If you're holding restricted stock units, it's time to talk to a professional.
Whether you're working for a large public company or a newly established startup, there's a good chance you're receiving some form of equity-based compensation. In recent years, restricted stock units have become an increasingly common form of equity compensation, as companies search for a simplified alternative to stock options.
What may happen to your RSUs following a merger or acquisition will ultimately depend on a wide range of factors that will be specific to the terms of the agreement between the two firms. Although the thought of your firm being acquired by another may raise concerns about job security and other issues, acquisitions generally result in a very positive outcome for those with equity compensation.
If you believe your company is being acquired, consult your financial advisor for details about how the sale may affect your equity position.
What are restricted stock units? RSUs are grants of company equity shares. The value of the shares is determined by the current market value on the date the RSUs vest. What determines when vesting will occur will depend on the terms set forth by your employer.
Many private companies will stipulate that grants will become vested after the employee meets a service requirement (time vesting) and the company has a liquidity event, such as going public or getting acquired. For public companies, vesting is typically time-based but may also include other performance-related requirements, such as reaching a certain stock price.
Taxation of restricted stock units. A driving factor in the adoption of RSUs over other types of equity compensation is the simplified tax treatment, especially for international companies. A benefit of RSUs compared to some other types of equity arrangements is that there is no taxable event upon grant of the shares.
For U.S. employees, the value of the stock will be included in your regular W-2 income when the shares vest, or are delivered to you. Since your restricted stock units are considered ordinary income upon vesting, the amount is also subject to federal, state, and local taxes in addition to Social Security (up to the maximum; in 2016 it is $118,500) and Medicare.
Most employers will automatically withhold a portion of your income to cover some of the tax due; however the amount may not be sufficient depending on your situation. Working with a certified public accountant to determine whether a quarterly tax payment needs to be made is recommended. Further, a large increase in your ordinary income may impact your ability to take advantage of other favorable tax provisions and may increase your marginal income tax bracket. Consult your financial advisor and CPA to ensure you have a tax planning strategy in place.
What happens to restricted stock units after a company is acquired? As sad as it is to say, the answer to this question mirrors the response to so many financial planning questions; it depends. What will ultimately happen to RSUs after an acquisition will depend on an overwhelming number of factors, but while you wait on the final terms of the agreement between the companies, these are some of the common considerations. You'll likely find that many of these points apply to your situation. This is part of the complexity, as it is typically a multitude of factors that determine the treatment of your stock grants. For example, an employee with unvested RSUs who goes on to work for the new firm may have their awards handled differently than an individual in a similar situation who is not hired by the acquiring firm.
If your RSUs have vested, you already hold stock in your current company. Those shares can't be cancelled or otherwise dissolved without some form of compensation (unless part of a bankruptcy proceeding which is a separate issue not addressed in this article). The acquiring firm may choose to cash out your shares at their current value or another agreed-upon price, or convert your shares into their stock. The details of how your company stock will be handled post-merger will be laid out in a merger and acquisition agreement you'll receive when the terms are finalized.
Employees with unvested RSUs are (quite understandably) typically more apprehensive about M&A discussions. However, the reality is that even those with unvested RSUs usually get something for their unearned stock awards. Some common outcomes include a transfer of unvested RSUs into stock options or RSUs at the new company, a full or partial cash-out, or even accelerated vesting of your RSUs. Again, the details will be included in an M&A agreement you'll receive when the terms are finalized.
For employers, equity compensation is part of a retention strategy to keep qualified employees. If the acquiring firm has a desire to keep talent, then it will likely make a strong effort to ensure those key employees are happy with the transition. Unfortunately, those who are not asked to remain with the company – or choose not to – might have a less favorable agreement. Another item to consider is the culture at the acquiring firm. If equity compensation is not part of the package for their employees, it could upset their existing base if newly acquired coworkers were given stock.
Yet another wrinkle in the what-if scenarios is the status of either firm as a public or private company. For private companies, valuation is always a concern; how might the acquiring firm value the company they're acquiring? For public companies, how might the financial markets may react to the news of the merger or acquisition?
If you hold restricted stock units and your company is being acquired or merging with another firm, consider working with a financial advisor familiar with the process. An advisor can help you navigate the legalese in the agreements and determine how those documents ultimately impact your financial and tax situation. Since these types of deals can be structured in so many ways and what may happen to unvested awards and current equity positions will depend on a wide array of factors, each situation will be unique.
Kristin McFarland is a blogger for The Smarter Investor and wealth advisor at Darrow Wealth Management, an SEC registered investment advisor in Massachusetts. The material contained in her articles is for general information only and should not be construed as the rendering of personalized investment, legal, accounting or tax advice. You can connect with her on LinkedIn and follow her on Twitter.