What Should I Do with My Biotech RSUs? A Complete Guide

Key Takeaways:

• Common among biotech professionals, RSUs are a form of equity compensation that represents actual shares of a company’s stock. 
• Before vesting, your company controls your granted RSUs in a “restricted” status within the plan. After vesting, the shares are legally yours to sell, provided there are no company restrictions or blackout periods.
• Every year, biotech professionals should review their grant agreements, vesting schedules, company restrictions and blackout windows, tax treatments, and concentration risks.
• With planning and guidance, biotech professionals can avoid common RSU mistakes, such as missing selling windows, unintentional non-compliance, and underestimating taxes.

Restricted stock units (RSUs) are a common form of equity compensation we see among biotech professionals and business owners as financial planners in San Diego. RSUs offer employees a tangible stake in the company’s success, aligning their interests with the company’s.

If you hold RSUs or work in an industry that grants them, it’s critical to understand the terms, vesting schedules, and tax treatments to manage them effectively. Use this in-depth guide to learn key fundamentals and considerations with respect to RSUs.

What Are the Basics of Biotech Restricted Stock Units?

What is a restricted stock unit? RSUs are a form of equity compensation representing actual shares of a company’s stock. Employees gain full ownership of the shares only after satisfying predetermined criteria, such as remaining with the company for a specified period or a vesting schedule. RSUs are prevalent among a number of industries, including:

• Technology/Software
• Pharmaceuticals
• Telecommunications
• Fintech
• Healthcare
• Manufacturing
• Energy

Why do biotech companies favor RSUs to traditional stock options?

• No Purchase Required: Unlike other company stock options, there is no initial investment or purchase required by employees; instead, employers grant RSUs to employees.
• Value Retention: RSUs carry value at the fair market price only once vested, at which point employees can sell or hold the shares as regular shareholders. Unlike stock options, which can put employees “underwater” if the stock price falls below the exercise price, RSUs retain some value unless the stock goes to zero.
• Employees Have “Skin in the Game”: With ownership tied to performance goals, a vesting schedule, or other factors, the approach can reduce employee turnover during critical phases and motivate employees to actively contribute to the company’s success, specific milestones, and stock value.

Why are RSUs attractive among biotech companies?

• Companies in startup or early stages may have fewer resources and need to conserve capital for research and development, rather than just salaries.
• Milestones, such as securing regulatory approval or completing a clinical trial, can take years to achieve, making attracting and retaining top talent in a high-demand field critical.
• They help ensure those who contribute to the company’s success or progress are appropriately rewarded.
• Retaining value, they offer clarity and structure during high-risk or volatile periods.

What Do I Need to Know Before My Biotech RSUs Vest?

Managing restricted stock units begins well before they vest. It’s important to understand how RSUs work and the key plan details you should check annually to avoid missing vesting dates, tax surprises, and overconcentration.

How do RSUs work?

• Grant Date: On your grant date, your employer awards you a specified number of RSUs that don’t yet have value but are a commitment based on specific criteria. 
• Vesting Schedule: You earn RSUs upon fulfilling the criteria outlined in the vesting schedule. Vesting criteria may be time-bound, performance-based, or a combination of both. For example, a biotech company conducting lengthy clinical trials may have vesting criteria like:
  • Employees will receive a percentage of their shares over four years, provided they have been employed for at least one year. They may receive 25% after the first year, and the remaining portion of shares will vest monthly over the next three years (time-bound) or upon reaching a milestone, such as regulatory approval (performance-based).
• Delivery of Shares: Once vested, the employee owns the shares outright at the current fair market price, which will be taxed as ordinary income. ​​Employees can then sell or hold the shares as regular shareholders.

What to check yearly:

• Vesting Schedules: Confirm whether your agreement is time- or performance-based, and review upcoming vesting dates and progress toward key milestones. Additionally, ensure you’ve reached the “cliff” vesting, if available. For example, an agreement may have a one-year cliff vesting, requiring you to stay employed for at least one year before your shares vest. 
• Tax Treatment: If you’ve had a job, marital, or income change, among other life updates, be sure to check how upcoming vesting may affect your taxable income and tax liability. RSUs are treated as ordinary income once vested and may bump you up a tax bracket, so be sure to check your tax withholdings and sell-to-cover rules to ensure you can cover taxes on your vested shares.
• Company Restrictions: Even if your shares have vested, your company may have trading blackout windows based on regulatory approvals or clinical trials, or other clearance periods before you can actually sell them. 
• Employment Requirements: An early departure, leave of absence, or termination may also affect your shares, which you should discuss with your employer or financial advisor.
• Concentration Risk: Biotech companies often experience volatility and periods of uncertainty. If you have a significant portion of your portfolio reliant on your company’s success, be sure to check how value swings may affect your net worth. It may be worth discussing with your financial advisor how you can diversify away from your company or capture other opportunities.

What Happens on Your BioTech RSU Vesting Day? A Step-by-Step Guide

As your vesting date approaches, here is everything you can expect and review to make the most of your RSUs:

Step 1: Your RSUs Convert to Shares

Before vesting, your company owns and controls your granted RSUs, which are held in a “restricted” status within the plan. After vesting, the shares are legally yours and will be deposited into a standard brokerage account, such as Morgan Stanley or Fidelity. Once you own them, you can sell them like any stock in your portfolio. They’re no longer subject to forfeiture rules, and the value of the stock on vesting day is considered taxable income by the IRS.

Step 2: Income Is Reported for Tax Purposes

Once vested, the fair market value of your shares is recognized as ordinary income by the IRS and will be reported on your W-2. This is critical to review, as biotech RSUs can swing dramatically in value from their grant to vest dates. 

• For example, let’s say the value of your RSUs was $25/share when they were granted a year ago but the fair market value is $50/share on vesting day. If you received 100 shares, on vesting day $5,000 will be taxed as ordinary income (100 x $50).

Step 3: Tax Withholding is Applied

To cover potentially high taxes due on vesting day, biotechs may implement any of the three tax withholding methods:

• Sell-to-Cover: A common method, this option will automatically sell a portion of your vested shares upon delivery to cover ordinary income taxes so there are no additional expenses on your part, streamlining the process.
• Net Share Settlement: Another common method is for the company to withhold, not sell, a portion of your shares to fulfill your tax obligation. This will reduce the number of shares you receive but may help you avoid trading during volatile periods.
• Cash Payment: Less common is requiring employees to pay out of pocket to cover taxes. While you will receive all your vested shares, it’s essential to set aside sufficient funds for this option.

How to Avoid Under-Withholding Taxes: Biotech companies often follow the IRS’s 22% withholding rule. However, this may not cover all taxes owed, including federal, state, and local taxes, especially if you’re a high earner in a higher tax bracket. Without proper guidance and planning, you could under-withhold and face a higher-than-expected tax bill on vesting day. Be sure to review your upcoming vesting dates with your tax professional and financial advisor to ensure you have enough set aside, if necessary.

Step 4: Shares Appear in Your Account

After taxes are handled, the net amount of your shares will be deposited into your brokerage account. As with any investment in your portfolio, it’s recommended to monitor the stock’s performance, value, concentration risk, and sell or hold opportunities.

Step 5: Check for Blackout Periods or Trading Restrictions

If you’re planning to sell your shares, confirm there are no trading restrictions or blackout periods barring you from selling, which may be due to a major announcement, launch, or FDA approval, for example. This is typically done to comply with insider trading policies. 

• For example, let’s say your biotech RSUs vest on March 1 but your company announces earnings on March 10. In this case, it may implement a blackout period around the announcement. 
• It’s critical to locate and review your company’s insider trading policies to ensure you stay compliant and avoid severe penalties.

Step 6: Decide on an Immediate Sell or Hold Strategy

Once your shares are vested and there are no blackout windows or trading restrictions, you can sell or hold them. Here’s what you can consider based on your financial situation:

• Selling: If you have cash needs or want to diversify away from your company’s stock and decide to sell your vested shares, you can immediately lock in gains. Here’s what to keep in mind:
  • If you sell immediately or shortly after vesting, you may reduce or eliminate capital gains because there is less time for the stock’s value to fluctuate.
  • If you’ve held the stock for less than a year and it has appreciated, you may be subject to higher, short-term capital gains taxes if you decide to sell. 
  • You may consider holding the stock longer than a year to qualify for lower capital gains tax rates.
  • You may miss out on any future appreciation if you had held.
• Holding: There are several reasons you may consider holding your shares. For example, you may have high confidence in your company’s long-term success or anticipate their value will increase. Here’s what to remember:
  • You can hold a portion and sell shares gradually. For example, you may sell a piece of the shares upon retirement, sell another portion later, and keep the remainder for the long term, provided it is less than 10–15% of your overall portfolio. 
  • Additionally, dollar-cost averaging involves selling small amounts of your stock over time using existing shares or new stock you receive through your RSUs that continue to vest. Spreading out your tax liability over several years may reduce the financial impact. 
  • You may be subject to potential price swings or significant depreciation. While RSUs retain some value as long as they’re worth more than zero be sure to align your strategy with your risk tolerance and needs.
• Gifting: You can also gift highly appreciated stock you’ve held for over a year to charity to manage your tax liability, providing a tax deduction to help avoid built-up capital gains.

What is a 10b5-1 Trading Plan?

If you’re concerned about when to sell, how much to sell, or how to avoid insider trading non-compliance, you may consider a 10b5-1 trading plan. This automated strategy outlines pre-scheduled sales — based on concentration, amount, and frequency — well before any company information could be deemed insider trading. Scheduling sales without prior information even allows you to sell shares during company blackout windows. This can help you stay compliant, streamline your selling strategy, and better plan for taxes and cash flow.

Step 7: Update Your Financial Plan

Once your RSUs vest, they become part of your broader financial strategy and should be managed accordingly. A financial advisor and tax professional can help you integrate your shares into your overall financial picture, focusing on areas such as:

• Concentration Risk: You may find a significant portion of your net worth is tied to RSUs, leaving you overly reliant on your company’s performance. If so, you may consider selling a portion to diversify and spread risk across different asset classes or hedge your exposure to minimize potential financial risks and protect against price movements that could have a negative impact.
• Tax Planning: Remember that RSUs are taxed twice: once when they vest as ordinary income and again when they’re sold as capital gains. 
  • Prepare for upcoming vesting and anticipated sales by setting aside enough cash or adjusting your tax withholding to cover taxes. 
  • Capital gains tax is what you owe for any appreciation you’ve incurred on assets you own. For example, if the fair market value of your RSUs on vesting day was $30/share, that’s your cost basis (or original “purchase” price). If you sell them later for $40/share, you will have $10 in capital gains per share. With planning, you can weigh the pros and cons of selling or holding and how best to manage your tax liability.  

Step 8: Keep Records for Tax and Planning Purposes

Keeping your RSU paperwork organized is a simple way to help avoid costly mistakes and reduce tax planning stress. Here are three documents you should save following a grant:

• Grant Agreement: This document outlines the terms and vesting schedule of your RSUs, as well as what happens if you leave the company, if the company is acquired, and if other situations occur.
• Confirmation: Once your RSUs vest, you will receive a document confirming the vesting date and the fair market value, both of which are important for calculating and planning for capital gains.
• Tax Statements: Documents such as your W-2 and brokerage statements confirm income was reported and help with future tax planning. 

What Are the Common Mistakes BioTech Employees Make With RSUs?

Working with biotech executives and professionals, we often see the common mistakes they run into when managing RSUs. From missed opportunities to poor planning and misunderstandings, referencing this guide can be a helpful first step in avoiding mistakes, such as:

• Misjudging Taxes: A large tax bill due to increased taxable income or capital gains taxes when you sell vested shares can be a surprise if not planned for proactively. 
• How to Avoid this Mistake: As the vesting and selling windows approach, ensure you’re well-prepared to manage taxes.
• Stock Concentration: If you’ve been with your company a long time, receive other stock options through your employer, or hold biotech stock from another company, you could easily be at risk for stock concentration. 
• How to Avoid this Mistake: Whether much of your net worth is tied to your company or the tech industry in general, it’s critical to create a balanced, diversified portfolio to help you weather market swings and avoid high reliance on a single industry or type of stock.
• Missing Selling Windows: Many biotech professionals miss opportune selling windows for various reasons. As vesting happens automatically, they may not be aware of the date, it may occur during a blackout period, or they may simply be too busy. This can mean having to wait until the next selling window, trading when the stock’s value is down, or missing key tax-planning opportunities.
• How to Avoid this Mistake: Integrate your RSU strategy into your overall financial planning and consult with your tax professional and financial advisor to help guide you on the best path forward. 
• Misunderstanding RSUs Must Vest to Sell: Separate grant, vesting, and sale dates can be confusing for employees. RSU holders may plan a purchase or tax strategy assuming they own their unvested RSUs. 
• How to Avoid this Mistake: A clear understanding of the grant agreement is crucial for taxes and cash flow management. RSUs are legally yours only once they vest, at which point you can sell them — barring any blackout periods or company restrictions. You should also factor in a few additional days for taxes to be settled before money is deposited into your brokerage account.
• Trading Windows vs. Blackout Periods: RSUs, even once vested, cannot necessarily be sold whenever you choose. You must wait for limited trading windows and ensure there are no blackout periods — even on your vesting date.
  • How to Avoid this Mistake: Create a clear schedule of your vesting dates, adding in blackout periods and restrictions as they’re announced to help avoid accidentally violating insider trading policies and missing a sales opportunity.
• Strict Insider Trading Rules: Given that a single announcement can shift a stock’s trajectory, biotech companies often have stricter, longer restrictions and blackout periods due to the industry’s volatility, lengthy development, and clinical trials. Misunderstanding your company’s insider trading rules can lead to missed selling windows, overconcentration, or unintentional non-compliance.
  • How to Avoid this Mistake: Plan your vesting dates and liquidity needs early, stay informed on company updates, and always check before you sell. You may also consider a 10b5-1 trading plan to schedule sales that automatically comply with policies and align with your investment strategy.

A Smart Plan for Managing Your BioTech RSUs: How CCMI Helps

Partnering with a financial advisor who understands biotech and specializes in equity compensation services can help you make informed decisions before, during, and after vesting. At CCMI, we become thoroughly familiar with your financial situation, clarify grant agreement details, and build broad strategies that consider your risk, goals, and timelines. We can also help you navigate:

• What to do with RSUs if you leave your company early
• Considerations for privately held companies
• Concentration and building a balanced, diversified portfolio
• Tax-efficient planning

Contact us to learn more about making the most of your RSUs, while managing concentration, creating balance, and planning for taxes.