If you work in the Bay Area for a public technology company, as I do, then part of your salary is paid in Restricted Stock Units (RSUs). I have explained how RSU works in another post which you can check out here. Many of my readers have been asking about how RSU refreshers work as part of their total compensation. Another hot topic is how RSU IPO taxes work. In order to explain how stock RSU refresh and RSU IPO taxes work, I will split the information across a two-part series. Welcome to part-1 of this two-part series.
- For part-1, I will explain how stock RSU refresh works and how they combine together to increase your overall pay.
- For part-2, I will explain how RSU IPO taxes work when showing a profit or claiming a loss.
Related Post: Are RSUs Taxed Twice
When are RSUs granted
Assuming you know how RSUs work. There are a couple of ways your employer can grant you RSUs.
- First is from your starting salary which includes an initial RSU grant as part of your pay.
- Second is RSU refresh where some companies will choose to provide salary raises in this form instead of an actual base salary increase.
What is an RSU Refresh
Silicon Valley companies often use RSU refreshers as a form of incentive for employees to stay with the company longer. In other words, employers will grant an RSU refresh to an employee in hopes that the employee stays with the company past the future vesting dates. Most companies will have RSU vesting dates typically spread out over a 4-year period. A typical RSU timeline for an employee would be an initial RSU package that spans over years 1 thru 4. While an RSU refresh rewarded after year-1 would span over years 2 thru 5. By granting RSU refreshes, the employer hopes that their employees will stay additional years especially if the stock price rises. The stick holding a carrot at the end just became longer for the donkey. (Similar to the rat-race metaphor. Maybe I should have used a rat instead of a donkey.) Most co-workers I have had, especially in the hyper-competitive Silicon Valley, almost never stay at the same employer longer than 4-years.
Increase Total Compensation with Stock RSU Refreshers
Part of an employee’s salary at a public company will often be in the form of RSUs combined with base salary. Some companies will choose to provide a salary raise in the form of a stock RSU refresh instead of increasing base pay. An employee’s total compensation can continue to increase with subsequent stock RSU refresh packages. For those employees lucky enough to be employed by public companies with increasing stock prices, stock RSU refresh is how they become part of the high earning 1%.
Short Employee Tenure in the Bay Area
To keep things simple, I have provided an example timeline below where an initial RSU package is combined with just one RSU refresh. Notice how the initial plus refresh RSU packages begin to combine in value starting year-2 thru year-4. However, the initial RSU share package runs out starting year-5 leaving only the RSU refresh package. Typically RSU refreshers even when combined over 4-years will likely not add up to the initial RSU package size. It is for this reason that most Silicon Valley employees leave their employer within 4-years in hopes of seeking a new initial RSU package.
- *Initial RSU Grant is 100 shares over 4-years annually (blue bars)
- After year-1: 25 shares granted from Initial RSUs; 25 total vested shares
- *Refresher RSU Grant is 40 shares over 4-years annually (red bars)
- After year-2: 25 shares granted from Initial RSUs and 10 shares granted from Refresher RSUs; 60 total vested shares
- After year-3: 25 shares granted from Initial RSUs and 10 shares granted from Refresher RSUs; 95 total vested shares
- After year-4: 25 shares granted from Initial RSUs and 10 shares granted from Refresher RSUs; 130 total vested shares
- After year-5: 10 shares granted from Refresher RSUs; 140 total vested shares
Quick Summary
Silicon Valley companies often use RSU refreshers as a form of incentive for employees to stay with the company longer. Most companies will have RSU vesting dates typically spread out over a 4-year period. An employee’s total compensation can continue to increase with subsequent stock RSU refresh packages. Typically RSU refreshers even when combined over 4-years will likely not add up to the initial RSU package size. It is for this reason that most Silicon Valley employees leave their employer within 4-years in hopes of seeking a new initial RSU package.
Stay tuned for part-2 of this two-part series to learn about stock RSU refresh taxes.
