5 Tips for Managing Underwater RSUs
Joining a publicly traded company can be an exciting and lucrative opportunity. The promise of stock options and Restricted Stock Units (RSUs) often forms a significant part of the compensation package. However, the reality of vested shares can be complex and sometimes disappointing, especially if the stock price has fallen. If you find yourself in this situation, here are five strategies to consider for managing your underwater RSUs effectively.
1. Wait it out
The stock market fluctuates, and stock prices may increase over time. So, if you are not in a hurry to sell your RSUs, you can wait and see if the stock price goes up in the future. If you're still an employee, it likely eliminates your ability to utilize option strategies. If you are able to use option strategies, you could consider these two options while you wait:
Protective puts. You can consider purchasing protective puts to help reduce further downside risk. The premiums would cost money but provide you with some insurance.
For example, if your shares are trading at $20 per share, you could buy a put at $20 per share if you wish to reduce the risk of further decline. In doing so, if the shares fall to $19 per share, your underlying stock has lost $1, but your puts have made $1 to offset the loss. This is a very general example, as several nuances to this strategy would impact the gain or loss of your option trade, including the premium cost of the put, the expiration date of the put, the number of your shares vs. options that represent 100 shares per contract, and the volatility of the stock.
Covered calls. Another strategy that could be used in tandem or on its own is selling covered calls. In this strategy, you would sell a buyer the right to purchase your shares at a future date and a given price. In this strategy, you cap your upside and do not protect the downside, but you receive premium income from selling the option while you wait.
For example, if your shares are trading at $20 per share, you could sell a buyer the right to buy your stock at $25 per share and collect a premium for that right. Like all options, there would be an expiration to this option, so the buyer would have to take action within a specific timeframe, but then you would collect income while you wait. In this strategy, you would only want to sell an option at a price you're comfortable potentially selling, as the stock could appreciate, and your shares could be called away.
Combo. Since these two strategies cover different paths to assist you in your wait, you could combine the two strategies. In that case, you would sell a covered call to collect a premium and then use that premium to pay for your put option to buy your "insurance" against further stock decline.
2. Diversify
If you have a significant portion of your portfolio in RSUs, it may be wise to diversify your holdings. Consider selling some RSUs and investing in other assets to spread your risk. If you're a current employee, you're likely subject to blackout windows for trading activity. If that's the case, then you might consider working backward by:
Determining what percentage of company shares vs. your total assets you feel comfortable owning. For a starting point, the general definition of a concentrated stock position in the industry is 10% or more.
Determine how quickly you wish to achieve that target allocation. If you have quarterly trading windows like most tech employees, we often discuss with our clients about going at 10-20% per quarter. For example, if your target is 10% of assets in your company stock and you're currently at 50%, then a 20% per quarter pace means you would be done diversifying after two quarters. The more conservative you are as an investor, the faster you want to pace yourself because your most significant risk lies in the business risk of owning such a concentrated stock position.
Remember that diversifying also means buying something with your proceeds. There are a variety of strategies to consider when buying into another investment. You will want to keep your risk appetite in mind. For example, a conservative investor might consider a portfolio of incoming producing dividend stocks, bonds, or even high-yield savings. Consider more aggressive growth stocks if you're an aggressive investor. Suppose you're hesitant to diversify and have an aggressive risk appetite. In that case, one idea is to look at which funds own your employer's stock and buy into one, as it allows you to retain some ownership of your employer's stock while diversifying across similar companies. A typical example of a growth tech company is the ticker QQQ, an ETF that owns the Nasdaq 100 companies.
3. Consider Tax Implications
Remember that when you sell your RSUs, you may be subject to taxes. Yes, you were subject to taxes when you vested the shares, but that doesn't mean you're off the hook for additional taxes beyond that date.
For example, if you vested your shares at $10 per share and the stock grew to $15, you are subject to a capital gains tax when you sell your shares.
One way to think of it is that you essentially bought shares of stock in your company on the day you vested shares. Instead of receiving cash compensation to buy your shares, your employer provided you with shares directly. Therefore, any gains or losses above your vested price are subject to capital gains. If you held the shares for over a year, you would be subject to the more favorable long-term capital gains tax rate. If you need more clarification, consulting with a financial advisor or tax professional can help you understand the tax implications of selling your RSUs.
4. Talk to Your Employer
You should talk with your employer to discuss your concerns about the value of your RSUs. Your employer may have insights into the current situation or could provide you with options for exercising your RSUs. From our experience, we often see employees receive additional stock grants beyond their initial sign-on grant. Employers today recognize the risk of a compensation cliff, meaning that after you vest your shares, you will earn less in total compensation for future years.
Most employers provide additional grants during review season to combat that risk that would likely result in you seeking new employment. If your shares have taken a bad stumble in performance, consider utilizing your review process to re-evaluate your stock grants with your employer.
5. Evaluate Your Overall Compensation Package
Besides reviewing your stock grants, consider the compensation package you receive from your employer, including salary, benefits, and other forms of equity compensation. If your compensation is not competitive or fair, you should discuss this with your employer or explore other job opportunities.
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We suggest that you seek counsel with a financial planner or tax advisor to understand your personal financial goals and options better. These individuals can give you the tax advice you need to make an informed decision about your company shares.
If you’re looking for some extra guidance, we’d love to connect with you and share a bit of what we’ve done for other clients in similar situations!
DiversiFi Capital LLC is a registered investment adviser located in CA and may only transact business or render personalized investment advice in those states and international jurisdictions where we are registered, notice filed, or where we qualify for an exemption or exclusion from registration requirements. Any communications with prospective clients residing in jurisdictions where DiversiFi Capital LLC is not registered or licensed shall be limited so as not to trigger registration or licensing requirements.
Past performance is not indicative of future returns, and investing always carries inherent risks, including the potential loss of principal capital. Any investment strategies are specific to individual clients and may not be representative of the experiences of all clients.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.