Disclaimer: This article is for informational purposes only and does not constitute financial, investment, legal, or tax advice. Always consult a qualified professional before making any financial decisions.
Many FAANG and FAANG-adjacent employees often misunderstand how to manage their RSUs (Restricted Stock Units).
These employees typically receive a regular monthly paycheck like any other salaried worker, but in addition, they’re granted company shares as RSUs—usually every quarter, depending on their vesting schedule.
Let’s take a simple example:
Imagine a FAANG employee who has worked at the same company for 2 years. It’s very likely that around 30% of their total compensation has come in the form of RSUs.
For clarity, let’s say the company is ABC, its share price is $100 , and the employee receives 100 shares every quarter.
Because ABC is a publicly listed company, these RSUs are treated as taxable income at the time of vesting.
Basic math: 100 shares x $100 = $10,000 in taxable income
The Fair Market Value (FMV) of the shares at the time of vesting is considered income, so the employee needs to pay taxes on this amount—let’s assume a 33% tax rate.
Now, employees usually have three options for handling these taxes:
1. Sell to Cover
In this option, a portion of the RSUs is automatically sold to cover the taxes (in this case, 33%).
So instead of 100 shares, the employee receives 77 shares, as 33 shares (~$3,300) are sold to cover the taxes.
2. Cash Payment
Here, the employee receives all 100 shares but must pay $3,300 out of pocket to cover the tax.
The employee gets the full 100 shares deposited into their account, but must transfer $3,300 in cash to the brokerage account to settle the tax obligation.
3. Sell All
In this case, all 100 shares are sold immediately, and the net amount after taxes is deposited as cash.
The employee receives $7,700 in cash, as $3,300 is withheld for taxes.
All three options are valid, and the best choice depends on an individual's financial situation and goals.
Let’s break down some common scenarios:
If someone needs cash immediately, Option 3 (sell all) might be the best.
If the goal is to build long-term wealth, either Option 1 or Option 2 could be more beneficial.
But choosing between Option 1 and Option 2 isn’t always straightforward. Let’s go deeper.
What if the employee isn’t living paycheck to paycheck?
If they have sufficient savings and believe their company is growing, Option 2 becomes appealing, as they retain all 100 shares.
But here’s the catch: with Option 1 or Option 2, employees continuously accumulate shares from the same company every quarter.
And that’s where the classic saying comes in:
Don’t put all your eggs in one basket.
Even if the company is performing well, holding only one company’s stock increases risk. Diversification is key to building a resilient investment portfolio.
So, what’s the solution?
Employees should think about creating an exit strategy for their RSUs.
Let’s revisit our employee example with a thought experiment:
Suppose they have $3,300 to invest, and they can choose between:
Buying more ABC shares (their employer’s stock at $100 per share), or
Buying XYZ shares, also priced at $100 per share.
If their current portfolio only includes ABC shares, what would you recommend?
To follow the principles of diversification, it might make sense to invest in XYZ instead, while allowing 33% of ABC shares to be sold each quarter to cover taxes (Option 2).
This approach builds a gradual exit strategy and helps reduce overexposure to a single stock.
With $3,300 still available that wasn’t needed for taxes, there’s flexibility to invest in XYZ or explore other promising opportunities. It’s a smart way to stay diversified, manage tax obligations, and make your portfolio work more efficiently over time.
Originally published at https://mastermentee.com
