RSUs Explained
Restricted Stock Units are grants of actual company stock that vest over time. Unlike stock options, you do not pay anything to receive them. When RSUs vest, you get shares — real shares with real market value — deposited into your brokerage account. There is no strike price, no exercise decision, no hoping the stock goes up enough to make the option worthwhile. RSUs have value as long as the stock is worth anything at all.
This simplicity is why RSUs have become the dominant form of equity compensation at public tech companies. It is also why engineers frequently mishandle them — the simplicity breeds complacency about concentration risk, tax planning, and the decision of when to sell.
How RSUs Work
When you receive an RSU grant, you are promised a certain number of shares that will be delivered to you over a vesting schedule. You own nothing until the shares vest.
Example RSU grant:
Total grant: 1,000 shares
Current stock price: $150/share
Grant value: $150,000
Vesting schedule: 4 years
When shares vest, they are deposited into your brokerage account.
You now own actual stock. You can sell it, hold it, or transfer it.
The key difference from options: RSUs always have value (unless the stock goes to zero). An option with a 80. An RSU vesting when the stock is at 80 per share. You might be disappointed that it is not 80 of real compensation per share.
Vesting Schedules
RSU vesting schedules vary significantly by company, and the structure matters more than most engineers realize.
Common vesting schedules:
Standard (equal quarterly):
Year 1: 25% | Year 2: 25% | Year 3: 25% | Year 4: 25%
Example: Google, most mid-size companies
Back-loaded (Amazon-style):
Year 1: 5% | Year 2: 15% | Year 3: 40% | Year 4: 40%
Heavily weighted toward years 3-4
Designed to retain employees long-term
Front-loaded:
Year 1: 40% | Year 2: 30% | Year 3: 20% | Year 4: 10%
Less common, but some companies use this
With cliff:
Year 1: 0% (cliff) | Month 13-48: ~2.78%/month
Similar to options cliff structure
Amazon's back-loaded vesting is particularly important to understand. An engineer with a 15,000 in year one and $45,000 in year two. The "total compensation" in your offer letter averages across all four years, but your actual take-home in years one and two is much lower. Amazon compensates for this with larger signing bonuses in years one and two, but those are one-time payments.
Amazon $300,000 RSU grant example (at grant price):
Year 1: 5% = $15,000 (+ signing bonus to bridge the gap)
Year 2: 15% = $45,000 (+ remaining signing bonus)
Year 3: 40% = $120,000 (no signing bonus — RSUs carry the load)
Year 4: 40% = $120,000
Refresher Grants
Most companies issue new RSU grants annually (refresher grants) to retain employees. These overlap with your initial grant, so after a few years, you have multiple grants vesting simultaneously.
Year 1: Initial grant vests 25%
Year 2: Initial grant vests 25% + Refresher 1 vests 25%
Year 3: Initial grant vests 25% + Refresher 1 vests 25% + Refresher 2 vests 25%
Year 4: Initial + Refresher 1 + Refresher 2 + Refresher 3 all vesting
After 4 years, you have a steady stream of vesting RSUs
from multiple overlapping grants.
Refresher grants are how companies keep your total compensation competitive without re-negotiating your base salary every year. The size of your refresher grant is typically tied to performance reviews.
Taxes on RSUs
RSUs are taxed as ordinary income when they vest. Not when they are granted. Not when you sell. When they vest.
Tax at vest:
200 shares vest at $150/share = $30,000
This $30,000 is treated as ordinary income (like salary)
Added to your W-2 for the year
Taxed at your marginal tax rate
At 32% federal + 9% state + 7.65% FICA:
Approximate tax: $30,000 x 48.65% = $14,595
Net value received: ~$15,405
Most companies handle this automatically through "sell to cover" — they sell a portion of your vesting shares to pay the tax withholding and deposit the remaining shares in your account.
Sell-to-cover example:
200 shares vest at $150/share
Company sells ~97 shares to cover taxes ($14,595)
You receive ~103 shares in your brokerage account
The Tax Trap Engineers Miss
Here is where it gets dangerous. The shares are taxed at vest based on the stock price at that moment. If the stock drops after vesting, you still owe taxes based on the higher vest-day price.
Dangerous scenario:
200 shares vest at $150/share → $30,000 income reported
Tax owed: ~$14,595
Stock drops to $80/share before you sell
Your shares are now worth: 103 shares x $80 = $8,240
You received $8,240 in stock value
But you owed $14,595 in taxes on $30,000 of "income"
Net financial result: negative
If you sold at $80, you can claim a capital loss on the
difference between vest price and sale price, but the
loss deduction is limited and the cash flow pain is real.
This scenario is not hypothetical. It happened to thousands of engineers during the 2022 tech stock decline. Engineers who held RSUs after vesting watched their stock drop 40-70% while still owing taxes on the higher vest-day value.
Concentration Risk
This is the most underappreciated risk in tech compensation. When you work at a tech company with significant RSU compensation, both your income and your wealth are tied to the same company.
Concentration risk example:
Salary: $180,000/year (depends on company survival)
RSU annual vest: $120,000/year (depends on stock price)
RSU holdings: $400,000 in company stock
Total exposure: your job + $400,000 to one company
If the company has a bad year:
- Layoffs reduce your income to $0
- Stock drops 50%, your $400,000 becomes $200,000
- Both happen simultaneously because they share the same cause
No financial advisor would recommend putting 80% of your investment portfolio into a single stock. But that is exactly what engineers do when they hold all their vesting RSUs.
The Enron Lesson
Enron employees had their retirement savings in Enron stock. When the company collapsed, they lost their jobs and their retirement simultaneously. Tech companies are not Enron, but the principle is the same: concentrating your wealth in your employer's stock is a risk that no amount of conviction in the company justifies.
Diversification is not a prediction that your company will fail. It is insurance against the possibility, and it costs very little.
When to Sell RSUs
The standard advice from financial professionals: sell RSUs immediately upon vesting. This is the right default for most engineers.
The Logic
Ask yourself: "If someone handed me $15,000 in cash today, would I use it to buy shares of my company's stock?" For most people, the answer is no — you would invest it in a diversified index fund.
That is exactly what is happening when RSUs vest. You are receiving compensation in the form of a single stock. The moment they vest, you have a choice: hold (which is equivalent to buying the stock at today's price) or sell and diversify.
Decision framework:
RSU vests → shares appear in brokerage
↓
Would you buy this stock today with your own cash?
↓
Yes → Hold (but recognize you are making an active bet)
No → Sell and invest proceeds in index funds
↓
Most people: sell and diversify
When Holding Might Make Sense
There are legitimate reasons to hold, but they require honest self-assessment:
Hold if:
- You have genuine inside knowledge that the stock is undervalued
(careful: trading on material non-public information is illegal)
- Your total company stock exposure is under 10% of net worth
- You are within a blackout period and legally cannot sell yet
- You have a specific short-term tax reason (holding for 1+ year
for long-term capital gains treatment on post-vest appreciation)
Sell if:
- Company stock is more than 10-15% of your net worth
- You would not buy the stock at current prices with new money
- You need the money for a specific goal (down payment, etc.)
- You are anxious about the stock price (this is a signal)
The Emotional Barrier to Selling
Engineers resist selling RSUs for several reasons, all of which are emotional rather than rational:
- "The stock might go up." It might. It might also go down. An index fund also goes up over time, but with less single-stock risk.
- "I believe in my company." Your labor already demonstrates that belief. You do not need your savings to prove it too.
- "I will feel bad if I sell and the stock goes up." You will feel worse if you hold and the stock drops 50%. Regret asymmetry is real.
- "Selling feels disloyal." Your CEO sells shares regularly. Your VP of Engineering sells shares. The company itself often sells shares to raise capital. Selling is a normal financial operation, not a betrayal.
Tax-Efficient Selling Strategy
If you want to minimize taxes while still diversifying, consider this approach:
At each vest:
1. Sell-to-cover handles tax withholding automatically
2. Sell remaining shares immediately (short-term capital gains,
but there is usually minimal gain since vest = cost basis)
3. Invest proceeds in index funds in your taxable brokerage
Alternative: hold for 1+ year after vest for LTCG treatment
- Only if your total company exposure remains under 10-15% of net worth
- Risk: the stock might drop during the holding period
- Benefit: 15-20% LTCG rate vs 32-37% ordinary income rate on appreciation
- Note: taxes were already paid on the vest-day value as ordinary income;
LTCG only applies to gains above the vest-day price
Since sell-to-cover already handles the tax on the vest-day value, selling immediately after vest typically results in minimal additional tax (the stock price has not moved much in a few days). The real tax decision is about holding for long-term capital gains treatment on any post-vest appreciation.
Real-World Example
An engineer at a public tech company receives a 4-year RSU grant of 800 shares when the stock is at 160,000).
Year 1 vest: 200 shares at $250/share (stock went up)
Gross value: $50,000
Tax withholding (sell-to-cover): ~$24,000 (sells ~96 shares)
Net shares received: ~104 shares
Action: sells 104 shares, invests $26,000 in VTI
Year 2 vest: 200 shares at $180/share (stock went down)
Gross value: $36,000
Tax withholding: ~$17,500 (sells ~97 shares)
Net shares received: ~103 shares
Action: sells 103 shares, invests $18,500 in VTI
Year 3 vest: 200 shares at $300/share (stock recovered)
Gross value: $60,000
Tax withholding: ~$29,000 (sells ~97 shares)
Net shares received: ~103 shares
Action: sells 103 shares, invests $31,000 in VTI
Year 4 vest: 200 shares at $280/share
Gross value: $56,000
Tax withholding: ~$27,000
Net shares received: ~103 shares
Action: sells 103 shares, invests $29,000 in VTI
Total invested in VTI over 4 years: $104,500
If she had held all company stock instead: value fluctuated wildly
The diversified VTI portfolio provided smoother, more predictable growth
Common Pitfalls
- Treating the grant-day value as guaranteed. A 200,000 only if the stock price stays the same. If the stock drops 40%, your 4-year grant is worth $120,000. The number in your offer letter is a snapshot, not a promise.
- Holding RSUs after vest without a deliberate strategy. Inaction is a decision. Every day you hold company stock is a day you are choosing to buy that stock at today's price. Make it a conscious choice.
- Ignoring concentration risk. If more than 15% of your net worth is in your employer's stock, you are taking uncompensated risk. Your career is already a bet on this company. Your savings should not be.
- Not understanding the tax at vest. RSUs are taxed as ordinary income at vest, regardless of whether you sell. Engineers who do not sell can owe taxes on income they never converted to cash.
- Comparing your RSU value to the grant-day price. The relevant number is the stock price today, not when the grant was made. A grant "worth" 120k in value is 200k is gone.
- Timing RSU sales around stock price predictions. You do not know where the stock is going. Professional analysts with far more information than you are wrong roughly half the time. Sell on a schedule, not on a prediction.
- Ignoring blackout periods. Most companies prohibit stock sales during blackout periods around earnings announcements. Plan your sales around these windows. Set up a 10b5-1 plan if available for automatic scheduled selling.
- Not accounting for RSU income in tax withholding. Large RSU vests can push you into a higher tax bracket. If the automatic sell-to-cover does not withhold enough (which is common), you may owe additional taxes at filing time. Make estimated tax payments if needed.
Key Takeaways
- RSUs are grants of actual company stock that vest over time. Unlike options, they always have value as long as the stock is worth anything.
- RSUs are taxed as ordinary income at vesting. The tax is owed whether you sell or hold. Most companies sell shares automatically to cover the tax withholding.
- Concentration risk is the biggest danger of RSUs: your job and your wealth depend on the same company. If both fail simultaneously, the damage is compounded.
- The default action should be to sell RSUs at vest and invest the proceeds in diversified index funds. Ask yourself: "Would I buy this stock with cash today?" If not, sell.
- Back-loaded vesting schedules (like Amazon's 5/15/40/40) mean your actual year-one compensation is much lower than the annualized number in your offer letter.
- Refresher grants create overlapping vesting schedules that eventually produce a steady stream of equity compensation after a few years at a company.
- Do not let emotions — loyalty, FOMO, or fear of regret — drive your sell-versus-hold decision. Selling is not disloyal. Your executives sell their shares regularly.
- Set up a systematic selling plan. Sell on a schedule, not on a prediction about stock price direction.