Restricted Stock Units: Everything You Need to Know

A restricted Stock Unit ( RSU ) refers to a accord of a rate equal to an amount of a company ’ s coarse lineage. It is typically given to employees for employment.7 min read1. What is a Restricted Stock Unit?
2. How Restricted Stock Units Work
3. Graduated Vesting
4. Advantages to a Company Using Restricted Stock Units
5. Comparing RSUs to Stock Options

6. Advantages and Disadvantages of RSUs
7. Who Can Offer RSUs as Compensation?
8. Understanding the Value of RSUs
9. Frequently Asked Questions
10. Helpful Information About Stock-Based Compensation:

Updated August 21, 2020: 

What is a Restricted Stock Unit?

A qualify Stock Unit ( RSU ) refers to a grant of a value adequate to an amount of a company ’ south common stock. The RSU is typically granted to a new or valuable employee as an bonus for employment or to meet assign operation goals. In the case of a newfangled employee, the RSU plan is normally included as function of the employee ’ s initial recompense package. RSUs are very popular today with startups and technology companies seeking to hire and retain highly skilled and talented employees .

How Restricted Stock Units Work

With an RSU plan, the caller offers the employee an economic interest in the company stated as a specific count of shares of company stock. The stock is not immediately given out to the employee, however, but is alternatively awarded at a future time upon completion of a declared goal or on reaching a declared date. In other words, the RSU design grants a “ vest interest ” in the stock to the employee that is awarded at a specify time in the future, according to the design ’ s vesting agenda. RSUs are assigned a bonny market value and converted to banal or to cash at the time they are vest, normally at the end of a five class time period. RSUs do not pay dividends until such time as they are converted to standard.

Graduated Vesting

Graduated vesting refers to vesting schedules under which malcolm stock to be awarded as part of an RSU plan vests in express amounts at stated intervals throughout the vest time period. As an illustration, if an RSU plan calls for the employee to become 100 % vested after five years of employment, he or she may become partially vest at declared intervals during the five class period, as laid out in the RSU plan. For exercise, the RSU plan may call for gradational vest as follows : 10 % after one year ; 30 % after two years ; 50 % after three years ; 80 % after four years ; 100 % after five years .

Advantages to a Company Using Restricted Stock Units

RSUs are a great tool for companies seeking to hire highly talented and in-demand employees by offering them the extra incentive of taking character in the company ’ second growth. additionally, RSUs are converted to stock at a future date according to a invest schedule, and therefore provide the caller with a floor of security in terms of retaining top employees because those employees are probably to remain with the company until the stock benefit is in full vested .

Comparing RSUs to Stock Options

stock options give an employee ( or any other option holder ) the mighty to purchase shares of a company ’ mho stock at a submit specific price on or before a specific date, therefore allowing the option holder the opportunity to purchase the banal at price below its stream rate ( that is, if the state option price is lower than the current price. ) If not, the choice will likely expire without being exercised, since the store choice has no value, in practical terms .
In contrast, RSUs are assigned a clean market measure at the time they become vest. A closer attend at the differences and similarities of RSUs and stock options are provided in this chart :

Restricted Stock Unit (RSU) Stock Option
Value Over Time The stock is assigned a fair market value at the time of vesting . When the price of stock rises above the grant price, the value of the option increases correspondingly. however, if the stock price drops below the grant price, the respect of the option decreases .
Vesting In most cases the vest agenda is completed at five years . stock options do not vest, but alternatively have an exhalation date, after which the option can not be exercised .
Term RSUs are converted to shares once they are vested, and therefore do not expire . Options have a stated exhalation date ( frequently, but not always, 10 years from the date they are granted. )
Taxation RSUs are taxed as ordinary income at the meter they become vested and liquid . A stock option is taxed at the time it is exercised. Once the underlying stock is sold, the gains on the sale are besides taxable at the time of the sale .

Advantages and Disadvantages of RSUs

There are advantages and disadvantages to RSUs for both employers and electric potential employees. here ’ s a expect :
Advantages for Employers Using RSUs:
RSUs are a dear solution for some companies, particularly those that expect to reach their current valuation at some point in the future, such as Dropbox, Twitter, AirBnB and Square. RSUs are less likely to be used by companies considered early on stage. other benefits include :

Disadvantages for Employers Using RSUs:
As is the lawsuit with any early employee bonus offered, there are some disadvantages to a company ’ s issue of RSUs. They include :

  • Your stock may not increase in value sufficiently to reward employees .
  • RSUs are not always a sufficient incentive to attract the veracious endowment .
  • RSUs are priced at the time their stock becomes vested, and therefore, their ultimate rate is unknown at the time the RSU design is created .

Advantages for Employees Accepting RSUs:

  • Your employer is offering you an economic interest in the caller in the form of banal shares .
  • once vested, you own the stock shares at their current market value .
  • Depending on the respect of the stock at the time of vesting, your earnings could be higher than in the first place expected .

Disadvantages for Employees Accepting RSUs:

  • The prize of the stock may not be a capital as predict .
  • RSUs typically do not amply vest for five years, think of that if you leave the ship’s company before that clock, you will lose your ability to claim some or all of the livestock shares under your RSU design .

Who Can Offer RSUs as Compensation?

Both populace and private companies have the right to offer RSUs as separate of their employee compensation packages .

Understanding the Value of RSUs

There are two basic methods for valuing RSUs : stream evaluation and future valuation. current valuations are fact based, that is, based on the known current value of the stock. future valuations, however, are based entirely on projections, that is, merely an educated estimate. hera ‘s how they work :

  • Current Valuation Method: Current evaluation works best for companies who have recently accepted guess capital fund since the value can be based on the price per share paid by the lender. For case, if you accepted the speculation capital company ‘s evaluation at a per parcel value of $ 50, then the stream measure of a single RSU would besides be $ 50 .
  • Future Valuation Method: The future evaluation method requires looking forth to what you estimate the company will be worth on a state future date. To successfully estimate the value of the breed, you must project earnings and expenses, arsenic well as bode electric potential new investments in the company. It is important to make clear to prospective employees that the valuation of the RSUs is is based entirely on your estimate .

Frequently Asked Questions

  • What is a restricted security?

A restricted security ( aka “ restricted stock ” or “ letter stock ” ) should not be confused with an RSU. Restricted securities are park stock that become vested over clock, careless of whether they are separate of an RSU or not. Restricted stock can not be sold by the grantee until the shares are vested. In closely all cases, the ship’s company has the right to repurchase all unvested shares if the employee leaves the company anterior to becoming vested. A person with a vested interest in restricted stock is considered a ship’s company stockholder. RSU ’ south, on the other hand, are a democratic form of employee recompense that combines the concept of a stock choice with the consumption of restrict securities .

  • What is a phantom stock?

Phantom stock refers to a contractual agreement of a cash requital ( typically offered to an employee, director, third-party seller or early interest individual ) to be paid out in the future at the happening of a stated specific event. Phantom stock is often used as a way to compensate certain individuals with a shape of equity engagement in a startup in stead of stock options. For exercise, the “ owner ” of apparition shares may receive a preset measure of money when the company issuing the apparition shares goes public. Phantom shares are considered a form of postpone compensation and, therefore, are carried by the company as a liability .

  • What is a stock grant?

store grants refer to the issue of an award, such as a stock option, that is provided to key employees as separate of a banal plan. malcolm stock grants allow the employee to purchase a specific number of shares of party stock at a specific price ( known as the accord price ) as stated in the grant. Restricted stock awarded to employees is a kind of stock grant .

  • Are there better options for employee compensation than RSUs?

An RSU is only one of many types of compensation that a company might use as an employee incentive. Some companies may elect to use RSUs, while others may choose stock grants or another class of equity recompense. It is up to you to decide which form is best for your company and your employees .

  • What is RSU income?

Stock awarded as part of an RSU plan is taxed as ordinary income at the time the award, as determined by the vest agenda. For tax purposes, the lineage is assigned a carnival market value at the time they become vest. A parcel of the stock is typically withhold to pay taxes, with the remaining shares awarded to the recipient role, who may then sell them or hold on to them, according to his or her preference .

  • How does the company’s stock value impact RSUs?

RSUs are assigned a fair market respect at the time they become vest. In other words, if the company ’ south banal is valued at $ 20 per share at the meter the RSU becomes vested, then the per-unit value of the RSUs is $ 20. As an exercise, if an employee is award 1000 RSUs at the time of her employment, and those RSUs become vest after five years, the value of those RSUs at the time they are vest is as follows :

  • Stock Value = $20 per share
  • RSU Value (when vested) = $20 per share
  • Taxable income (when vested): $20 x 1000 = $20,000

Helpful Information About Stock-Based Compensation:

equity ( Stock ) – Based Compensation Audit Techniques Guide ( IRS )
“ Restricted ” Securities : Removing the restrictive Legend ( SEC )
Sample Restricted Stock Units Agreement ( Bristol-Meyers Squibb )

Restricted Stock Units ( RSUs ) and Backup Withholding
case of restrict broth unit certificate
If you need help with an RSU, post your legal want on UpCounsel ‘s market. UpCounsel accepts lone the top 5 percentage of lawyers to its site. Lawyers from UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal know, including influence with or on behalf of Google, Menlo Ventures, and Airbnb .

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Category : Finance

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