form called W-8BEN if you are an Indian resident that you need to fill, so that when you sell the shares, the taxes are not withheld by the US government. You can also, depending on your grant plan, choose to reinvest dividends in the same stock, or choose get paid dividends. We can talk about these options later in a separate post.
Third, update your Indian bank account details where you want to receive money when you sell shares. BTW, if and when you sell shares, the money is not automatically transferred to you. It is held in the account in the US, and you need to initiate the transfer using Wire/SWIFT mode. Good news is that the process to initiate the transfer is very easy and seamless in most platforms!
Well, something finally vested!
Congratulations! You are now the proud owner of some stocks in a foreign country!!! You can sell these stocks when ever you want, but you need to figure out if you want to hold, sell or forget about them!
That aside, you may see that if you had 100 stocks due to vest, a smaller number landed in your account as vested units. This is because, my friend, your RSUs are not exactly free. You need to pay taxes on them. I was very sad for days when I realized this! So what happens is RSUs when they vest are "perquisites" in Indian tax terminology. And they are taxed at normal salary rates. And the company is not going to foot the bill for the taxes out of the generosity of their hearts. Your perquisites are valued at a particular rate, usually the closing/opening price on the day of the vest (unless your stock grant specified a fixed rate). If you are entitled to 100 shares, and price on the day of vesting was $10, your company is going to say "You got compensation worth $1000". And the government is going to say "Pay me tax on $1000". There is an automated process usually that kicks in. You get 70 shares, 30 shares are withheld and automatically sold at $10 on the same day. $300 is then sent to your employer in India who will deposit it as part of your Tax deducted at source.
(PS: No such thing as a free lunch!)
This is a lot to digest. I will continue on this topic in Part 2, where I will rant about taxes when you sell stocks, as well as touch upon what are the things to keep in mind while deciding what to do with your grants.
If you want to read more formal gyaan: Everything You Need to Know About Stock Options and RSUs (hbr.org)
RSUs are...
Irrelevant to me, because I don't have/have never had them
Something I think I get double taxed on when they vest
Absolutely clear to me