Frequently Asked Questions about RSUs and ESPPs
FAQ about RSUs and ESPPs
This FAQ addresses common questions about Restricted Stock Units (RSUs) and Employee Stock Purchase Plans (ESPPs). Remember, this information is for educational purposes only and does not constitute financial or tax advice. Consult with a qualified professional for personalized guidance.
RSUs (Restricted Stock Units)
Q: What is vesting?
A: Vesting is the process by which you earn the right to receive the shares granted through RSUs. It usually occurs over a period of time (e.g., four years) or upon achieving certain performance goals.
Q: When can I sell my RSU shares?
A: Typically, you can sell your RSU shares after they have vested. However, your company’s plan documents may have specific restrictions.
Q: What is the difference between the grant date and the vesting date?
A: The grant date is when the RSUs are awarded to you. The vesting date is when you actually earn the right to receive the shares.
Q: Do I have to pay anything to receive RSUs?
A: No, you generally do not have to pay anything to receive RSUs. They are a form of compensation.
Q: How are RSUs taxed?
A: RSUs are taxed as ordinary income based on the fair market value of the shares at the time they vest. You’ll also be subject to capital gains tax when you eventually sell the shares.
ESPPs (Employee Stock Purchase Plans)
Q: How does an ESPP work?
A: An ESPP allows you to purchase shares of your company’s stock at a discounted price, usually through payroll deductions.
Q: What is a look-back period?
A: A look-back period allows the purchase price to be based on the lower of the stock price at the beginning or end of the offering period. This can be a significant benefit.
Q: What is a qualified disposition?
A: A qualified disposition is the sale of ESPP shares after meeting specific holding period requirements (generally two years from the offering date and one year from the purchase date) to receive favorable tax treatment.
Q: What is a disqualifying disposition?
A: A disqualifying disposition is the sale of ESPP shares before meeting the required holding periods for a qualified disposition. This results in less favorable tax treatment.
Q: How are ESPP shares taxed?
A: The tax treatment depends on whether the sale is a qualified or disqualifying disposition. Qualified dispositions result in part of the gain being taxed as ordinary income and the rest as capital gains. Disqualifying dispositions result in the entire gain being taxed as ordinary income.
RSUs and ESPPs (General)
Q: What is the difference between RSUs and ESPPs?
A: RSUs are a promise to receive shares in the future after vesting. ESPPs give you the option to buy shares at a discount. RSUs don’t require you to use your own money for the initial grant, while ESPPs do require you to purchase the shares.
Q: How do I manage my RSUs and ESPPs?
A: Managing RSUs and ESPPs involves integrating them into your overall financial plan, diversifying your portfolio, understanding the tax implications, and reading your company’s plan documents.
Q: Should I consult a financial advisor about my RSUs and ESPPs?
A: Yes, consulting with a financial advisor is highly recommended. They can help you develop a personalized plan to maximize the benefits of your equity compensation.
Q: Are RSUs and ESPPs a good investment?
A: The value of RSUs and ESPPs is tied to the performance of your company’s stock. While they can be a valuable part of your compensation package, it’s important to consider the risks and diversify your investments.
Q: Where can I find more information about RSUs and ESPPs?
A: You can find more information on your company’s intranet, through your HR department, and on reputable financial websites. This website also provides helpful information.
Q: What happens to my RSUs or ESPP if I leave the company?
A: The specific terms will vary depending on your company’s plan. Generally, unvested RSUs are forfeited. For ESPPs, you typically have the option to purchase the shares or receive a refund of your contributions.
This FAQ is a starting point.
Carefully review your company’s specific plan documents and consult a qualified financial or tax advisor for personalized advice.