(3 minutes to read)

It’s important to have an accurate view of your financial position in order to make good financial decisions going forward. This view, though, can be more complicated when restricted stock units (RSUs) are part of the picture—they add a level of complexity that doesn’t exist if your compensation is simple salary and bonus or commission.

When you have RSUs, more variables come into play when you’re modeling your financial goals. So let’s run through a few financial planning questions and considerations you may want to take into account:

Vested or unvested. In planning for the future, should you include only your shares from vested RSUs, or should you also include your unvested RSUs? Typically, you would include unvested RSUs if you expect to remain with the company through your full vesting period. If not, you may want to truncate the vesting period you’re modeling and include only the time left that you plan to stay at the company. For example, if you plan to leave in a year, then only include the value of RSUs that will vest within one year. If you’re planning on leaving soon, it doesn’t make sense to include the full value of your unvested shares in any financial analysis. You would be leaving money on the table when you leave, and you should know what that amount would be when making your decision to go elsewhere.

Future grants. Should you include potential future RSU grants in your planning? Assuming you’ve been refreshed with new RSUs regularly and you’re already looking at a typical four-year vesting schedule on the recent refresh grants—probably not. Anything that far into the future is pretty speculative. To build in a safety margin and leave yourself some buffer in your planning, it’s probably better to leave out RSUs that may never be granted. For example, you might decide to leave your job in the tech industry for an industry that doesn’t offer RSUs. It’s also hard to gauge what size of grant you might receive in the future. As companies mature and the employee count grows, RSUs grants tend to shrink in size, even for the most valued team members. Because of all this, it’s usually best to simply allow future grants to be an unexpected upside to your financial plan.

Current value. What is the current value of your RSUs? This one can be tricky, especially if your grants are from a private company. In these cases, you often will not know, or even have a reasonably reliable guess, what the value of your RSUs are. Since the company’s stock is not yet publicly traded, you cannot directly observe the market price. You’ll have to do your own back-of-the-envelope calculation based on how much of the company you own and what comparable companies were valued at when they went public or were acquired. Take that number, then discount it even more to add a safety margin and create a hype buffer. The value of private companies can experience large swings over short time periods, just like publicly traded companies. Just because someone said the value of the company was a certain number on an internal Slack channel, it isn’t necessarily so. And it may be even less so when looking out a year or two.

For public companies, where a price can be observed directly, you can use the current stock price to value your unvested RSUs. But it’s good to be aware of the stock price’s range over recent years and apply some judgment. If the stock price is at an all-time high and recently had a sharp run-up, you may want to pick a lower number, maybe even 25% lower to pull a number out of the air. Again, build in some cushion and allow room for downside risk.

Held shares. What should you assume about the rate of return (growth rate in value) of held shares from previously vested RSUs? It’s really hard to predict the investment return of a single stock—in fact, it’s impossible—so there’s not a lot you can reasonably assume here. From a modeling perspective, it’s better to assume that you will sell the vested shares and invest them in a diversified portfolio that has a more reliable rate of return and volatility characteristics. We have a good idea how a diversified portfolio will perform, based on nearly 100 years of financial markets history, but we have no idea how a single stock will perform over a typical financial planning horizon. In a financial model, and in real life, it’s better to diversify concentrated stock positions.

Context matters here. If your RSUs are a small part of your total net worth, like 10% or less, the modeling assumptions aren’t as important. But if your RSUs make up a substantial portion of your net worth, like 25% or more, careful evaluation of your modeling assumptions matters. How you model the value and timing of your RSUs can have ripple effects across your finances, influencing everything from tax planning to investment approaches to home purchase (or remodel) decisions.

Parkworth Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you want help properly modeling your RSUs and using them to build wealth, schedule a complimentary consultation.