Over the last couple of weeks, many Lilly employees have received shares of Lilly stock from Restricted Stock Unit (RSU) awards. Often-times we find confusion among people about what exactly Restricted Stock Units are and what people need to do with them.
RSUs are not like stock options that were much more common several years ago. With stock options, you had to actually do something – exercise the option – in order to own the stock. And you had to do it before the option expired. It was also possible that the option could expire without being worth anything. None of that is true with RSUs.
Let’s look at an example of how RSUs work. On February 3, 2016, you received 150 RSUs. February 3, 2016, is known as the Grant Date. As the market price of Lilly stock changes, so does the value of each RSU. You become vested in these RSUs over a three-year period as follows:
- 25% year 1
- 25% year 2
- 50% year 3
This means that after one year, on February 3, 2017, the restriction on 25% of your 150 RSUs will lapse, (38 units). Some shares will be sold to pay the income taxes due and the net shares will be paid out to you in the form of one share of Lilly stock per RSU into a Merrill Lynch account. On February 3, 2018, the restriction lapses on 25% more RSUs and then on February 3, 2019, the final 50% restriction lapses and the remaining units of your 2016 RSU grant are paid out.
You now hold the Lilly shares in your Merrill Lynch account. This account is an individual account. If you are married and you die, the assets will be frozen until the probate process is completed. This can be lengthy. If you’re married, you should consider moving these assets into a joint account. If you die while owning the shares in a joint account, the account can be passed to the surviving spouse without the probate process. If you are single, you should consider moving to a TOD or Transfer On Death Account. This means that you can name a beneficiary to inherit the assets in the account, avoiding probate.
Too Much Company Stock?
Now that you own the Lilly stock, what should you do with it? This is a very personal decision and depends on your circumstances. One rule is to not let the stock make up more than 10% of your overall portfolio. I actually prefer that it be less than five percent of your portfolio when it is your employer’s stock. Why does it matter if it’s your employer’s stock versus any other stock? Because if the company stock is down, the same issues causing the stock to be down may also cause employees to lose their jobs and income.
Between RSUs, other equity awards and the Lilly stock fund in the 401(k) it’s not difficult for long-time Lilly employees to accumulate a lot of company stock. It’s often a good idea for those who already hold five percent or more in Lilly stock to sell the stock from the RSUs each year as the restriction lapses so that you keep your holdings at five percent or less and do not create possible income taxes from holding the stock and letting it appreciate. The proceeds can then be invested in a diversified portfolio for future growth.