Restricted Stock Units

What Are Restricted Stock Units?

Restricted stock units (RSUs) are a form of equity compensation in which a company promises to deliver shares of stock to an employee at a future date, subject to the satisfaction of certain conditions — most commonly a vesting schedule. Unlike stock options, RSUs do not have an exercise price and do not require the employee to purchase anything. When RSUs vest, the employee receives actual shares (or their cash equivalent) and owes ordinary income tax on the full fair market value of those shares at that time.

How RSUs Work

The Lifecycle of an RSU

1. Grant — You receive an RSU award specifying the number of units and the vesting schedule. There is no cost to you and no tax event at grant.
2. Vesting — As RSUs vest according to the schedule (typically over four years), the vested units convert into actual shares of company stock.
3. Settlement and Tax — Upon vesting, the shares are delivered to you, and the full FMV of the vested shares is taxed as ordinary income. Your employer withholds taxes, often by holding back a portion of the shares (a "sell-to-cover" arrangement).
4. Sale — When you eventually sell the shares, any gain above the FMV at vesting is taxed as a capital gain (long-term if held more than one year after vesting, short-term otherwise).

RSUs vs. Stock Options

RSUs and stock options are fundamentally different instruments:

• RSUs always have value as long as the stock has any value, because there is no exercise price. Stock options can become worthless if the stock price falls below the exercise price.
• RSUs require no out-of-pocket cost. Stock options require you to pay the exercise price.
• RSUs are taxed at vesting. Stock options are taxed at exercise (for NSOs) or potentially at sale (for ISOs).
• RSUs offer less upside leverage. Because there is no exercise price, the percentage return on RSUs is equal to the stock's percentage appreciation. Stock options amplify returns because the exercise price is fixed.

Practical Implications for Startup Employees

RSUs at Private Companies — The Liquidity Problem

RSUs at private companies create a unique challenge. When RSUs vest, you owe ordinary income tax on the FMV of the shares, but you cannot sell the shares because there is no public market. This creates a tax bill without the cash to pay it. To address this, many private companies use a "double trigger" vesting structure where RSUs require both time-based vesting and a liquidity event (IPO or acquisition) before shares are actually delivered and taxes are due.

Single Trigger vs. Double Trigger

• Single trigger — RSUs vest based on time alone. Common at public companies where shares can be immediately sold to cover taxes.
• Double trigger — RSUs vest based on time and require a separate liquidity event for settlement. Common at late-stage private companies to avoid creating a tax burden on illiquid shares.

RSUs and Financial Planning

Because RSUs are taxed as ordinary income at vesting, they are more predictable from a tax perspective than stock options. There is no AMT to worry about and no exercise decision to make. However, you still need to decide whether to hold or sell the shares after they vest. Holding concentrates your financial exposure in a single company, while selling allows you to diversify.

Comparing RSUs and Options in an Offer

When evaluating an offer, consider whether the equity is in RSUs or options. RSUs have lower risk (they always have value), but options have higher potential reward due to leverage. The right choice depends on your risk tolerance, the company's stage, and your financial situation.

How It Relates to Exercising Stock Options

RSUs do not involve an exercise decision — they vest and settle automatically. However, understanding RSUs is important for startup employees who may receive a mix of options and RSUs or transition between companies that use different equity instruments. Comparing the economics of RSUs and options helps you evaluate offers and make informed decisions about your total compensation.