A restricted stock unit (RSU) is a form of equity compensation that companies issue to employees. An RSU is a promise from your employer to give you shares of the company’s stock (or the cash equivalent) on a future date—as soon as you meet certain conditions. These conditions are the “restrictions” placed on the award, and the process of meeting the conditions is called vesting.
RSUs vs. stock options
RSUs are an alternative to stock options (like ISOs or NSOs), which give employees the chance to buy company stock at a set price. With RSUs, you don’t have to pay anything to get the stock. Instead, you are usually only responsible for paying the applicable taxes when you receive the shares. Unlike with restricted stock awards (RSAs), you won’t acquire the RSUs until they vest.
You typically don’t get to choose which type of stock award you receive; instead, what you receive depends on your role and the size, stage, and preferences of your company. RSUs are more commonly issued by larger, later-stage companies.
In order for you to receive your RSUs, you have to meet the vesting conditions outlined in your award letter. These restrictions on the award may be:
If time-based or milestone-based vesting is the only restriction, the grants are considered single-trigger RSUs. Grants that use a combination of the two are called double-trigger RSUs. Most RSUs issued by privately held companies are double-trigger RSUs.
When you meet the conditions outlined in your RSU grant, your RSUs vest and you receive your shares.
When thinking about whether to sell your RSUs, consider things like:
If your company is public, you can usually sell your RSUs as soon as you meet the vesting criteria and get your shares, as long as you comply with your company’s trading policy (With some companies, for example, you’re only allowed to trade stock during certain times of the year).
If your company is private, you’ll need to wait for a liquidity event (like an acquisition, IPO, or company-led secondary transaction, such as a tender offer, to sell your vested RSUs). Or, if your company approves the transaction, you can find a third-party buyer to buy your shares.
Unlike ISOs (where you sometimes don’t pay taxes until you sell your shares) and NSOs (where you pay taxes both when you purchase and sell your shares), with RSUs, you usually have to pay ordinary income tax on the fair market value (FMV) of the shares when you acquire them, which is usually as soon as they vest.
Employers are required to withhold 22% for federal income taxes on the first $1M in supplemental income for employees, and 37% of any amount exceeding $1M. Your RSUs, along with any bonuses you receive, are taxed as supplemental income.
You may owe more in income tax on your shares depending on your effective tax rate: If it’s higher than 22% for the year you vest your shares, you’ll owe more than your employer has withheld. In addition, you’ll owe Social Security, Medicare, and state income taxes on your shares.
Your company may allow you to sell a portion of your vested shares to cover the tax obligation your employer must withhold. Then, you can choose whether to hold the remaining shares or sell them right away.
When you sell, you may also need to pay capital gains tax on the spread (the increase between the FMV of the shares when you vested and the sale price). How long you hold the shares usually determines whether you will pay short- or long-term capital gains tax. If you sell right after your shares vest, you probably won’t experience a gain and may not have to pay additional tax.
If you leave your company, you’ll get to keep your fully vested shares.
With double-trigger RSUs, you’ll usually lose any shares that aren’t time-vested. In addition, it’s possible for your time-vested shares to expire before they fully vest (by meeting the milestone-based conditions of the second trigger, such as a liquidation event). Your award letter should indicate if and when unvested double-trigger RSUs will expire.
This policy applies to all employees who have received RSU.
