What is a restricted stock unit (RSU)?

A restricted stock unit (RSU) is a type of employee compensation in the form of several company shares. RSUs come with a vesting schedule that determines when the employee takes ownership of the stocks, usually after they have worked for the company for a certain number of years.

Restricted stock units do not hold any value until they are vested, but once vested, are considered income. While a portion of the income is withheld to pay income taxes, the employee receives the rest and can sell or hold on to them.

What are the benefits of RSUs?

RSUs function as a recruitment tool for top talent. They incentivize employees to remain at the company for the long run. As they continue working at the company, their shares increase in value.

In contrast to employee stock options, RSUs are easy to understand. There is a clear vesting schedule that explains when employees receive shares, and share value is easily obtainable at any time.

Administration costs for RSUs are low. As there aren’t actual shares to keep track of, employers can wait to issue shares until the end of the vesting schedule. This helps prevent the delay of diluting shares.

What are the disadvantages of RSUs?

There could be tax consequences with RSUs if the company isn’t public and can’t offset the tax burden. Many private companies can’t allocate cash to afford the taxes.

Employees won’t receive any income if they leave the company before the end of the vesting period.

Finally, stock prices can decrease. Unlike a cash bonus which guarantees a certain amount of money, if the value of the company’s stock decreases between the grant and vesting date, the RSU sum decreases.

What are the tax implications of RSUs?

Employees will need to pay taxes on RSUs when they vest. RSUs are taxed as income, which means tax rates depend on the employee’s income and are subject to withholding from Social Security and Medicare taxes. Finally, depending on the employee’s state of residence, RSUs may be subject to state income tax.

Are there different types of RSUs?

Generally, there are two different types of RSUs: single-trigger RSUs and double-trigger RSUs.

Single-trigger RSUs are only subject to a vesting schedule. They hold no value until the end of the vesting period.

Double-trigger RSUs have other restrictions of use beyond a vesting schedule. Restrictions are usually related to performance, where employees need to reach set milestones such as a product or service launch, a merger, an acquisition, or an initial public offering.