Do You Lose RSUs When You Leave a Company?

Restricted Stock Units (RSUs) represent a promise from an employer to grant company stock to an employee at a future date. These equity awards are a significant component of compensation packages, particularly in technology and fast-growing industries. Understanding what happens to RSUs when employment ends is important for financial planning.

Understanding Restricted Stock Units and Vesting

Restricted Stock Units are a form of equity compensation that gives an employee a right to receive shares of company stock once certain conditions are met. Unlike stock options, RSUs hold inherent value from the moment they are granted, as they represent actual shares rather than the option to purchase shares. The primary condition for an RSU to convert into actual shares is typically continued employment over a specified period.

The process by which an employee gains full ownership of their RSUs is called vesting. Vesting ensures the employee earns the right to the stock over time or upon achieving specific milestones. Until RSUs are vested, they are not owned by the employee and cannot be sold or transferred.

Time-based vesting is the most common approach, where a portion of the RSU grant vests after a certain duration of employment. A typical schedule might involve a “cliff” vesting, such as 25% of the grant vesting after one year, followed by the remaining 75% vesting quarterly over the next three years. This means an employee must complete the initial one-year period to receive any shares from the grant. After the cliff, shares vest incrementally, often every three months, until the entire grant is fully vested over a four-year period.

Performance-based vesting schedules also exist, where RSUs vest only if specific company or individual performance targets are achieved, in addition to continued employment. These targets can include revenue growth, profit margins, or successful project completion. While less common for broad employee grants, performance vesting links compensation directly to measurable outcomes.

Impact of Leaving on Unvested RSUs

When an employee departs from a company, any RSUs that have not yet vested by the employee’s last day of employment are typically forfeited. The specific timing of forfeiture is usually detailed in the RSU grant agreement.

For voluntary resignations, all units that have not completed their vesting schedule by the final day of employment are lost. For example, if an employee’s last day is July 15th and the next vesting date is August 1st, those upcoming units will not vest. This applies regardless of how close an employee is to a vesting date, highlighting the importance of understanding one’s vesting schedule.

In cases of termination with cause, such as for violating company policy or poor performance, the forfeiture of unvested RSUs is typically immediate. Companies often include provisions in their RSU plans that allow for the immediate cancellation of unvested awards under such circumstances.

When an employee is terminated without cause, unvested RSUs are generally forfeited on the last day of employment. However, some companies may, as part of a severance package, offer to accelerate the vesting of a small portion of unvested RSUs or provide a short grace period. These exceptions are uncommon and are explicitly outlined in a severance agreement.

Retirement often presents a more favorable scenario for unvested RSUs, depending on the company’s specific “good leaver” provisions. Many companies offer accelerated vesting or continued vesting of a portion of unvested RSUs for employees who meet specific age and service requirements. For example, an employee might vest an additional year’s worth of RSUs or continue vesting for a limited period post-retirement. These retirement provisions are detailed within the company’s RSU plan document.

Managing Vested RSUs Upon Departure

Restricted Stock Units that have successfully vested by an employee’s departure date are considered the employee’s property. Once RSUs vest, they are typically converted into actual shares of company stock and deposited into a brokerage account. This account is often pre-established by the company with a designated brokerage firm.

Upon vesting, the fair market value of the shares is treated as ordinary income for tax purposes, similar to regular salary. The company typically withholds a portion of the shares or cash to cover the required income taxes, including federal, state, and payroll taxes. For example, if 100 shares vest at $50 per share, $5,000 is added to the employee’s taxable income, and the company might withhold 22 shares to cover the tax obligation, leaving 78 shares for the employee.

After leaving, employees should verify that their vested shares are accessible and transferable from the company-designated brokerage account. While there isn’t a post-termination exercise period like with stock options, employees may need to transfer shares to a personal brokerage account to consolidate investments. Brokerage firms typically provide instructions on how to transfer shares, and some may have nominal fees. It is advisable to initiate this transfer within a reasonable timeframe, often within 90 days of departure, to ensure easy access.

When the vested shares are eventually sold, any difference between the sale price and the fair market value on the vesting date is subject to capital gains or losses. If sold within one year of their vesting date, any gain is a short-term capital gain and taxed at ordinary income rates. If held for more than one year after vesting, any gain is a long-term capital gain, typically taxed at lower preferential rates. Maintaining accurate records of vesting dates and fair market values is important for proper tax reporting when selling these shares.

Key Factors Influencing RSU Outcomes

The most significant factor determining the outcome of Restricted Stock Units upon an employee’s departure is the specific RSU grant agreement and the company’s overall RSU plan document. These legally binding documents outline all terms and conditions, including vesting schedules, forfeiture rules, and provisions for various types of separation. Employees should review these documents thoroughly, as they provide definitive answers to how their RSUs will be treated.

The precise timing of an employee’s departure relative to their vesting dates can also significantly impact the number of RSUs received. Leaving just a few days before a scheduled vesting event means forfeiting those units, whereas delaying departure until after the vesting date ensures ownership. Understanding the exact vesting schedule and planning accordingly can be financially advantageous.

Company-specific policies regarding different types of separation also play a role. Some companies have explicit “good leaver” clauses for retirement, disability, or death, allowing for continued or accelerated vesting. Conversely, “bad leaver” clauses, often associated with termination for cause, typically result in immediate and complete forfeiture. These policies are not universal and vary widely among employers.

The type of company issuing the RSUs can influence liquidity and access to the shares. For public companies, vested shares are typically liquid and can be sold on an exchange immediately after vesting, subject to any company-imposed trading windows. However, for private companies, vested shares may remain illiquid until a significant event like an initial public offering (IPO) or an acquisition occurs. This means that while the shares are owned, they may not be immediately convertible to cash.

Maintaining a clear understanding of the brokerage account relationship and ensuring continued access after leaving the company is important. Employees should confirm how their vested shares will be managed, whether they remain with the company’s designated broker or need to be transferred to a personal account.