A Restricted Stock Unit (RSU) is a form of equity compensation that companies issue to employees. It is a promise from the employer to give the employee shares of the companys stock (or the cash equivalent) at a specified point in the future, subject to certain conditions. RSUs are generally subject to a vesting schedule, meaning the stock does not fully belong to the employee until such a time it is vested. During the vesting period, the stock cannot be sold. Once vested, the stock is given a Fair Market Value and is considered taxable compensation to the employee. Once vested, the employee can sell any shares they own.
RSUs are an alternative to stock options, which give employees the chance to buy company stock at a set price. With RSUs, the employee does not have to pay anything to get the stock. Instead, they are usually only responsible for paying the applicable taxes when they receive the shares. RSUs provide an incentive for employees to stay with a company for the long term and help it perform well so that their shares increase in value. RSUs are appealing because if the company performs well and the share price takes off, employees can receive a significant financial benefit. RSUs encourage employees to stay for the long term and can improve retention.
Key features of RSUs include:
- RSUs are a form of stock-based employee compensation.
- RSUs are restricted during a vesting period that may last several years, during which time they cannot be sold.
- Once they are vested, RSUs can be sold or kept like any other shares of company stock.
- Unlike stock options or warrants, RSUs always have some value based on the underlying shares.
- For tax purposes, the entire value of vested RSUs must be included as ordinary income in the year of vesting.
RSUs are issued by companies as a way to attract and retain talent. They are more commonly issued by larger, later-stage companies. RSUs can have other restrictions beyond a vesting schedule that are often related to performance. RSUs are generally subject to a vesting schedule, meaning the stock does not fully belong to the employee until such a time it is vested. During the vesting period, the stock cannot be sold. Once vested, the stock is given a Fair Market Value and is considered taxable compensation to the employee. Once vested, the employee can sell any shares they own.
