What are Restricted Stock Units ?

Restricted Stock Units (RSUs) are a form of employee compensation some companies use as an alternative to other stock-based rewards, like stock options. They are restricted during a vesting period, during which employees can't sell the stock. Once vested, employees can either sell or hold these stocks.

RSUs represent an interest in a company's equity but hold no tangible value until vested. Vesting plans for RSUs vary, depending on the employer's conditions. These might be based on achieving specific milestones, like a successful IPO, or linked to the duration of employment, such as a three-year period. Some plans combine time- and milestone-based criteria.

Employers and RSUs

Employers offer RSUs to attract talent, especially when unable to offer high salaries. RSUs can motivate employees to remain with the company and align their interests with company performance. The forfeit of unvested shares upon termination incentivizes employee loyalty and retention. However, employees don't receive dividends or voting rights until the shares are vested, and must navigate tax complexities when the shares become transferable.

Taxation of Restricted Stock Units

When RSUs vest, they are assigned a fair market value and considered income, with accompanying tax implications. Typically, a portion of the shares is withheld to cover immediate income taxes, and the employee receives the remainder. These shares, once vested, can be retained or sold by the employee.

Comparing RSUs and Stock Options

Stock options grant employees the right to buy shares at a pre-set price within a specific time frame. They are often subject to a time-based vesting period. The main difference between RSUs and stock options lies in their tax treatment and accounting rules. Stock options are taxed upon sale or exercise, while RSUs are taxed when vested.

Differences Between RSUs and Restricted Stock Awards (RSAs)

RSAs involve an immediate stock grant, giving the recipient actual shares upon awarding. RSAs entitle the holder to dividends and voting rights immediately (if the shares have voting rights), unlike RSUs, which only confer these rights upon settlement. Tax implications for RSAs arise if the employee pays the fair market value for the shares; otherwise, they face capital gains tax on any subsequent gains or losses. RSUs, however, trigger tax implications only when the shares are vested and settled.