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Restricted Stock Units | Definition (Advantages & Disadvantages) - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo friends today we are
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going to discuss a tutorial on
restricted stock units we are going to
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discuss all the examples on the same or
the tax implications and we are going to
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discuss some of the differences let me
show you one article and then let's
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analyze something over here in the
article you know it has certain few
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details on in addition to the ESPP
that is the employees stock option plan
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for employees in certain roles have been
eligible to receive restricted stock
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units so that they are saying RSU units
now see restricted stock units is one of
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the popular way of equity compensation
used by employers for stock based
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compensation that is known as ESPP so
restricted stock units is basically use
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is valued in stocks at the time of grand
but however does not pass to the
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employees until they satisfy some of the
vesting conditions so I'll give you so
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you know this this basically this above
extract over here is basically of Tim
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Cook Apple memo on stock ownership
program for employees in Apple initiated
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its restricted stock units which is
known as RSU you you can say that of to
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retain and motivate their employees so
in this particular tutorial we'll be
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looking at so many details regarding
restricted stock units so let's get into
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the nitty-gritty of the same at the very
first end let's discuss what are
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restricted stock units so restricted
stock units are restricted RSU you is
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basically I'll write RSU you as a short
form is one of the packet of equity
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compensation offered by a company to its
employees very important because it is
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offered by company to its employees in
terms of companies shares now what
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happens however you know these shares of
the company are given to the employees
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at the future date as for the vesting
plan of the company so the employer
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receives a stock you can say stock
compensation after they complete the
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vesting requirement like you know such
as required performance milestones or
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some of the market conditions or serving
the company
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for a particular length of time since so
on and so forth
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see now Amazon I'll give an example of
Amazon Amazon utilizes restricted stock
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units as a primary source of equity
compensation as it aligns basically the
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long-term interest of both the
shareholders as well as the employee
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I'll show you the article of the same
you can see over here in the article we
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seek efficiently manage shareholders
dilution while maintaining the
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flexibility of issue shares for
strategic purposes for purposes like
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financing acquisitions aligning
employees compensation with the
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shareholders interest and so on and so
forth so V utilizes restricted stock RSU
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you as a primary vacant for equity
compensation because we believe that
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this compensation model aligns the long
term interest or for shareholders and
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employees
so once the restricted stock unit is
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basically assigned to an employer at a
fair market value I'm repeating it has
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been assigned at fair market value they
are considered as the income of the
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employee and since it is an income of
the employee the company with holds a
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percentage of the shares in order to pay
the income tax nevertheless the
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employee can receive the remaining
shares and has an author if you sell
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them I mean time at his own convenience
so why it is restricted I mean why this
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R letter so let me give some explanation
of the same it is because the grant is
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limited okay it is limited and is
subject to vesting schedule so the
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company establishes vesting a
requirement they have some sort of
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requirement which with which they work
and they based on the performance of an
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individual or you can say the length of
employment so apart from the basic
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requirement the company sets the limit
on the transfer of the seeds of the
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units so if an individual does not need
the requirement set for the buyer falls
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by the cooperations before the end of
the vesting period the unit of a person
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are forfeited as simple as that
so this is this exactly happens in the
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scenario now restricted stock units
example let's discuss an example let's
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say suppose there is a person who gets a
job proposal from a company the company
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over here
you know they believe that his skill set
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will turn out to be really good asset
for the company so therefore the company
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decides to offer him RSU that is
restricted stock units close enough to
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600 they are giving 600
as a part of the company's compensation
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apart from giving it giving him
substantial salary and other benefits
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so the shares of the company trade in
the market close enough to the market
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price I'll just write ma MP as the
market price as 150 Sorry 50 dollars
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per share and that makes
it makes 600 RSUs worth close
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enough to 600 that is 30,000 right 30,000 is the
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total value so the determination of the
market price is usually done based on
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either the prior days closed price of
the stock or the average high or low
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price look at that is how it been
calculated however you know if the
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person is supposed to get let's say
close enough to $30,000 over
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here as an incentive he has to serve the
firm for at least close enough to in the
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neighborhood of 5 years and due to
this of the vesting schedule so the
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person will be eligible to for for close
enough to 20% of the total RSU total RSU
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you can say in at the end of the first
year of the employment and another 20%
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of the RSU of the total RSU in the
second year and so on until he gets all
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the 600 RSU's at the end of the
five so whatever be the price of the
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shares at the end of the five year the
person will receive approximately
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$30,000 at the end of the fifth year got it so the RSU works as a
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motivational factor in the organization
it is not only it normally allows the
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employees to stay with the organization
but it enables them to perform phen
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which in turn results in the increase in
the performance of the shares eventually
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like for instance the person stays with
the organization for let's say five years
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if it stays for the five years to get
all the 600 RSUs then and by the time
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the price of the shares jumped to close
enough to 70 so over here
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600 will remain the same but here we
hear it jumps to 70 now what so he will
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end up receiving how much 42,000 as
simple as that so however it is taxable
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income so the company will hold the few
offered shares for the income tax and
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the capital gain tax so in contrast if
the person would have left the job during
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in the vesting period he wouldn't be
eligible for the reward
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like for example let us assume that the
person leaves the job after one year of
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his employment then he will be available
for only how much 150 that is 600
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divided by it should be 120 sorry RSU
and he he would be he would forfeit the
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remaining 450 shares so basically not
5 years over here it should be 150
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and the balance would be 600 less 150
will be forfeited that is full of dishes
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now what is the difference between the
grant date and the vesting date which is
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very important to learn at the very
first and what is grant date one should
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not get confused with the grant date and
the vesting date as both the dates are
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different on the grant date what happens
the company provides your
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restricted RSU I'll just write grant dates
the company provides your RSU's okay
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however you are not allowed to sell or
transfer the RSU's for a particular
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time once the particular time is up the
company gives a permission to sell or
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transfer the RSU which is known as the
vesting date in fact you know there are
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number of enterprises they they ask the
employees not to sell lower transfer the
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vested shares for a period like Amazon's
restricted stock unit schedule you know
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I'll provide you the same let me show
you something over there
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can you see we hear the scheduled
vesting restricted stock units that is
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given in is 2017 2018 2019 so this is
for the year ended ah data is that that
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we have say Amazon has granted in total
19.8 million restricted
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stock units out of its total 7 million RSU's vests in 2017
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got it and 7.2 million of RSU's vests in
2018 now what is RSU's full grant
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what is RSU' s of a full value of grant
so at the very first end restricted
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stock units are considered to be a total
amount of the stock the total amount of
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the stock ran for a reason that the
grant is worth the full value of the
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shares at the time of the vesting does
unlike the stock options then often
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considered underwater RSU's will
not result in any loss so meaning the
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outcome will always lead to some income
even though the market price drops let
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me give an example of our RSU example
let's say let's say we here the company
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over here grants how much 15000
restricted stock units to its employees
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on the vesting date when the share who
shares are given to you the stock price
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of the company is $20 per share so that's
a stock price it results in the grant
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value of $300,000 as simple as that 15,000*20 however if the stock price were
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15 a share at the vesting date the
grant value would still be worth
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$225,000 that is 15000*15 that is there
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is a drop in the price so it is because
the restricted stock units do not
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consider the grand date instead they take
into consideration the vesting date as
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simple as that so let's see how the
calculation go up out in this particular
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scenario so the shares of stock price at
vesting it was 20 so the value of the
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shares at the vesting or delivery is
$300,000 and when it is $15 per share it goes
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to 225,000 I hope you have got the
idea so you know below I'll show you an
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Amazon's
restricted stock in its activity in the
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year you know 2014 15 and 16 so but this
is basically Amazon's restricted stock
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unit and over here we note that now the
total RSU's granted in 2016
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his 9.3 million and the RSU's that
were been vested were 6.1 million and the
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RSU forfeited what 2.3 million now let's understand the
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taxation issue on the restricted stock
units so in case of the taxation issue
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when a shares of the restricted stock
units are delivered to the employees at
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the vesting Nate they are taxed they are
tax does the taxable income of the
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employee could be market value I'll just
write MV as a market value of the shares
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at the time of the vesting now the
employees have a compensation income
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which is subject to the federal and the
employment tax as well as any state and
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local tax so for the US employees the
withholding tax appears on the form of
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w-2 okay along with income I'll give you
an example of how the example on rsu's
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taxation law let's let's say suppose
there is an employee who is is delivered
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a 1000 shares in total this are the
number of shares at the vesting date
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with a fair market value of the share
that is f MV close enough to $20 per
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share so therefore we will recognize a
taxable income of how much 1000*20
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there which gives us $20,000
now since the income is taxable
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the company may offer various options to
pay the tax due on $20,000 with this
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we have following choices you know like
you know withholding to cover that is
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the first thing withholding to cover
then we have close enough to some other
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details like a cash details of cash and
so on and so forth now there are some of
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the benefits that we have of restricted
stock in the first and the foremost
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benefit that we have of this is you know
there are possibility lower taxes of RSU's
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see us restricted stock units don't
include section 83 B of provision
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therefore the possibility of the
overpayment is minimum in the case of RSU's
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now the second benefit that we can
talk about is different of shares
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issuance I'll just write for you
issuance so companies in the
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organization can issue restricted stock
units without diluting the share base
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now this creates a substantial advantage
over the other form of equity
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compensation like such as employee stock
option plans
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statutory or non statutory stock option
schemes and so on and so forth the third
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benefit that you have is
economical economical now what happens
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companies an organization the income in
this particular scenario RSU's minimum
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administrative expenses because there is
no actual shares to hold the record of
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off track the fourth one is like you
know you can get the tax reference over
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here so the difference not reference
over here difference so what happens the
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company of the company or forms can
defer taxation beyond the vesting period
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vesting it by dealing the issuance of
the shares to the employees the last one
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is over here is the foreign tax is
friendly so the foreign tax becomes
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friendly over here and restricted stock
units for the US employees working
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outside the united states have similar
taxation as compared to those working in
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the home countries so they are taxed on
the value of the tax at the time of the
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delivery not granted and then liable to
the capital gain tax on the sale of the
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stocks there are some of the
restrictions also there are some of the
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drawbacks you know like there are no
voting rights you can say there are no
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voting rights and then you have there
are no dividends you have then you have
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no section 83 election in in this
particular scenario so after discussing
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all of this thing we can finally
conclude that you know the restricted
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stock units are considered a better
equity compensation as compared to these
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stock options because as RSU's have
provided a downside protection as simple
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as that so in it only states that the
employer is giving more money to its
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employees in the straightforward words
restricted stock units enables the
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employees to get richer with the growth
of the company and RSU's are going to
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gain popularity quickly due to its
benefits over the other equity
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compensation according to red ford.com
it says that only 3% of the technology
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company had RSU centric equity plans 11
years ago in the u.s. however this
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number has grown to more than 50% 50% in
the technology as more and more company
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started practicing lyrics restricted
stock units thank you everyone
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