What Happens to RSUs When a Company Goes Private?

Restricted Stock Units (RSUs) are equity compensation granted to employees, vesting over time. RSUs promise company shares or cash equivalent once vesting conditions, like continued employment, are met. When a publicly traded company “goes private,” its shares cease public trading, often via merger, acquisition, or leveraged buyout. This transition removes public reporting requirements, concentrates ownership, and introduces specific considerations for RSU holders.

Common Outcomes for RSUs

When a company transitions from public to private ownership, the treatment of outstanding Restricted Stock Units (RSUs) is a key aspect of the transaction agreement. Terms for RSUs are outlined in the definitive merger or acquisition agreement. These agreements often specify common outcomes for vested and unvested RSUs, or a combination.

A common outcome for RSUs in a going-private transaction is a cash-out. Unvested and vested RSUs convert to a cash payment based on the acquisition price or company valuation. For unvested RSUs, the cash payment is made at the transaction’s closing, accelerating value realization without shares vesting.

Acceleration of vesting is another common treatment for unvested Restricted Stock Units. Unvested RSUs immediately vest upon change of control or transaction closing. This accelerated vesting means the employee gains full ownership of the underlying shares, which are then treated like other shares, often resulting in a cash-out.

Alternatively, RSUs may be converted into equity of the newly private entity or the acquiring company. Employees holding RSUs may receive shares or other equity interests (e.g., options, new RSUs) in the non-public company. The transaction agreement determines the exchange ratio and terms of new equity awards, with value equivalent to the RSUs at close. This maintains employee incentive alignment with the new private ownership.

Going-private transactions often involve a combination of these approaches, tailored to RSU types or employee groups. For example, vested RSUs might be cashed out, while unvested RSUs might see partial acceleration followed by conversion into new private company equity. The combination of outcomes depends on transaction specifics, including the acquiring entity’s strategy and negotiated terms. Employees should consult official transaction documents for their RSU treatment.

Tax Considerations

The tax implications for Restricted Stock Units (RSUs) when a company goes private depend on how the RSUs are treated in the transaction. Understanding these tax consequences is important for financial planning and meeting tax obligations. The fair market value of RSUs at a taxable event is the basis for calculating taxable income.

When Restricted Stock Units are cashed out, the full cash payment received is taxed as ordinary income in the year of the transaction. The cash payment is treated as compensation, subject to federal income, Social Security, Medicare, and state and local income taxes. The employer withholds these taxes from the cash payment.

If unvested RSUs undergo accelerated vesting due to the company going private, the shares’ fair market value at vesting is recognized as ordinary income. This income is subject to federal, Social Security, Medicare, and state/local income taxes in the vesting year. Once vested shares are sold, any difference between sale price and fair market value at vesting (cost basis) is a capital gain or loss. The holding period for capital gains or losses begins on the vesting date.

The tax treatment of RSUs converted into private company equity is complex and depends on if the exchange qualifies as a tax-deferred event under Internal Revenue Code sections. If criteria are met, conversion may not be taxable, deferring taxation until new private shares are sold. If the exchange does not qualify for tax deferral, the new private equity’s fair market value could be immediately taxable as ordinary income at conversion. Exchange terms and transaction structure are key in determining if immediate taxation occurs.

Employers handle the withholding of income and employment taxes at any taxable RSU event. For cash-outs, taxes are withheld from the payment. For accelerated vesting with issued shares, employers may withhold shares or require the employee to pay the withholding. Taxable events are reported on the employee’s Form W-2 for ordinary income. If shares are sold through a broker, the transaction is reported on Form 1099-B, indicating gross proceeds and potential cost basis for capital gains or losses.

Employee Actions and Information Sources

When a company announces its intention to go private, employees holding RSUs should understand how their equity compensation will be affected. First, review RSU grant agreements and company equity compensation plan documents. These documents contain RSU grant terms, including “change of control” clauses governing RSU treatment during mergers, acquisitions, or leveraged buyouts.

Employees should examine all company communications regarding the going-private transaction, including proxy statements or merger agreements. These documents provide detailed information on transaction terms and equity award treatment. Understanding these details is important for assessing financial implications and preparing for equity changes.

Given the complexities of corporate transactions and tax law, seeking professional advice is wise. A financial advisor specializing in equity compensation can help employees understand RSU treatment implications and integrate them into financial planning. A tax professional (e.g., CPA, tax attorney) can provide guidance on tax consequences based on transaction terms and individual tax situation.

Employees may consider consulting with legal counsel, especially if concerned about RSU agreement interpretation or treatment fairness. These professionals can offer insights into the legal aspects of the transaction and ensure employee rights are protected. This advice helps employees navigate transaction nuances and make informed equity decisions.

Finally, employees should engage with their company’s internal departments for clarification. Human Resources, Legal, or Finance departments manage employee equity and can provide specific answers on how RSU grants will be affected. Asking targeted questions about vesting schedules, payment timelines, and tax withholding helps resolve uncertainties and ensures understanding of compensation impact.