You've worked hard, and your company has rewarded you with Restricted Stock Units (RSUs). They're a great incentive, offering you a stake in the business and a slice of its future growth. But what happens when you decide it's time to resign? Does all that hard work go down the drain, taking your valuable RSUs with it?
To help you sort things out without incurring too many losses, this article explores this complex topic and the various angles to consider when leaving a job with RSUs in play.
First things first. Restricted Stock Units are a form of company stock that you receive as part of your employee equity compensation. Unlike regular vested stock options or even unvested stock options, RSUs come with conditions—typically, a vesting schedule that requires you to stay with the company for a certain period before you can fully own the shares.
What happens to unvested stock when you quit?
The Emotional and Financial Investment
It's important to realize how emotionally and financially invested you might become in your company's growth. Receiving RSUs signifies a shared commitment; the company is essentially saying, "We want you here for the long haul, and as we grow, we want you to benefit too." The RSUs are a tether, not just a financial benefit but an emotional one, too.
This emotional investment can make the decision to resign incredibly complicated. When you decide to leave the company, you're not just walking away from a job but potentially from a significant financial gain. The potential of restricted stock units might make you second-guess your decision to resign. Should you stay until the next vesting period? Would leaving now mean you're walking away from future financial security?
Risks and Rewards
RSUs aren't just a boon; they come with their own set of risks. The value of RSUs is tied to the company's performance. So, if the company doesn't do well, your RSUs might not yield the rewards you expected. When contemplating resignation, weigh this risk against the benefit of staying. Are you optimistic about the company’s future? Do you think your RSUs will indeed be valuable in the long run? If not, perhaps resigning and seeking other opportunities is the smarter financial move.
Making the Decision
Making the decision to resign when RSUs are in play is not straightforward. It's essential to be aware of not only the financial but also the emotional investments you have tied up in those RSUs. Deciding to leave a company means you might be leaving behind more than just a paycheck; you could be walking away from an investment in a future that suddenly you won't be a part of.
Understanding Your Vesting Schedule
When it comes to RSUs, your vesting schedule is the timeline that dictates when your RSUs convert into actual, freely tradable vested shares. The schedule is usually outlined in your RSU grant agreement and can differ from company to company. Typically, there's a cliff—a point you have to reach before any shares vest—and periodic vesting afterward, often annually or quarterly.
Significance of the Vesting Schedule in Life Events
One aspect often overlooked is how your vesting schedule can coincide with significant life events. Are you planning to buy a house, pay for a wedding, or maybe even take a sabbatical? Understanding when your RSUs vest can greatly affect your financial planning for these life events. In other words, your vesting schedule isn't just a timeline; it's potentially synced with your life's timeline. Resigning might significantly shift these plans, so consider how the vesting of RSUs fits into your broader life goals.
Critical Milestones Within the Vesting Schedule
Every vesting schedule has critical milestones that you should be aware of. Sometimes these milestones can include performance evaluations that could potentially lead to accelerated vesting. Is your resignation date close to any of these critical milestones? If so, the decision to resign might warrant additional consideration. Could waiting for a month or two result in a substantial number of RSUs vesting? It's important to plan your exit strategy around these milestones, if possible.
The 'Golden Handcuffs' Dilemma
RSUs act as 'Golden Handcuffs,' designed to make it financially attractive for you to stay with the company. The vesting schedule is the key to these cuffs. The closer you are to a vesting date, the harder it may be emotionally and financially to make the decision to leave. Therefore, dissecting your vesting schedule becomes not just a financial necessity but also an emotional one. Make sure you are comfortable with what you are potentially giving up and weigh that against what you aim to gain with your resignation.
Consider the Company's Health
Another angle to consider is the company's current standing and future prospects. Your RSUs are only as valuable as the company issuing them. Even if you have RSUs vesting soon, if the company isn’t performing well, those shares might not be worth sticking around for. Therefore, when looking at your vesting schedule, align it with your perspective on the company's future performance.
What Happens When You Resign Before Vesting
Resigning before your RSUs have vested is a tough pill to swallow. Usually, you'll lose all the RSUs that have not yet vested at the time of your resignation. They'll be forfeited back to the company, and you'll walk away with nothing for those unvested units.
1. The Immediate Financial Impact
One of the most apparent outcomes of resigning before vesting is the immediate loss of potential income. You need to understand that unvested stock or RSUs are, in essence, deferred compensation. By resigning before they vest, you're leaving a vested portion of your negotiated compensation package on the table. It's like walking away from a job offer that you've partially accepted but haven't fully reaped the benefits from yet.
2. The Opportunity Cost
Beyond the immediate financial loss, there’s also an opportunity cost to consider. Those RSUs could potentially have grown in value over time, leading to higher financial gains had you stayed with the company until they vested. Calculate the future value of the RSUs you’re leaving behind, as this can help you understand what you might be foregoing in long-term wealth.
3. The Psychological Toll
The forfeiture of unvested stock or RSUs can also have a psychological impact. There may be a feeling of loss or regret, especially if you see the company perform exceptionally well after your exit. Such feelings can be exacerbated if you leave the company due to conflicts or dissatisfaction, making you question whether staying might have been the better financial decision despite other concerns.
Special Circumstances and Exceptions
It's worth noting that some private companies offer a grace period, post termination exercise period, post termination exercise window, or pro-rated vesting for employees who resign under specific conditions, such as health issues or family emergencies. While this is not standard practice, if you’re resigning for such reasons, it may be worth discussing this option with your HR department or legal counsel. You might be able to negotiate terms that are more favorable than outright forfeiture.
Counteroffers and Retention Strategies
If you're a key employee or possess highly valued skills, the company may attempt to retain you by modifying your RSU agreement or offering additional incentives. While this is often a tempting proposition, understand that accepting such a counteroffer may come with revised conditions for your RSUs, like a new vesting schedule or performance metrics. Always read the fine print and consult with a financial advisor to make an informed decision.
Your Tax Implications
RSUs and taxes go hand-in-hand. The moment your RSUs vest, they become income, and you are liable for income tax based on the fair market value of the vested shares at the time of vesting. If you've already had some RSUs vested, then you've already gone through this taxation process.
However, if you resign and cash out your vested RSUs, any gains you make from the sale will also be subject to capital gains tax. Keep this in mind when you're considering whether to hold or sell your vested RSUs upon resignation. It might be beneficial to consult a tax advisor to optimize your tax liability.
Negotiating RSUs in Your Exit Strategy
So, you've made up your mind to resign, and you're now wondering whether there's a way to salvage some or all of your unvested stock or RSUs. Contrary to popular belief, your RSUs are not entirely out of your hands once you decide to leave. Here’s what you need to consider while negotiating RSUs as part of your exit strategy.
1. Know Your Worth and Leverage
Before going into any negotiation, assess your value to the company. Are you a high-performing employee? Do you possess skills that are difficult to replace? Private companies are more likely to negotiate with you if your departure represents a significant loss. Knowing your worth can give you the leverage you need to negotiate more favorable terms for your RSUs.
2. Open Channels of Communication
Don't make the mistake of assuming that the default terms in your employment contract are non-negotiable. Open a line of communication with your HR department or supervisor to discuss your RSUs. Transparency and openness can often pave the way for mutually beneficial arrangements, but remember to approach the conversation with tact and professionalism.
3. Timing
Timing is important when discussing your exit strategy. If you're close to a significant vesting milestone, it may be beneficial to delay the conversation until after that date has passed. Alternatively, bringing up your intent to resign shortly before a large company event, like a product launch, might give you additional negotiating power. Be mindful of company dynamics when picking the time to initiate these discussions.
4. Explore Alternative Arrangements
There may be room for creative solutions. For instance, some companies might offer to accelerate your vesting schedule, provide a lump-sum payment equivalent to the value of some of your unvested RSUs, or even allow you to keep them as long as you agree to some consultancy work post-resignation. Each of these vested stock option grant has its own pros and cons, so weigh them carefully.
5. Seek Professional Guidance
Don't underestimate the value of professional advice. Legal and financial advisors can offer insights that you might not have considered. They can help you understand the legal limitations of your negotiations and propose strategies you may not have thought of.
6. Prepare for All Outcomes
Be ready for the possibility that the company will refuse to negotiate your RSUs. In such cases, all unvested RSUs will be forfeited upon your departure. While this is a less-than-ideal scenario, being mentally and financially prepared for it will enable you to move on more swiftly.
Should You Leave?
The answer would definitely depend on individual circumstances, yet considering that the company offers RSUs to its employees, it speaks volumes about how it values you as one of the assets that it wants to keep for the long haul. But in case it just won’t suffice for you, you’re free to leave, but not without incurring some losses.
Leaving a job is never a simple process, and when RSUs are involved, the stakes are even higher. However, understanding your RSUs and the rules governing them can go a long way in helping you make an informed decision. Whether you're vested or not, knowing your options and obligations can give you the negotiating power you need to walk away with your hard-earned benefits intact. So review the grant employment agreement, consult with financial and legal advisors, and make the choice that's best for you.
Want to know more about RSUs to see if your company has the best equity compensation practices? Feel free to browse Upstock’s learning materials here.
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