RSUs and Modeling Your Financial Goals
It’s important to have an accurate view of your financial position in order to make good financial decisions going forward. This view, though, can be more complicated when restricted stock units (RSUs) are part of the picture. RSUs introduce additional variables that don’t exist when compensation consists solely of salary, bonus, or commission.
When RSUs enter the picture, more factors influence how you model your financial goals. Below are several planning questions and considerations worth evaluating.
Vested or Unvested
When planning for the future, should you include only vested RSUs, or should you also factor in unvested shares? In many cases, it may be reasonable to include unvested RSUs if you expect to remain with your employer through the full vesting period. If not, consider shortening the vesting period you model and include only the RSUs you expect to vest before you leave.
For example, if you plan to leave your company within a year, include only the value of RSUs scheduled to vest during that time. Including the full value of unvested shares when you do not plan to stay can distort your analysis. Understanding how much equity you would forfeit can also inform decisions about changing employers.
Future Grants
Should future RSU grants factor into your plan? Even if you receive regular refresh grants and follow a typical four-year vesting schedule, future awards remain uncertain. From a planning perspective, it is often prudent to exclude potential grants to preserve a margin of safety.
Career changes can also disrupt expectations. You may leave an industry that offers RSUs for one that does not, or future grants may shrink as a company matures and expands its workforce. For these reasons, treating future RSU grants as upside rather than assumptions can help reduce planning risk.
Current Value
Determining the current value of RSUs can present challenges, especially when the issuing company is private. Without a public market price, estimating value often requires approximation. In those cases, you may estimate value based on your ownership percentage and comparable public company transactions, then apply a conservative discount to reflect uncertainty.
Private company valuations can fluctuate significantly, and informal estimates shared internally may not reflect future outcomes. Applying an additional discount can help account for valuation volatility and execution risk.
For publicly traded companies, current market prices provide a clear reference point. Even so, historical price ranges deserve consideration. If shares trade near all-time highs following a rapid increase, using a more conservative estimate may provide a useful margin of safety.
Held Shares
What assumptions should you make about the growth of shares from vested RSUs that you continue to hold? Predicting the long-term performance of a single stock is inherently unreliable. From a modeling standpoint, assuming diversification often produces more realistic results.
Diversified portfolios offer more predictable return and volatility characteristics based on extensive market history. Concentrated stock positions do not. Modeling vested RSUs as proceeds reinvested into a diversified portfolio may produce more stable modeling assumptions.
Context matters. If RSUs make up a small portion of your net worth, modeling assumptions carry less weight. If they represent a significant share, careful evaluation becomes essential. How you model RSU value and timing can influence tax planning, investment strategy, and major financial decisions such as purchasing or remodeling a home.
Savant Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you want help exploring how these concepts may apply to your circumstances, schedule a complimentary consultation.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Bruce R. Barton
Managing Partner / Financial Advisor
CFP®, CFA®, MBA