RSUs: Restricted Stock Units: How They Work

RSUs are a way companies, especially publicly traded ones, give you shares (or the equivalent value) as part of your compensation. Think of them as a promise of future shares, which you’ll actually receive once certain conditions are met, typically time-based. This differs from stock options, where you have the option to buy shares at a certain price. With RSUs, you don’t buy them; you receive them.

How RSUs work:

• Grant: Your company awards you a specific number of RSUs. These are not actual shares yet, but a promise of them. The grant date itself has tax implications, so remember to mark it down.
• Vesting: RSUs typically vest over time, meaning you gradually earn the right to receive the shares. A common vesting schedule is four years with a one-year cliff. This means you get nothing if you leave before one year, but after that first year, 25% of your RSUs vest. Then, for the remaining three years, you continue to vest the remaining RSUs, usually in equal increments.
• Vesting Schedule Variations: Other vesting schedules exist, such as monthly, quarterly, or performance-based vesting. Refer to your RSU grant agreement for your specific vesting schedule.
• Distribution: Once your RSUs vest, your company distributes them to you as actual shares of company stock. At this point, you officially own them.
• Taxes: You pay taxes on the fair market value of the shares on the vesting date, not the grant date. These taxes are usually withheld from your paycheck at the time of distribution, similar to how regular income tax is withheld. For example, if 100 RSUs vest, and the fair market value is $10 per share, you’ll pay taxes as if you received $1,000 in income.
• Selling: Once your RSUs vest and are distributed as shares, you can generally sell them like any other stock you own, subject to any company restrictions or lock-up periods. Lock Up Periods When You Cant Sell Yet

RSUs vs. Stock Options: Understanding Your Stock Options ISO vs NSO While both offer potential upside related to company performance, there are key differences:

• Cost: RSUs are essentially free; you don’t pay anything to receive them (though you pay taxes later). Stock options require you to buy shares at a pre-determined price.
• Value at Grant: RSUs have some value at grant (the promise of future shares), even if it’s not yet realized. Stock options might have zero value at grant if the exercise price is higher than the current market price.

Why companies offer RSUs:

• Attracting and Retaining Talent: RSUs are a powerful incentive, tying employee compensation to the company’s success and encouraging them to stay longer.
• Alignment of Interests: RSUs help align the interests of employees and shareholders, motivating employees to work towards increasing the company’s value.
• No Cash Outlay for Employees: RSUs don’t require employees to spend their own money to purchase shares, making them an accessible form of equity compensation.

What to consider:

• Company Performance: The value of your RSUs is directly linked to your company’s stock price. If the company does well, the shares could become very valuable. If the company underperforms, the value of your shares could decrease.
• Taxes: It’s important to plan for taxes when your RSUs vest, as they’ll be treated as ordinary income. Consult with a tax advisor for personalized guidance.

So here’s what we covered:

• Definition of RSUs and how they differ from stock options.
• The process of RSU granting, vesting, distribution, and selling.
• Tax implications of RSUs.
• Reasons why companies offer RSUs.
• Key considerations for employees who receive RSUs.