Equity compensation
Jun 26
min read

How do RSUs work?

Maximize RSU wealth wisely: Plan for taxes, diversify, manage risk, and seek professional advice. Don't overlook pitfalls for financial success.
Katy Song, CFP®
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  • RSUs are an excellent way to build wealth but they need to fit in with your larger financial plan.
  • RSUs can attract a large amount of tax but it’s often possible to make RSUs more tax efficient through planning.
  • Without planning, RSUs can result in your wealth being overly concentrated in your employer, opening you up to serious downside risk in the event of a drop in your employer's share price. For example, how impacted would you be if your employer’s stock dropped 25% tomorrow?
  • It’s often worth talking to an advisor to make sure your RSUs are being managed in the most efficient way.

Understanding RSUs

Restricted Stock Units (RSUs) are a great way to share in your company’s growth, but you should avoid common pitfalls that can impact your overall investment portfolio. There are countless stories of people who think of their RSUs as ‘money in the bank’. Rest assured, they are not.

Heard it a thousand times.

Here’s a common story

  • Sheila works at Spotify.
  • In 2020, she was granted RSUs worth $200,000, vesting quarterly over three years.
  • Her average price at the time of vesting was $125 per share.

Shiela dutifully held on to all her vested shares, paying taxes on them based on the then-current value. She did this because she believed in the long-term prospects of Spotify. In fact, all signs at work confirmed that belief.

Sheila believed in the company so much that she neglected to invest her other savings in the broader market, allowing her overall investment portfolio, including her 401(k) and IRA, to be heavily concentrated in just one stock.

Then the market took a dive, overly punishing technology stocks compared to the rest of the market.

Don’t put all your eggs in one basket

Diversification among your investments is a fundamental principle you cannot ignore. It is the surest way to avoid being hit by significant market moves.  Yet time and time again people fall victim to what Nobel Prize-winning behavioral economist Daniel Kahneman calls optimism bias, which is the tendency of people to overestimate their odds of success, while simultaneously underestimating their odds of failure.

Shiela didn’t take into account that Spotify was trading at historically unheard-of multiples, or that their growth was spurred on by a black swan event called Covid.  She also didn’t consider the most important factor of all, that the stock could actually go down.  Because of that oversight, she paid taxes on the stock, which is treated as ordinary income, when it was valued at $145, even though today the stock trades at roughly half that amount.

So what is the right RSU strategy?

Here are seven tips when thinking about RSUs, though it’s important to keep in mind that your unique situation may vary and it’s advisable to seek the help of a professional advisor when making important financial decisions.

Treat RSUs like any other asset

While you may think of your company stock as a unique asset because you work there or because you feel like you know the company well, it’s an asset like any other and needs to be treated that way. Warren Buffet makes a great point about the personal attributes we assign to the stocks we hold - we remember exactly how we heard about it, what we paid, and why we think it’s a great investment. The stock doesn’t care. It will behave independently of those attributes.

You should think about your RSUs objectively and avoid optimism bias. Some helpful tips are to force yourself to think about the negative case. For example, what happens if your company’s stock goes down?  This will help you apply a more objective and balanced approach to your portfolio.

Programmatic divestiture

If RSUs make up a meaningful percentage of your overall investment portfolio, there are ways to mitigate concentration risk by regularly selling vested shares over a period of time. Doing this takes the emotion out of the decision, and allows you to benefit from dollar cost averaging, which is the notion that over time your average selling price will be a blend of the highs and lows of the stock.


Having a diversified portfolio is a central tenet of any good investment approach. If you have a lot of your wealth tied to your company’s stock, you can increase diversification by buying an ETF with broad market exposure.  Sheila might also want to consider a broad market ETF with slightly less technology exposure since so much of her portfolio is already correlated to that sector through her RSUs.

Risk management

All investments have risks. It’s important to understand how your RSUs fit into your overall portfolio and personal risk tolerance.  For example, Sheila is in her early 30s and early in her career. She may be comfortable taking more risks with her RSUs than someone who is closer to retirement.  Adjust your RSU strategy to align with your risk preferences and financial objectives.

Tax planning

Because RSUs are treated like ordinary income when they vest, this can result in a significant tax liability. You should consider how to mitigate the tax implications of RSUs by timing the sale of vested shares.

Consider market conditions

It’s incredibly important to consider overall market conditions when making decisions about RSUs. For example, the stock market may be in a period of extreme volatility or your company’s stock may be trading at a historically high multiple. These variables can have a meaningful impact on whether you sell or hold vested RSUs.

Financial planning

Financial Planning. RSUs should be a central component of your overall financial plan.  Consider your short-term and long-term goals. If you have immediate financial needs, selling some or all of your vested RSUs could provide liquidity for something significant like a down payment on a home. Alternatively, if you have a longer time horizon, you might choose to hold on to RSUs for a goal such as retirement.


Sheila didn’t make the most of her RSUs at Spotify. Hopefully, her story sheds some light on the potential pitfalls that employees may encounter. While RSUs offer an enticing prospect of sharing in a company's success, the associated risks, such as market volatility, tax implications, and lack of diversification should not be overlooked. As employees navigate the world of equity compensation, it’s crucial to understand these issues and seek professional financial advice in the pursuit of success with RSUs.

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