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Restricted stock units

A restricted stock unit (RSU) is a promise to issue shares to an employee or executive upon vesting. Unlike restricted stock, the holder owns nothing until vesting; they receive no dividends, no votes, and no legal claim until the company settles shares. Upon vesting, shares are issued, and the holder recognizes income tax on the grant-date fair market value.

How RSUs work

An employee receives a grant of 1,000 RSUs. The RSUs vest over 4 years on a standard schedule (1-year cliff, then monthly vesting). On vesting dates, the company delivers shares — typically by withholding shares to cover tax withholding and issuing the remainder to the employee.

Example vesting:

  • Year 1 cliff: 250 RSUs vest. The company calculates tax withholding (say, $50,000 in shares), withholds those, and issues 200 net shares to the employee.
  • Month 13–48: 6.25 RSUs vest per month. Over months 13–48, as each batch vests, the company witholds for taxes and issues net shares.

The employee receives the shares and can then hold or sell them. Once delivered, shares are unrestricted and fully owned.

RSU versus restricted stock

The crucial difference is timing of ownership and tax treatment:

Restricted stock:

  • You own shares from grant date.
  • You vote and receive dividends on unvested shares.
  • If you leave before vesting, you forfeit the shares (lose both the shares and any dividends or capital appreciation).
  • Taxes owed at vesting on the FMV at vesting.
  • Can file an 83(b) election to accelerate tax and lock in the grant-date value.

RSUs:

  • You own nothing until settlement.
  • You vote and receive dividends only after settlement.
  • If you leave before vesting, you forfeit the RSUs but lose only the grant, not pre-vesting appreciation (because there is no pre-vesting ownership).
  • Taxes owed at settlement on the FMV at vesting.
  • No 83(b) election available because there is no property to elect.

For employees, RSUs are simpler: you forgo nothing if you leave, and you have no tax complications with vesting-date valuation.

Why companies prefer RSUs

Large public companies heavily adopted RSUs in the 1990s-2000s because:

  1. Administrative simplicity. RSUs are essentially a future obligation (a liability on the balance sheet) until vested. The company can issue shares to satisfy the obligation, or buy shares in the open market. No need to track restricted share voting, dividend withholding, or 83(b) elections.

  2. Cleaner accounting. RSUs are marked-to-market over the vesting period; the accounting expense adjusts each quarter as the stock price moves. Restricted stock has the same accounting but with voting complications.

  3. Tax predictability. Employees know they will owe income tax at vesting on the vesting-date value. With restricted stock, an 83(b) election complicates the picture and can surprise employees.

  4. Reduced dilution for employees. Since RSUs are often settled by buying shares in the market (rather than issuing new shares), the company’s authorized share count and dilution may be lower.

RSUs in public versus private companies

Public companies use RSUs extensively. Microsoft, Apple, Google, Meta, and Tesla all rely heavily on RSUs for employee compensation. The advantage is that vesting-date value is easy to determine (stock price is public).

Private companies use RSUs less frequently because the FMV at vesting is harder to establish. Private companies more commonly use restricted stock or options.

Dividend equivalents

Some RSU grants include “dividend equivalents” — the company tracks what the dividend would have been and adds that to the number of RSUs vesting, or credits it as additional vesting shares. This approximates the experience of owning restricted stock (where dividends accrue), though the RSU holder has never actually owned the underlying shares.

Settlement and tax withholding

When RSUs vest, the company issues shares and withholds a portion for tax withholding. The withholding rate is typically the employee’s marginal tax rate (say, 40% for a high-income employee). The company deducts the withholding shares and issues the remainder.

Some companies allow net settlement (withhold only for taxes) or allow the employee to cover withholding with cash, though net settlement is standard.

Taxable event at vesting

The taxable event is the vesting date, not the grant date. If you are granted 100 RSUs worth $100 each (grant date value = $10,000) and they vest four years later when the stock is worth $200 each (vesting date value = $20,000), you owe ordinary income tax on $20,000, not $10,000.

This can be favorable if the stock appreciates (you lock in the appreciation at long-term capital gains rates) or unfavorable if the stock declines (you owe tax on the vesting-date value even if shares later become worthless).

RSUs and performance conditions

Some RSU grants include performance vesting — the units vest only if the company or executive meets certain targets (revenue, profitability, stock price, etc.). Performance RSUs are more favorable to the company because vesting is contingent.

Wider context