RSU’s: Restricted Stock Units – 8 Essential Insights

RSU’s: Restricted Stock Units – 8 Essential Insights

“The large print giveth and the small print taketh away.”

– Tom Waits

ACTUAL CASE HISTORIES: Marta had just received a graduate degree as an Artificial Intelligence Engineer, and was recruited by several large employers. The salary, bonus and benefits she was offered by each were considerable.

The offer she accepted was different, in that it also included 25,000 Restricted Stock Units, often called RSU’s, which vested 5,000 units each anniversary of her first day of work. As her employer’s stock was worth about $10 per share, it was a sizable beginning to her potential long term wealth and retirement fund. And, too, chances were the stock price would grow over time. Since it was such a powerful recruitment tool, and resulted in Marta’s remaining the full five years, and motivated her, too, it was a perfect “win-win” scenario.

In recent years, we’ve helped a significant number of employees who were offered or granted employee compensation in the form of “Restricted Stock Units” (“RSU’s,” for short.) Their popularity has grown particularly among start-up or early-stage employers in light of the fact that they prove quite effective in:

    (a) attracting top talent with the opportunity to accrue significant wealth over time,
    (b) retaining top talent with the requirement that the talent needs to remain with the employer a number of years to achieve that wealth,
    (c) motivating top talent to achieve greater success by the specter of having to meet possible productivity conditions, and
    (d) ensuring that top talent does not engage in misconduct of any kind, which can result in their loss of granted RSU’s.

And one more advantage to “younger” or “start up” companies: granting employees RSU’s is not a current cash expense. Instead, while they may have a “dilutive” effect on outstanding shares, they are not an out-of-pocket expense.

Everyone wants to attract, retain, and motivate top talent. It’s for this reason that the granting of RSU’s sure seems like a win-win proposition for all.

Some of our clients have been very pleased with the significant compensation they have achieved through grants of Restricted Stock Units. Others, though, have not felt that way, for a variety of reasons. Of course, negotiation of the terms and conditions of RSU grants is important, to the degree possible, to ensure future events are “rewarding” and not “disappointing.”

LESSONS TO LEARN: Restricted Stock Units represent an opportunity to grow with an employer, and develop wealth in the process. The Lesson to Learn is simple: it’s important to understand the basics, at the very least, and some of the finer points, too, of RSUs, so that you are better able to ask the right questions, make the right requests, and guide yourself in negotiating both opportunities and disappointments regarding RSU’s.

And, so, it pays to take a few minutes now to educate yourself, at least to the basics of RSU’s, so that you can best deal with RSU opportunities and difficulties. This Newsletter provides you with those basics, and a few finer points, too, in presenting these Eight Essential Insights. Read on.

WHAT YOU CAN DO: Read, think, consider and remember, the best you can, these Eight Essential Insights regarding employee compensation in the form of Restricted Stock Units, called “RSU’s”:

1. Why do they call them “Units” in the phrase “Restricted Stock Units?” Simply put, the word “Unit” is used because what you are granted is not – at least for the time being – anything of value that you can sell, use, transfer or enjoy. Rather, RSU’s are a grant of something – called “Units” for lack of a better word – that may later “ripen” into something of value. That something that your Units will “ripen” into is shares of common stock of your employer.

Here’s an analogy that might make sense: “We promised to give our daughter, Sofia, a bicycle for Christmas, provided that (a) she does her homework, (b) cleans her room, and (c) does not misbehave, all until Christmas.”

Does that mean that Sofia can today (i) use that bicycle, (ii) show that bicycle to her friends, (iii) or trade it to a friend for another bicycle? Of course not; right now all she has is a promise, and a promise that we can take back under certain events and circumstances. That is the deal. Is that fair? Well, we say it is, because Sofia can always earn it by behaving as we want her to. So, if she does behave, we will be happy and so will she; a real win-win scenario.

By the way, the word used in place of “ripen” is “vest.” This is discussed in greater depth below.

2. Why do they use the word “Stock” in the phrase Restricted Stock Unit, if what I am getting is not stock? It is essential that you understand that, despite the word “stock” being used in its name, an RSU is not a share of stock. Rather, each RSU may – or may not – later become a share of your employer’s stock. In this context the word “stock” is used merely to signify that what your possible, later-to-arise “right to” is, in fact, a share of your employer’s common stock. (Just as what Sofia, above, may get a bicycle).

And, as they are not shares of stock, RSU’s do not earn dividends, as actual shares of stock generally do, and, too, they do not entitle their holders to vote in shareholder elections, as stock shares usually do.

So, remember, an RSU is not a share of stock in your employer, but one day it may become one, if all conditions are met for it to do so, and you do not engage in any misconduct in the future.

Workplace Document Confusing? Offer Letter? Non-Compete Agreement? Retention Agreement? Consulting Agreement? Others? Want it Reviewed and Explained? Get Your Workplace Document Reviewed, Analyzed and Explained to You, with 30 Minutes to Ask Questions. Just email us at [Vanessa@ExecutiveLaw.com.]

3. What is meant by the word “Restricted” in “Restricted Stock Unit?” This is really important.

The most important of the three words in “Restricted Stock Unit” is the first one: “restricted.” That is because these units have attached to them considerable restrictions and conditions, as examples:

    (i) who may be eligible to receive them,

    (ii) in whose names they may “vest” (discussed below),

    (iii) to whom you might sell or transfer them,

    (iv) restricted in that they may be forfeited back to the employer in certain situations,

    (v) perhaps might be repurchased from the employee by the employer at below their fair market value, what might have been paid for them, and even possibly for zero dollars, and

    (vi) are also restricted by having attached to them post-employment restrictions such as non-compete covenants, and other restrictions on the employee’s future freedom.

4. What is meant by an RSU “vesting?” Generally speaking, “vesting” means that something “ripens” and thereby becomes “yours to keep.” So, once one RSU becomes “vested,” it generally means that you own one share of the company’s common stock, and that you can sell it, transfer it to someone else, or use it as a pledge of collateral for a loan.

    (i) “Serial Vesting”: In the most common scenario, “vesting” of RSU’s takes place over time, something like 25% per year over four years of future employment. This kind of vesting is called “serial vesting,” and the time period of vesting is called a “vesting schedule.” Each slice or chunk of RSU’s that vests is referred to as a “tranche,” which almost rhymes with the word “launch.”

    (ii) “Cliff Vesting”: In some instances, “vesting” does not take place unless you have achieved certain milestones of performance, such as meeting your sales quota, or if the company has not met certain goals of its own, such as revenue, profit, or stock price growth. If RSU’s vest all at once, such as all after four years, or all when you or the company reaches a predetermined goal, that is referred to as “cliff vesting.”

    (iii) “Graded or Blended Vesting”: Sometimes we even see a mixture of “serial vesting” and “cliff vesting,” and that is commonly referred to as a “graded or blended vesting.”

    (iv) “Accelerated Vesting”: In some circumstances, RSU Award Agreements and Long Term Incentive Plans provide for immediate, total vesting of unvested RSU’s, which is what we call “accelerated vesting.” The most common circumstances of “accelerated vesting” are upon death, disability and termination without “cause.”

    (v) “Reverse Vesting”: See Section 7, below.

Have you been offered “Employee-Ownership Interests?” Consider our Model Memo and Addendum Responding to an Offer of Employee Ownership from a New or Young Company. A unique and sophisticated model to gain significant protections to both your employment and your equity. “What To Say, and How to Say It.”™ To get your copy just [click here.] Delivered by Email – Instantly!

5. Where can you locate and identify these important (some might say “dangerous”) restrictions? Generally, we find them a bit scattered in four different legal documents: (i) Employment Agreement (or Offer Letter), (ii) RSU Award Agreement, (iii) RSU Plan, and (iv) the company’s Shareholder Agreement. Let’s take them one-by-one:

    (i) Employment Agreement (or Offer Letter): Simply put, these are the two documents that generally first set down what compensation an employee will receive, and it is generally expected that RSU’s are mentioned here. That said, not every employee has a written Employment Agreement (or even Offer Letter.)

    While it is common for the number of RSU’s to be granted to an employee to be noted in employment agreements or offer letters, little information about restrictions on RSU vesting are usually found in these documents. Don’t forget for a moment that “The devil is in the details.”

    (ii) RSU Award Agreement: Though sometimes having a different (but similar) title, it is in this document that you will probably find the critical details of RSU restrictions and conditions, vesting and potential forfeiture of RSU’s.

    (iii) Long Term Incentive Plan (could also be called “Employee Stock Plan”): Chances are great that in this document – which might be 20, 30, 40 or more pages – that you will find most, if not all, RSU’s conditions and restrictions.

    (iv) Shareholder (or Stockholder) Agreement: While it is not common to find details of RSU’s in this document, it is here where you will likely find the many ways that the company Board of Directors may decrease, if not decimate, the value of RSU’s by, including others, their ability to issue many, many more shares, and thus dilute their value. Unless you are a very senior executive, or have other very significant leverage, do not expect to be able to change, modify or alter even a word of this document.

Why is it that the critical details of RSU restrictions and conditions are so “spread out” in various documents, like pieces of a puzzle scattered on the floor of four different rooms, and as a result so difficult to identify? In my experienced view and opinion, it is quite intentional, because knowledge reduces fear and increases empowerment, and fear and disempowerment of employees reduces their ability to effectively navigate and negotiate for themselves.

6. Before they become “vested,” can RSU’s be taken from you? Yes, unvested RSU’s are commonly lost in one of three ways:

    (i) Employment Termination: Generally – but not always – when your employment terminates, any unvested RSU’s you may have are cancelled, and no longer vest.

    (ii) Engagement in Misconduct: Most Employment Agreements, RSU Award Agreements, and Long Term Incentive Plans provide that you will lose unvested RSU’s if you engage in serious misconduct of any kind, whether a violation of law, regulation, company policy or procedure, or dishonesty in one way or another.

    (iii) Failure to Honor a Future Restriction, Such as a Non-Compete: It is not that rare that, if you are terminated “Without Cause” your unvested RSU’s either immediately vest, or continue to vest over time. In these circumstances, it is fairly common to see vesting of your unvested RSU’s be conditioned on your continuing to honor due future obligations. This is called a “future compliance” restriction, which means that if you fail to comply with such things as non-competes, non-solicitation covenants, or confidential agreements, your unvested RSU’s are immediately forfeited.

    These essentially provide, “If you do not honor our company’s requirement that you do not go to work for a competitor, or you do not honor any obligation you may have to not solicit our customers, or you do not keep what you know about us confidential, then we can unvest, cancel or you forfeit your unvested RSU’s, or perhaps even stock received from them.

Leaving but Want Your Options or RSU’s Vested Anyway? This is especially possible for those who are laid off without “cause.” We offer a Model Memo Requesting Vesting of Unvested Options When Laid Off. Applies to Unvested RSU’s, as well. It shows you “What to Say and How to Say It.”™ To obtain a copy, just [click here.] Delivered by Email – Instantly!

7. Can Vested RSU’s get “Unvested” or “Reverse Vested?” Surprisingly, the answer is “yes” by a process that is often called either “Repurchase Rights” or “Reverse Vesting,” essentially two names for the same process.

In more and more employer RSU plans, there are provisions that say that, at any time, the Company can repurchase from you your RSU’s, or the stock you have received from vested RSU’s. This is sometimes called “Repurchase Rights” or “Reverse Vesting.” The purchase price? Often “what you paid for it,” which is usually zero. In some Plans it says, “the lower of what they are worth or what you paid for it.”

You might want to view a blogpost I wrote entitled “Robbery by Repurchase Rights.” To do so, just [ click here. ]

8. There is just no substitute for careful review and analysis of your RSU Documents. There is simply no substitute for good, careful review of your RSU documents so that you know what you get, when you get it, and how and when you might lose it. Then you can factor that data into your decisions and actions.

For example, one client named Molly was being recruited for a job. She mentioned to the recruiter that “I can’t start until after March 15th, because that is when my RSU’s vest.” Without even asking for it, her job offer included stock in the new company to make up what she would have lost from her soon-to-be forfeited RSU’s. If she had not known her vesting date, and that she would have lost stock if she left before March 15, she could not have mentioned it to the recruiter, and she would never had gotten the “replacement stock” from her new employer.

Will it likely cost you legal fees to do so? Yes, but as the saying goes “If you think education is expensive, you have no idea how much more expensive ignorance is.”

In Summary . . .

Restricted Stock Units, often called RSU’s, are an increasingly common form of employee compensation. It is important that you understand at least their basics, to guide you to achieving their highest potential reward, and the least likely possible loss to you. We offer you, above, the Eight Essential Insights of RSU’s. With them, you are a stronger and wiser “career navigator.” As we often say, “The Better the Data, the Better the Decision.”

P.S.: If you would like to speak directly about this or other subjects, I am available for 30-MINUTE, 60-MINUTE, OR 120-MINUTE TELEPHONE CONSULTATIONS, just [click here.] Evenings and weekends can often be accommodated.

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you – traps and pitfalls, included – and to avoid the likely bumps in the road. For those employees who anticipate receiving Restricted Stock Options, or who have already received RSU’s, knowing what you have, what you are entitled to and what you may gain or lose by wise negotiation of them, all grow out of your understanding these Eight Essential Insights. Standing up for yourself in this context, and on this issue, is nothing less than wise “navigation and negotiation.”

Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.

Please Note: This Email Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.

Sklover Working Wisdom™ is a trademarked newsletter publication of Alan L. Sklover, of Sklover & Company, LLC, a law firm dedicated to the counsel and representation of employees in matters of their employment, compensation and severance. Nothing expressed in this material constitutes legal advice. Please note that Mr. Sklover is admitted to practice in the State of New York, only. When assisting clients in other jurisdictions, he retains the assistance of local counsel and/or obtains permission of local Courts to appear.  Copying, use and/or reproduction of this material in any form or media without prior written permission is strictly prohibited. All rights reserved. For further information, contact Sklover & Company, LLC, 45 Rockefeller Plaza, Suite 2000, New York, New York 10111 (212) 757-5000.

Repairing the World,
One Empowered – and Productive – Employee at a Time™

© 2019, Alan L. Sklover All Rights Reserved. Commercial Use Strictly Prohibited and Enforced.