Things I've Learned About RSUs

I joined Facebook (now Meta) as a software engineer in May 2021. The offer letter I received included details about my compensation. There would be three main components: salary, an annual bonus target, and RSUs (restricted stock units). I was very familiar with the first two parts, but I had never had a job pay me in RSUs before.

This article is not financial advice or educational content.

Since working at Meta, I've learned some things about RSUs that I think will help me in the future. Before I get into that, let me describe what how RSUs work at Meta.

RSU basics

My offer letter stated I'd be granted $X of RSUs that would vest quarterly over a four-year period. Facebook divided my grant's value by the average stock price the month before I joined and rounded up the result to get Y, the total number of shares I'd be given over the course of four years. Every three months, I'd be given Y/4 shares in a Schwab brokerage account.

As an example, if I was granted $200,000 in RSUs and the stock price was $125, then I'd get $200,000 / $125 = 1600 shares over four years. And I'd get 1600 shares / 16 = 100 shares per quarter.

What this means is that my compensation would track Meta's stock price. Continuing the example above, if my salary was $100,000 and the stock price stayed flat at $158, then I'd earn every three months I'd earn $25,000 in salary and 100 * $125 = $12,500 in RSUs for a total quarterly income of $37,500. If the stock price went up to $130, then my quarterly income would be $25,000 + 100 * $130 = $38,000. Of course, if the stock dropped to $100, then my quarterly income would suffer as well and drop to $35,000

Why I'll be selling my RSUs in the future

I've learned the hard way that you should follow the conventional wisdom of selling all your RSUs when they vest.

The way my RSUs vest at Facebook is as follows. First, Schwab takes 22% (the tax rate on supplemental wages) of the shares I'm about to vest, sells them immediately, and withholds the proceeds for federal income taxes for me. The remaining shares are deposited in my Schwab brokerage account. At the same time, I get a pay stub listing the dollar value of the shares I vested based on the current stock price. This value is also later reported to the IRS as regular income at the end of the year.

I think the key to thinking about RSUs is to realize that being paid in RSUs is actually two separate transactions. First, you're paid the value of the RSUs you're vesting in cash, and then your company sells you some shares at fair market value.

It's like getting paid in gift cards. Yes, the gift cards have a cash value, but you have to buy something and then return it in order to actually get the cash. (Of course, no one ever pays me in gum.)

This means that RSUs are effectively a default investing strategy. The company is saying "we're going to pay you $X every year, but we're going to automatically invest Y% of your salary in our stock for you every quarter instead of paying cash."

If I sell my shares the day they vest, them I'm effectively saying "No thanks, I'd like to choose my own investing strategy."

I choose to invest in index funds in order to diversify my holdings. By getting paid in one company's stock, my investment diversification is being significantly decreased. From now on, I'll be selling my RSUs immediately so I can choose to buy whatever securities I think best fit my investment strategy.

I'm opting out.

Photo by Aditya Vyas



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