Restricted Stock Units (RSUs)
What Are Restricted Stock Units (RSUs)?
Restricted Stock Units (RSUs) are a form of equity compensation that companies grant to employees. RSUs represent a promise that the employee will receive shares of the company’s stock in the future once certain conditions are met.
These conditions typically include vesting requirements, such as remaining employed with the company for a specific period or meeting performance milestones.
Why It Matters
RSUs allow employees to share in the company’s financial success. As the company grows and its stock price increases, the value of the RSUs may rise as well.
For companies, RSUs help attract and retain talent by aligning employee incentives with long-term business performance.
How RSUs Work
The typical RSU process includes:
- the company grants RSUs to the employee
- a vesting schedule determines when shares become available
- once vested, the RSUs convert into actual company shares
- the employee may choose to hold or sell the shares
RSUs are usually taxed as ordinary income when they vest.
Example
An employee receives 1,000 RSUs that vest over four years. Each year, 250 shares vest and become available to the employee.
RSUs vs Stock Options
- RSUs represent a promise to receive shares once they vest.
- Stock options give employees the right to purchase shares at a predetermined price.
RSUs generally have value as long as the company’s stock has value, while stock options may become worthless if the stock price falls below the option price.
FAQs About RSUs
Do employees pay to receive RSUs?
No. RSUs are granted by the company as part of compensation.
When are RSUs taxed?
Typically when they vest and convert into shares.
Can employees sell RSU shares?
Yes, once the shares have vested and are issued.
Related Terms
- Stock Options
- Employee Stock Purchase Program (ESPP)
- Equity Compensation
- Vesting Schedule
- Shareholder
