Restricted Stock & RSUs: 3 Planning Tips

Equity compensation is becoming more mainstream and is not just for executives anymore. Grants of restricted stock or restricted stock units (RSUs) are getting to be more common than stock options – and the rules are different, as is the tax planning. Below we will look at some of the particulars of how restricted stock and RSUs operate, how to understand a grant, planning for the tax consequences, and what to do after the shares vest.

How Restricted Stock and RSUs Work

At their core, restricted stock and RSU company shares that vest according to a schedule can be awarded as compensation. The vesting schedule can be tied to length of employment, meeting certain performance criteria, or a combination of both. Upon vesting, the employee owns the shares themselves and can do what they wish with them – from holding, selling, gifting, etc. While this might sound simple, the devil is in the details.

Understanding Your Grant

First, it is important to understand that restricted stock or RSUs are similar to stock options but have important tax and financial planning differences.

There are important facts you need to determine. First, how does the vesting schedule work; what amount of shares vest and when? Is the vesting simply tied to length of service or are there performance or even liquidity event triggers? Second, what are your tax-withholding choices?

From there, you can determine or at least estimate key factors such as how much the award will be worth both pre-tax and post-tax.

Tax Planning – Section 83(b) Election

Taxation can be tricky with restricted stock and RSUs. One strategy is to use a Section 83(b) election for restricted stock.

Typically, a person is taxed when the restricted stock vests regardless of whether the shares are sold. The Section 83(b) election allows the taxpayer to be taxed on the share value at the grant date instead. This election can be made within 30 days from the grant date of the restricted stock and is not an option for RSUs.

Why would you want to consider a Section 83(b) election? Remember that regardless of the election or not, you are taxed as ordinary income for the share value regardless of whether you hold or sell the shares. The advantages are that if you think the stock price will rise between the grant and vesting, then you will pay less ordinary income tax and have lower cash outflows. Second, after the initial taxation of the grant, the change in value after this point is capital gains.

Tax Planning – Withholding

The other issue to consider is not withholding enough taxes. The IRS rules say that your company is required to withhold 22 percent for restricted stock and RSUs (37 percent for income over $1 million during the same year).

The problem is that there is a good chance your margin tax bracket is higher than 22 percent if you are receiving these kinds of equity compensation awards. As a result, you will need to make some estimated payments to cover the difference. Unless you have enough cash from other sources, you may need to consider liquidating some of your shares to cover the tax bill.

The conundrum here is that if you do not see the shares immediately and the price falls, then you will be selling shares at a lower value than what you are being taxed on. It is best to consider your holistic tax scenario and work with your tax advisor to come up with a plan.

Game Plan for After Vesting

Aside from the tax consequences, you need to consider the impact on your overall financial planning. One of the biggest risks taxpayers can face is that they become heavily concentrated in the company stock. You will need to look at your overall portfolio and consider if you need to diversify depending on how much of your net worth is tied up in a single stock now.

Some financial planners recommend looking at the situation this way in an example with your shares worth $150,000 at vesting. If you had $150,000 in cash to invest, pay down debt, etc., would you use all of that to buy the company stock? If the answer is no, then why would you hold it? In other words, do not let tax implications lead your financial planning decisions.

Conclusion

More and more companies are issuing compensation in equity forms such as restricted stock grants or RSUs. Make sure you understand your vesting schedule and conditions so you can plan for the tax implications as well as your overall financial picture.

Wishing on a Star: Investors Pour Billions in to SPACs

A SPAC is a special purpose acquisition company. It is typically sponsored by a venture capitalist or a private equity firm that has expertise in a specific sector or industry, such as green technology. A SPAC launches as an IPO, but it is nothing more than a shell company that raises money from investors. Post-IPO, it has a limited amount of time (one to two years) to merge with an existing company, where the capitol is deployed. Once that happens, the private operating company trades publicly under the SPAC name.

While SPACs have been around for about 30 years, they’ve only become popular in the past year or so. In fact, this year investors have already poured more than $100 billion into these vehicles, and that’s more than the total amount raised since they were first introduced. SPACs offer investors the opportunity to buy into a startup, which might be at early-, middle- or late-stage development when it partners with the SPAC. In 2020 and 2021, industries heavily represented by SPACs include electric vehicles, consumer-oriented technology, communications and retail.

What makes the SPAC particularly interesting is that investors do not know what company they are buying into since the entity has no commercial operations of its own. As such, they are sold largely based on trust in the management sponsor and belief in the growth potential for the industry it represents.

SPACs differ from traditional IPOs in that the IPO price is not based on the valuation of an existing business. Instead, investors typically pay $10 per common share of regular stock at the initial offering. These shares are referred to as units. Each unit also includes a warrant, which offers the right to purchase the company’s stock at a specific price and at a later date. Once a SPAC merges with a private company, the shares and warrants are listed and publicly traded on the stock exchange. Capital raised by the sale of warrants is typically used to compensate the SPAC sponsor.

One of the appeals of the SPAC model is that individual investors have the opportunity to invest in a startup that has been vetted and funded by an experienced private equity partner. This presents less risk as well as a ground-floor opportunity that is usually not feasible for individual investors. Most IPO opportunities require higher capital investments and occur at a later stage of development. SPACs provide the opportunity to commit a smaller investment at an earlier stage in a company’s life cycle, which often offers the potential for higher returns.

Unfortunately, the lack of a longer, established track record also increases risk – which is something the Securities and Exchange Commission (SEC) is currently scrutinizing. For now, the SEC has taken a hands-off approach, hoping the market will regulate itself. However, if SPAC sponsors oversell the entity’s capabilities or investors become disillusioned with the returns on their investment, the SPAC market may be subject to considerable regulation in the future.

As for investment returns, the outcomes are mixed. Initial SPAC IPOs tend to outperform the S&P 500. However, once SPACs merge with their respective private companies, the results tend to be less impressive. Given their recent surge in popularity, there’s no way to gauge their long-term performance success. 

5 Tips for Going Back to the Office

Slowly, our world is changing. A percentage of the population has been vaccinated and many employees are headed back to the office. However, this may cause a bit of anxiety – and understandably so. Here are few ways to help take the edge off of returning to the workplace.

Wake up Earlier

For some of you, working from home might have caused you to shift your office hours. Maybe you’re starting later and staying up later. Whatever your routine, it’s safe to say that generally, office hours are 9 a.m. to 5 p.m. A few days, perhaps a week, before you expect to go back, set your alarm earlier. Each day, baby step it back a few minutes to the time you roused yourself before the shutdown began. Though things might never be the same, at least your re-entry into the work world might feel somewhat familiar.

Prepare the Night Before Your First Day

Along with starting your day earlier, think through everything you need to take with you. Do you drink coffee? Make sure you have a thermos with a hot cup of joe ready to go. Do you eat lunch at work? Make your lunch the night before; or if you prefer microwavable meals, be sure you’ve got all your favs ready to pop into your work bag. Ensuring that you will have sustenance at whatever time you lunch will save you a lot of worry.

Review Your Workplace Protocols

Here we’re talking about rules to keep you safe. Do you need a mask if you’ve been vaccinated? What if you haven’t been vaccinated? Do you need to always wear a mask? Will there be hand sanitizer onsite or do you need to bring your own? Email HR or leadership to be fully aware of the policy so you can keep up-to-date with any changes. Staying informed will help calm your nerves.

Manage Your Stress

Make sure you’re being mindful of how you’re feeling emotionally before, during, and after you return to work. If you’re dealing with anxiety when you’re back at work, practice self-care. Take a walk outside during lunch to get some fresh air. If you like to exercise and your gym is open, plan a quick workout. If for some reason you can’t leave the office, try meditation apps like Calm, Headspace or Simple Habit. (These are also great when you get home and before you go to bed – anytime, actually.) You might also call a friend or family member and share how you’re feeling. Letting off some steam and expressing yourself helps alleviate some of the pressure that might be building up.

Communicate with Your Team

Making the transition back to the office can be challenging, if not downright tough. To diffuse any misunderstandings, practice transparency with everyone, no matter what their position. If you’re a manager, lay out your expectations so that everyone is on the same page. If you’re an individual contributor, make sure your manager and peers know what you’re working on, your hours, and any out-of-the-office days you have coming up. Many companies are asking employees, initially, to split their time between the office and home, which means that for some a full transition back to the office is yet to come. Regardless, overcommunicating will ensure you don’t miss out on anything important.

We may never return to the days before the pandemic. However, we’re making strides to get back to a place of normalcy and are here to guide you every step of the way.

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Returning To Work In The Office? 5 Tips To Prepare For The Transition