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As part of a recent company acquisition I've been granted some restricted stock units at a certain value.
How do they work? I'm told we have a vesting schedule of 1/3 every year for the next 3 years.
For a layman who has never dealt with stocks before what does it all mean?
They give you shares, but they aren't actually yours straight away.
They become yours over the next three years, 1/3 at a time.
Good way of retaining employees, because if you leave, they keep the shares. (The ones that haven't vested yet)
Okay so when they vest I get that 1/3 value in shares at the shares rate at that time?
Can I then sell the shares and take the cash?
It's free cash, well sort of. The cash award will be used to buy shares in your company and in one year's time you'll get 1/3 of them. Chances are that what will actually happen is a bunch will be sold to cover your income tax (yes is counts as income) and then you can either sell them or leave them. If you leave them then any gain from that point onwards becomes a capital gain rather than income. Assuming this is a one off award then in two years time the second third can be sold at the market price and in three years the third third can be sold at the market price.
What the others have said above it basically right
You don't have to sell them though, you can hold onto them. They'll usually be released net, so tax would have been covered and they are yours to keep or sell. Any further increases are subject to CGT
Okay thanks all, seems simple enough. I have a year until the first lot vest so fingers crossed the stock goes up!
fingers crossed the stock goes up!
And that's why they do it 🙂
Staff retention and also having staff with (literally) a vested interest in the success of the company.