RSU Selling Strategies
Restricted Stock Units (RSUs) are one of our favorite forms of equity compensation to write about because their tax planning isn’t overly complex, companies offer them often, and we find it fun to optimize around the possible RSU selling strategies.
The hardest part about managing RSUs effectively is making a plan to sell them.
The purpose of this article is to provide you with several strategies for selling RSUs and offer suggestions that will help you decide which RSU selling strategy will be the best option to meet your specific needs.
Gain Awareness Before Selling RSUs
In order to make the best financial decisions, you’ll first need to gain an understanding of your own personal finances. This doesn’t have to be a long, drawn-out process, but before selling RSUs for the first time, you should at least do a quick check-in to be sure you have all the information you’ll need to select the right strategy for you.
Here are some questions you’ll want to know the rough answer to or take some time to reflect on:
Do I have large expenses coming up?
What debts do I have?
What’s my net worth?
How much of my net worth is made up of company RSUs?
Will I be receiving another grant of RSUs in the future?
Am I participating in the company ESPP? How many shares have I purchased?
Do I enjoy working for this current company?
Does my company seem to be growing? Will it be around in another 10 years?
If I sell RSUs, do I have a place for the proceeds to go? Will I invest the proceeds? Use them to pay down debt? Or put them in savings?
These are very basic questions (which some of you may have already thought through), but a brief check-in will help you decide how many RSUs you should sell.
RSU Selling Strategy #1 - Sell Everything Immediately at Vest
Selling RSUs immediately after they vest is the most common strategy. It’s also the strategy most commonly advised by other financial blogs and professionals. However, just because it’s the most common doesn’t necessarily mean it’s the best strategy for selling RSUs.
Pros of Selling All RSUs at Vest:
When RSUs vest, the entire value of the vested amount becomes taxable to you. Selling everything at vest ensures that you’ll have enough cash to cover your tax bill - especially since your employer may not withhold enough to cover it.
Selling all RSUs at vest allows you to put all the money to work elsewhere. This could mean paying down debts, putting the money toward the purchase of a home, or investing in a more diversified manner. “The Bogleheads’ Guide to the Three-Fund Portfolio” is a great place to learn how to improve your investment strategy (paid link).
Selling all RSUs at vest helps reduce the risk of owning too much company stock. Your employer provides you with a paycheck, benefits, and RSUs. Being too tied to a single company is a risk you shouldn’t take lightly.
Cons of Selling All RSUs at Vest:
By selling all RSUs at vest, you might miss out on future gains. It’s possible that your company’s stock price could outperform the rest of the stock market. If you sell absolutely everything, you might regret missing out on those gains.
If you sell all your RSUs at vest, you should have a plan in place for what to do with the proceeds. If you sell everything and don’t have a purpose for the proceeds, you won’t be making the most of the RSUs you received.
If you’re risk-averse, have other debts, have a big purchase coming up, will be receiving more grants of RSUs, or don’t want to hold more company stock, then it could make sense for you to sell all your vesting RSUs immediately.
RSU Selling Strategy #2 - Sell 80%, Keep 20%
Have you heard of the 80/20 rule? While it’s not often applied to equity compensation, it can provide a useful guide as you’re determining how many RSUs to sell.
Pros of Selling 80% and Keeping 20%:
By selling 80% of your RSUs at vest, you’ll get enough cash to cover any taxes, even if your company under-withholds.
The proceeds from selling 80% will be able to go toward other things. Whether it’s other investments, paying down debt, or saving for a purchase, 80% can provide enough cash to make a meaningful impact elsewhere.
By keeping 20% of your vested RSUs in your company stock, you’ll continue to stay invested in the company and will benefit if the stock price rises over time.
The 20% you keep won’t require much thinking on your part. You’ll stay invested, and won’t have to worry about it again.
Cons of Selling 80% and Keeping 20%:
If you’re receiving grants from your company often, you’ll likely end up with a lot of “eggs in one basket.” Even if you sell 80% of your RSUs that vest, your overall exposure may be larger than you can stomach.
Selling 80% of your vesting RSUs still requires some thought and planning about what to do with the proceeds. If keeping the proceeds in cash is the plan, that’s great. You just want to be sure that the money is being put to good use.
Selling 80% of RSUs at vest and keeping 20% is one of our favorite strategies if you're working for a company you have faith in. We’ve worked with people at Amazon, Apple, Nvidia, Square, and Netflix and sometimes it’s worth taking on a little added risk to hold some extra company stock. We’ve found that the 80/20 RSU strategy is a pretty good rule to follow. (If you work at Nvidia, it’s really worked out!)
RSU Selling Strategy #3 - Sell 50% at Vest, Keep 50%
Selling 50% of RSUs at vest and keeping the other 50% is where the risk of being overly vested in one single company really starts to ramp up. Any time you leave 50% or more of your vested RSUs on the table, you should carefully consider whether that’s really the best move for you. (If you need to re-read the awareness section at the beginning of this article, please do.)
Pros of Selling 50% of RSUs at Vest and Keeping the Other 50%:
For 2021, selling 50% of your RSUs at vest practically guarantees you’ll have enough cash to pay the taxes that vesting RSUs have created.
Keeping 50% of the RSUs means that you’ll still be tied pretty heavily to your company’s stock performance in the future. If the company does really well, so will you.
By selling 50% of your vested RSUs, you’ll still have some cash that you can use for other things that are important to you.
Cons of Selling 50% of RSUs at Vest and Keeping the Other 50%:
Your overall portfolio performance will be pretty heavily tied to your company stock. As mentioned above, this can be a great thing, but it can also be really bad. This effect will be amplified if you’re receiving annual grants of RSUs from your company.
You’ll have less cash that could be put toward other important things. There are financial priorities that should be addressed before taking on additional single company stock risk (e.g., paying down debt, creating an emergency fund, holding mostly diversified investments).
We recognize that when you receive shares from a batch of RSUs vesting, you’ll typically receive shares net of your company withholding some shares for taxes. Assuming you’re selling 50% of the net shares you receive, this is still a viable option if the outlook of your company is positive.
Again, we recommend that you exercise caution to ensure that you’re not taking on too much risk for your situation.
RSU Selling Strategy #4 - Sell Just Enough RSUs to Cover Taxes
This RSU selling strategy can be fairly easy to execute, because typically companies will withhold shares for you to cover the taxes you’ll owe. This means that you don’t have to do anything. However, if you’re making $100k+ in any given year, there’s a pretty good chance that your company isn’t withholding enough to cover your tax liability. (We’ve built an RSU Tax Calculator to help you figure this one out.)
Pros of Selling RSUs to Cover Taxes:
It’s super easy. Most companies withhold shares for you to cover the taxes you’ll owe from the RSUs that have just vested. If you want to go with this strategy, you won’t have to do anything. You just accumulate shares.
If your company’s stock performs well, you’ll see considerable gains as well.
Cons of Selling RSUs to Cover Taxes:
There’s a chance your company won’t withhold enough to cover the tax bill you’ll owe. If this happens, you’ll face an unwelcome surprise in April when you file your taxes.
You won’t be pulling out any cash to use toward other things. The hope is that you’ve already checked off other important financial goals, but if you haven’t, you could be neglecting important areas of your personal finances.
If your company stock doesn’t perform well, your portfolio won’t either.
This RSU selling strategy is low-effort, high-risk, and has potential for large returns. But the only time this strategy is appropriate is if the amount you’re receiving in RSUs is relatively small compared to your overall balance sheet.
If keeping all your RSUs from a vest makes up only 1% of your balance sheet, then there isn’t much risk. However, if one RSUs vest ends up being 70% of your net worth, we strongly recommend that you consider using another RSU selling strategy.
RSU Selling Strategy #5 - Don’t Sell Any RSUs at Vest
You would think that this RSU selling strategy would require the least amount of effort, but that’s not the case. Most companies want you to sell at least enough RSUs to cover the taxes. In fact, not selling any RSUs at vest may not even be a viable strategy because you’ll need to figure out some other way to pay the tax bill from your vesting RSUs.
Pro of Not Selling Any RSUs at Vest:
You get to go all-in on your company. If the company does extremely well, so will you.
Cons of Not Selling Any RSUs at Vest:
You’ll need to work with HR or your compensation team to arrange some way for you to withhold taxes on each batch of RSUs that vest.
You’ll be heavily tied to your company’s stock price. If the company doesn’t do well, neither will your portfolio.
You won’t be pulling any money out of the company for other important things.
This is our least favorite strategy. The only time this might be a strategy worth considering is when you’re receiving double trigger RSUs at a company that has yet to go public. And if that’s the case, the other strategies we’ve listed will be available to you once the company goes public.
Investing isn’t gambling, but using this strategy comes pretty close. Please be extra cautious before considering it. If you have a significant other who could be impacted, due to the potential risks involved, this is definitely a strategy we’d recommend discussing with them first.
Our Recommendation For RSU Selling Strategies
We’ve tried to provide enough examples to help you determine which strategy will work best for you, but also understand that every person’s financial situation is unique. This can make providing general rules of thumb difficult. That said, the two most commonly recommended strategies are RSU Selling Strategy #1 - Sell Everything and RSU Selling Strategy #2 - Use the 80/20 Rule (for the reasons previously discussed in the article).
Because your equity compensation is specific and personal to you, the advice you receive should also be personal. Please feel welcome to reach out and chat with us so that we can help you determine the strategy that’s best for you.