Do You Keep RSUs If You Leave a Company?

Restricted Stock Units (RSUs) are a common component of employee compensation, particularly in technology and publicly traded companies. RSUs represent a promise from an employer to grant shares of company stock to an employee once specific conditions are met. Understanding how RSUs are treated, especially upon an employee’s departure, is important for financial planning. This article explores RSU mechanics and their disposition when leaving an employer.

Understanding Restricted Stock Units and Vesting

Restricted Stock Units (RSUs) are a form of equity compensation. Employers use RSUs to provide employees with an interest in company stock without requiring an upfront purchase. An RSU is a promise to deliver shares of company stock, or their cash equivalent, at a future date, provided certain criteria are satisfied. Until these conditions are met, the employee does not own the shares and therefore does not have voting rights or receive dividends.

The process by which an employee gains full ownership of these promised shares is known as vesting. Vesting depends on meeting specific conditions, most commonly a service period, referred to as time-based vesting. Some RSUs may also vest based on performance milestones, such as achieving company financial targets or individual goals, known as performance-based vesting.

Time-based vesting schedules vary, with common structures including “cliff vesting” and “graded vesting.” Cliff vesting means all RSUs vest at once after a set period, often one year, while graded vesting allows units to vest incrementally over several years, for example, 25% each year over four years. Performance-based vesting ties the release of shares directly to predefined company objectives. The specific terms governing an employee’s RSUs, including the vesting schedule and any conditions, are detailed in the individual RSU grant agreement or the company’s equity plan document. Employees should always consult these documents for precise information.

Impact of Departure on Restricted Stock Units

The fate of Restricted Stock Units (RSUs) when an employee leaves a company depends on whether the units are vested or unvested at the time of departure. Unvested RSUs are generally forfeited and revert to the company, regardless of the reason for separation. In contrast, RSUs that have already vested are retained by the employee.

The specific circumstances of an employee’s departure can influence the treatment of RSUs, as outlined in the grant agreement. In a voluntary resignation, employees forfeit all unvested RSUs immediately. This is because the core purpose of RSUs is to incentivize continued employment.

In situations of involuntary termination without cause, such as a layoff, some companies may offer more favorable terms. Unvested RSUs are forfeited, but certain agreements might include provisions for accelerated vesting of a portion of unvested RSUs or allow for continued vesting for a limited period. This outcome is dependent on the company’s policy and the specific terms within the RSU grant agreement. Conversely, involuntary termination for cause, which typically involves misconduct, usually results in the immediate forfeiture of all unvested RSUs. Some agreements may include clawback provisions allowing the company to reclaim recently vested shares in such scenarios.

Special provisions apply to departures due to retirement, death, or disability. Many RSU plans include clauses that allow for accelerated vesting or continued vesting of unvested RSUs for employees reaching retirement eligibility, particularly for long-term employees. In the event of an employee’s death or permanent disability, plans provide for immediate full vesting or accelerated vesting of all unvested RSUs, with ownership transferring to the employee’s estate or designated beneficiaries. It is always essential to review the specific RSU grant agreement, as company policies and the terms for each type of departure can vary widely.

Managing Vested Restricted Stock Units After Leaving

Once Restricted Stock Units have vested and are retained after an employee leaves a company, they become shares of company stock. These are held in a brokerage account, managed by the employer’s plan administrator. The former employee then has several options for managing these shares.

One common option is to sell the shares. This can be done through the brokerage account, though individuals should consider market conditions and any applicable company trading windows that may restrict sales. Alternatively, an individual can choose to hold onto the shares, remaining a shareholder of the former company.

Regarding tax implications, the initial vesting event of RSUs triggers ordinary income tax on the fair market value of the shares, and any subsequent sale of these shares after departure involves capital gains tax. This tax applies to the difference between the sale price and the fair market value of the shares at the time they vested, which serves as the cost basis. If shares are sold within one year of vesting, any gain is taxed at ordinary income rates as a short-term capital gain. Holding them for over a year qualifies for lower long-term capital gains rates. For personalized advice on managing RSU holdings and navigating specific tax considerations post-departure, consulting with a financial advisor or tax professional is advisable.