What Is a Restricted Stock Unit (RSU)?

What Is a Restricted Stock Unit (RSU)?

Let me start by defining what a restricted stock unit, or RSU, actually is. It's an award of stock shares given to you as part of your employee compensation, but you don't get them right away—you have to meet certain conditions before they're transferred to you.

These RSUs come with a vesting plan and distribution schedule, which kick in after you hit required performance milestones or stick with your employer for a set period. Until they vest, RSUs give you an interest in your company's equity, but they hold no tangible value. Once vested, they're assigned a fair market value, and that's when they count as income. Your employer withholds a portion for taxes, and you get the rest, which you can then sell if you choose.

Understanding Restricted Stock Units (RSUs)

You need to understand that RSUs gained traction as employee compensation after the mid-2000s accounting scandals at places like Enron and WorldCom. Back then, the Financial Accounting Standards Board required companies to expense stock options, which made RSUs a more level alternative.

Companies shifted to RSUs, especially for broader employee bases beyond just top management. Data shows stock options granted dropped by 40% between 2003 and 2005, while RSU awards rose by nearly 41% in the same timeframe.

Special Considerations

Taxes on RSUs work differently from other stock options. The full value of your vested RSUs counts as ordinary income in the vesting year. To calculate it, subtract any original purchase or exercise price from the fair market value on the vesting date—that's your taxable amount.

If you sell the stock later, the difference between the sale price and that vesting-date fair market value becomes a capital gain or loss. Also, note that vesting might continue in cases like disability or retirement.

Advantages and Disadvantages of RSUs

On the advantages side, RSUs motivate you to stay long-term and contribute to your company's success, boosting share value. If you hold until full vesting and the stock rises, you gain the capital appreciation minus taxes. For employers, administration is straightforward since there are no actual shares to track initially, and it delays share dilution.

Disadvantages include no dividends before vesting, though some employers offer equivalents that go into escrow or reinvest. RSUs are taxed under IRC Section 1244 on the vesting date when they become transferable. They aren't tangible property, so you can't elect to pay taxes early under IRC 83(b). Plus, no voting rights until vested, and if you leave early, you forfeit unvested units.

Examples of RSUs

Consider this scenario: You get a job offer with 1,000 RSUs valued at $10 per share, totaling $10,000 potential. They're on a five-year vesting schedule, so you get 200 shares each year. Your actual value depends on stock performance—it could be more or less.

In a real case, Tesla's CFO received 104,619 RSUs in November 2024, per an SEC filing, convertible to common stock upon vesting.

Frequently Asked Questions

You might wonder how RSUs work—they're compensation shares paid out over years, fluctuating in value, aiding retention and potentially yielding big income. Compared to stock options, RSUs don't give a purchase right but award shares outright on schedule, with value guaranteed upon vesting. They lack voting rights or dividends until vested.

The Bottom Line

In summary, RSUs reward your long-term commitment by granting shares via a vesting schedule. They align your interests with the company's without immediate value, rights, or dividends, but once vested, they're taxable income you can sell or hold for gains. This makes them a key tool for talent retention and equity distribution.