Disadvantages of Restricted Stock Units
1. Tax Implications Upon Vesting: RSUs are subject to taxation upon vesting, as the fair market value of the shares is included in the employee’s income as ordinary income. This can result in a significant tax liability for employees, particularly if the stock price has appreciated since the grant date.
2. Lack of Control: Until RSUs vest and the shares are received, employees have limited control over their equity compensation. They cannot sell or transfer RSUs, and they may forfeit the units if they leave the company before the vesting conditions are met.
3. Risk of Forfeiture: RSUs may be subject to forfeiture if the employee leaves the company before the units vest or other conditions are met. This can occur due to voluntary resignation, termination, or other reasons, resulting in the loss of potential equity compensation.
4. No Dividend Rights: While RSUs represent the right to receive company stock, they typically do not grant any voting rights or dividend rights until the shares are actually delivered. This means that employees do not benefit from dividends or have a voice in corporate governance until the RSUs vest and the shares are received.
5. Market Risk: The value of RSUs is tied to the performance of the company’s stock price. If the stock price declines between the grant date and the vesting date, the value of the RSUs may decrease, resulting in a lower payout for employees.
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