A Software Engineer's Guide to Restricted Stock Units (RSUs)

Restricted stock units (RSUs) are a type of equity compensation that is often offered to software engineers. RSUs give employees the right to own shares of company stock, but there are certain restrictions on when and how the shares can be claimed.

How do RSUs work?

When an employee is granted RSUs, they are given the right to purchase a certain number of shares of company stock at a predetermined price, known as the grant price. The RSUs typically vest over a period of time, such as four years. This means that the employee can claim the shares and purchase them at the grant price once they have been vested.

For example, let's say you are granted 100 RSUs with a grant price of $10 per share. The RSUs vest over a period of four years, so you will be able to claim 25 shares of stock per year. If the stock price is $20 per share when the RSUs vest, you will be able to purchase the shares for $10 per share and immediately sell them for a profit of $10 per share.

The benefits of RSUs

RSUs can be a great way for software engineers to build wealth. They offer the potential for significant financial gains if the stock price of the company appreciates. Additionally, RSUs are typically taxed at the lower capital gains rate when they are sold, which can save you money on taxes.

The drawbacks of RSUs

There are a few drawbacks to RSUs that you should be aware of. First, you don't actually own the shares of stock until they vest. This means that you don't have the right to vote on company matters or receive dividends until the shares vest. Second, if the stock price of the company decreases, you may end up losing money on your RSUs.

How to manage your RSUs

If you are granted RSUs, it is important to have a plan for how you will manage them. Here are a few things to consider:

• When will the RSUs vest? This will determine when you will be able to claim the shares and purchase them at the grant price.
• What is the current stock price? This will determine how much profit you could make if you sell the shares immediately.
• What is your risk tolerance? If the stock price decreases, are you comfortable losing money on your RSUs?
• What are your financial goals? Are you saving for retirement, a down payment on a house, or something else?

Once you have considered these factors, you can decide how to manage your RSUs. You may choose to sell them immediately, hold them for the long term, or sell them at a certain price target.

Conclusion

RSUs can be a great way for software engineers to build wealth. However, it is important to understand how they work and the risks involved before you accept them as part of your compensation package.