RSUs Explained: Vesting Schedules & Cliff
45sClear, step-by-step explanation of RSUs with a relatable example (SpaceX) that demystifies a complex topic for job seekers and employees.
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This video explains Restricted Stock Units (RSUs) in simple terms, covering the typical 4-year vesting schedule, the concept of a cliff, and the tax implications when shares vest.
Chapters
[00:01]
What are RSUs?
RSUs (Restricted Stock Units) are offered by companies like SpaceX, Amazon, and Apple as part of compensation to incentivize employees to stay longer. They typically have a 4-year vesting schedule.
[00:17]
The Cliff
A cliff is a period (usually one year) before which no shares vest. This ensures employees don't join, grab shares, and quit immediately. After the cliff, a portion of shares vests.
[00:31]
Vesting Schedule
Example: If granted 4,000 shares, at year one you unlock 25% (1,000 shares). After that, you vest equal amounts monthly until fully vested at year four.
[00:43]
Taxation on Vesting
Once RSUs vest, they are considered income and taxed like a paycheck based on the stock's value on the vesting day. For example, 1,000 shares at $150 each adds $150,000 to your taxable income.
[01:09]
Selling to Cover Taxes
Many companies automatically sell some vested shares to cover the tax liability, which is a common practice.
RSUs are a common form of stock-based compensation that vest over time and are taxed as income upon vesting, with companies often selling shares to cover taxes.
Study Flashcards (6)
What does RSU stand for?
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What does RSU stand for?
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Restricted Stock Unit
00:01
What is the typical vesting schedule for RSUs?
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What is the typical vesting schedule for RSUs?
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4-year vesting schedule
00:01
What is a 'cliff' in the context of RSUs?
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What is a 'cliff' in the context of RSUs?
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A period (usually one year) before which no shares vest, ensuring employees stay with the company.
00:17
If granted 4,000 shares with a 4-year vest and 1-year cliff, how many shares vest at year one?
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If granted 4,000 shares with a 4-year vest and 1-year cliff, how many shares vest at year one?
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25% of 4,000 = 1,000 shares
00:31
How are vested RSUs taxed?
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How are vested RSUs taxed?
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They are taxed as income based on the stock's value on the vesting day.
00:43
What is a common method companies use to handle tax on vested RSUs?
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What is a common method companies use to handle tax on vested RSUs?
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Automatically selling some shares to cover the tax.
01:09
💡 Key Takeaways
💡
RSUs as long-term incentive
Explains the purpose of RSUs: to incentivize employees to stay longer.
00:01
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Cliff prevents quick exits
The cliff is a key mechanism to ensure employee retention.
00:17
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Vesting triggers income tax
Many employees overlook that vested RSUs are taxed as income, which is a crucial financial consideration.
00:43Full Transcript
[00:01] like SpaceX, Amazon, Apple, or any other big company that offers stock, you might get offered something called an RSU or a restricted stock unit. These incentivize longer, and most of these RSUs have what's called a 4-year vesting schedule
[00:17] mean? Pretend you're granted 4,000 shares of SpaceX when you sign your offer letter. Well, from day zero to the end of year one while working there, you cliff. That's to ensure that people don't just join the company, grab and
[00:31] then quit, which makes a lot of sense. At year one, you will unlock 25% of your shares, and then you'll start to vest more in equal amounts every month after that until you're fully vested at year four. Once RSUs become vested, they get
[00:43] now that they're actually yours, so you sell them. But, the thing most people miss is that once they vest, they actually count as income, so the value of those shares on your vesting day, it
[00:56] gets taxed like a paycheck. So, if you have 1,000 shares and the stock is trading at $150, that's $150,000 added if you never touch them or sell them at all. Some companies will handle this by
[01:09] automatically selling some of your shares to cover the tax. That's pretty normal. And this is how stock-based compensation works, especially at a big compensation works, especially at a big company.
