How Do Restricted Stock Units (RSUs) Work, and Should I Accept Them as Compensation for a Side Gig, Advisory, or Employed Position?
- Nisha Mehta, MD
- Aug 4
- 9 min read
Many companies offer restricted stock units (RSUs) as compensation for employees; however, it’s not common to do so in medicine, and therefore, most in our online physician communities are unaware of how they work. Increasingly, we are seeing them offered to doctors seeking side gig work, advisory positions, or non-clinical or consulting work. There are nuances to accepting these, and especially if offered these as the sole or dominant means of payment, it’s very important to understand how they work, the pros and cons of accepting them as a part of your compensation package, and tax implications on this money, so that you can fully understand the net amount of money that you can expect to end up with in your pocket. Below, we cover what RSUs are, the pros and cons, and related taxes you should be aware of.
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What is a restricted stock unit (RSU)?
Restricted stock units (RSUs) are one way of granting equity to employees in a company. RSUs grant employees with a specific number of shares of the company based on certain conditions being met. The most common stipulation is that an employee works for a company for a certain time and ‘vests’ the shares on a set vesting schedule, but there can be additional metrics that need to be met in order to be granted the shares.
This model is very common in companies that are growing rapidly, where employees may want to be able to take advantage of the upside and the growth. On the employer side, it’s an attractive method by which to attract, as well as retain, good talent, as it incentivizes the employee to want the company to do well, and reduces turnover by encouraging employees to stay longer to vest in more equity.
Sounds straightforward, right? Yes and no. There’s a lot of nuances you need to understand when determining how much tangible value you will get from the shares you receive.
What should you know about how RSUs work?
Do I need to buy RSUs like I need to buy stock options?
No. Unlike stock options which you may be given in an advisory board type capacity, you are given the shares once you meet the requirements that are specified in your agreement, such as once you’ve vested shares in a vesting schedule.
How do vesting schedules for RSUs work if based on time worked for the company?
Vesting schedules can be structured in different ways, but there are two common structures.
One is that after you’ve worked for the company for a certain amount of time, you get all of the shares at once. This is commonly referred to as a ‘cliff,’ because you accumulate credit over time and then everything vests and is available to you at once.
Another common way of doing things is to give you shares in regular intervals. This could be monthly or yearly, but essentially you have a graded vesting schedule where you get a set number of shares in each interval. This could go on indefinitely, or have an endpoint where you stop accumulating shares (for example, you could get 10,000 shares over 5 years, but then afterwards you would get no more shares).
It’s important to know that if you leave a company before shares are vested, you forfeit the unvested shares. In the case of an all or nothing cliff vesting schedule, this may mean you get no shares if you leave the company earlier than anticipated by the schedule.
What are other ways where people get RSUs or conditions which may be applied before RSUs are issued?
When performance based issuance of RSUs is done, it’s usually on top of a time based vesting schedule.
Other companies, especially privately held companies that normally don't have shareholders or distributions, may stipulate that these shares only become available once the company has had a liquidity event and now has the ability to issue shares. This could be through M & A (mergers and acquisitions) or because a company has gone public through an IPO (initial public offering). These are sometimes referred to as ‘double trigger RSUs.’
Some companies may have other conditions for the issuance of RSUs. In these cases, you should make sure there are clear KPIs (key performance indicators) or metrics that determine when you qualify for the shares.
When can I sell my shares?
This is more nuanced. If your company is a publicly traded company, it’s pretty straightforward as there’s an open buy and sell market for those shares. However, for example, if your company is a privately held company or a startup, there may not be an open market for your shares. Additionally, your company may have to approve who you sell your shares to in this situation. As we’ll discuss in the pros and cons section below, the frustrating part of this may be that you owe taxes on your shares before you can actually even sell them, which exposes you to more risk. Let’s say you have to wait until an acquisition or an IPO until you can sell them - if the company goes belly up before this happens, or if the value of the shares declines between when you’re vested and when you sell them, you will have paid a potentially large amount of money in taxes ahead of time (see tax implications of RSUs below).
Can I keep the shares if I leave the company?
Typically as long as you are vested in your shares, they are yours even after you leave the company. Privately held companies may have some stipulations associated with this, so confirm if there’s any fine print.
How is the value of my RSUs determined (i.e. how much are my shares worth)?
One thing to note about RSUs is that their value is always changing based on the valuation of the company. Remember, you become a shareholder in the company through these shares, similar to how you own stocks in the stock market. Therefore, the value of your RSU grant is always changing.
That said, you can calculate the value of a potential RSU grant at any given time by multiplying the number of shares that you have the potential to be granted and multiplying it by the stock price.
Remember that you only actually own the shares that you have been vested in, so until you’ve vested, that’s just potential value. Once you’ve vested some shares, you can multiply the number of shares times the stock price to know the value of what you actually own.
How do I factor taxes into the value of my RSUs?
This is very important, as RSUs have tax implications, so what you can actually put in your pocket is significantly different than the paper value of the shares.
The first thing to know is that just holding an RSU grant as part of your compensation package has no tax implications, because you haven’t been given anything yet, so you don’t own any shares of the company. So there’s nothing you need to declare on your taxes at the beginning when you sign a contract.
However, when the shares vest, this is a taxable event. This is counted as part of the compensation that you are given by a company, and therefore the value of these shares is considered income. The value of these shares is determined by multiplying the fair market value (FMV) of the shares at the time when they are vested times the number of shares. Your employer is required to withhold taxes from your compensation accordingly. This is ordinary income and taxed as such.
Next, when you sell the shares, this is also a taxable event. The amount that you owe will be determined by the price of the share at the time you sell it. If the share value has gone up since you vested in the shares, you’ll have to pay capital gains tax on the amount it has gone up in the interim. If you’ve held them for longer than a year, this will be taxed as long term capital gains tax, which is favorable relative to the income tax of most doctors. If you’ve held them for less than a year, they’re considered short term capital gains and taxed at a higher rate than long term capital gains.
What are different ways that the taxes can be paid?
Recognizing that your income or savings may not be enough to cover the tax liability, especially if the shares have increased a lot in value, there are several ways that taxes can be paid on these shares.
You can pay the taxes out of pocket from your savings.
The company may elect to (or depending on the situation, be required to by the IRS) reduce the number of shares that they give you in a value commensurate with the taxes that you owed. This will be based on the fair market value of the shares at the time of the taxable event. If you think the value of the shares is going to be much greater in the future, this can be very frustrating, as you lose the potential for the upside of those shares that you don’t receive. If you can afford it, you should see if you can pay the tax burden out of pocket instead and get your full shares.
You can sell enough shares to cover the taxes.
The TLDR on this is that you should always discuss the tax implications with a financial advisor and/or accountant, because especially if the shares hold a lot of value, you may have to plan accordingly and have cash on hand for the tax consequences. You also want to ensure you understand the tax consequences and strategize accordingly when it comes to selling the shares (for example, it would be frustrating to sell your shares a week before they switch over to long term capital gains instead of short term capital gains).
What are the pros and cons of accepting RSUs as compensation?
We’ve alluded to some of the pros and cons above, but let’s list them out.
Benefits of RSUs
Unlike stock options, you don’t need to purchase RSUs - they’re gifted to you
The ability to own a piece of the company
The cash value of the shares (unless the company goes bankrupt or never undergoes a liquidity event or has distributions, there will likely be some value to those shares)
The potential get a large financial upside if your company does really well
Downsides of RSUs
Tax implications can be significant and need to be planned for carefully to avoid surprises.
If your company never goes public or has a liquidity event, there may not be any value to the shares.
Shares are constantly fluctuating in value. The share values can decrease or even go to zero after your shares are vested, so if you don’t have the ability to sell them, you may have to deal with the tax consequences and filings without having the upside.
You also won’t know the value of your shares when you accept the RSU grant, as a lot can change between when you accept them and when you are able to sell them.
My side gig only wants to offer me RSUs; should I take that?
Ehhh. While we can’t decide this for you, we would caution against this scenario unless the company is an established company where you know the shares will retain significant value and that you will be able to sell the shares. If the company is a startup or a privately held company, the RSUs may never hold any value if there is not a liquidity event or a marketplace to sell the shares. Additionally, regardless of whether a company is public or private, you don’t know if the value of the shares will increase or decrease, so there’s no way to know how much you will actually be compensated if this is your sole means of compensation. Tread carefully in these situations. Personally, we’d ask for at least some guaranteed compensation to offset the opportunity cost of your time, and then any additional upside from the RSUs can be icing on the cake and incentivize you to do a great job in your role so that the value of those shares increases.
Conclusion
RSUs can be a valuable part of the compensation package, but understanding how they work is critical to understanding both the risks associated with them as well as the tax consequences. On the plus side, they offer you an opportunity to share in the upside of what you’re creating, and in some cases, particularly if a company is growing significantly, the value of your RSUs could be higher than your actual salary from the job.
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