The potential drawbacks and risks of RSUs
Restricted stock units (RSUs) are a type of equity compensation offered by some companies to their employees.
While they can be a valuable addition to an employee's compensation package, there are also potential drawbacks and risks to consider.
Vesting period. One potential drawback of RSUs is the vesting period. This is the period of time that an employee must work for the company before they are entitled to receive the shares of stock. If an employee leaves the company before their RSUs have vested, they may lose the opportunity to receive the shares.
Tax implications. Another potential risk of RSUs is the tax implications. When RSUs vest and the shares are distributed to the employee, the value of the shares is considered taxable income. This can result in a significant tax bill, especially if the stock has appreciated significantly in value.
Risk of stock price fluctuations. Another risk of RSUs is the potential for stock price fluctuations. If the stock price falls significantly, the value of the RSUs may be reduced. This can result in a financial loss for the employee if they decide to sell the shares.
Potential dilution. Finally, RSUs can also carry the risk of dilution. This occurs when a company issues new shares of stock, resulting in a decrease in the value of the existing shares. This can reduce the value of an employee's RSUs, even if the stock price remains unchanged.
It's important to carefully consider the potential drawbacks and risks of RSUs before accepting them as part of your compensation package.
While they can be a valuable addition to your income, it's important to understand the potential risks and plan accordingly. This may include seeking the advice of a financial advisor or tax professional.
In summary, RSUs can be a valuable addition to an employee's compensation package, but there are also potential drawbacks and risks to consider.
These include the vesting period, tax implications, risk of stock price fluctuations, and potential dilution. It's important to carefully consider these risks before accepting RSUs as part of your compensation.