Non‑cash compensation has become increasingly common at startups and public companies.
Employers use restricted stock units (RSUs) to attract new talent, retain key contributors, and reinforce a sense of ownership. As stock option grants have declined, RSUs are now a core component of many compensation packages.
RSUs align long‑term interests for both employees and employers. Below is an overview of how they work and key considerations.
What are Restricted Stock Units?
RSUs are a promise by your employer to deliver company stock at a future date once certain conditions, called vesting requirements, are met. These typically involve continued employment over time, though some plans include performance milestones.
RSUs have potential economic value before vesting, but that value is contingent and not realized until the shares are delivered. At vesting, the fair market value of the shares is taxed as ordinary income. If the stock price rises between the grant date and the vesting dates, the value of the RSUs increases accordingly.
Employers may automatically withhold shares to cover taxes (“net settlement”). If you keep the remaining shares, any future appreciation is taxed under capital gains rules. The holding period for capital gains begins at vesting, not at grant.
Example: If you receive 1,000 RSUs at $10 per share and the price rises to $20 at vesting, the shares are worth $20,000 before taxes. RSUs do not qualify for Net Unrealized Appreciation (NUA) treatment, which applies only to employer stock distributed from qualified retirement plans such as 401(k)s.
What are the Advantages and Considerations of RSUs?
For You, the Employee
- Ownership & Value: Provides equity in your employer with no upfront cost. The value of vested shares depends on the market price of the company’s stock.
- Forfeiture Risk: Unvested RSUs could be forfeited if you leave, though new employers may offset lost awards.
- Limited Rights Pre-Vesting: No voting rights or dividends until vesting, though some plans may offer dividend equivalents.
- Tax at Vesting: Taxed as ordinary income at vesting. Employers generally withhold taxes at supplemental rates (22% up to the threshold and 37% above it), which may be insufficient for higher earners.
- Liquidity Constraints (Private Companies): Double‑trigger RSUs require both vesting and a liquidity event, such as an IPO or acquisition. Even after vesting, shares may not be immediately sellable.
- Concentration Risk: Exposure to a single company may increase financial risk, particularly when both your investments and income depend on the same source.
For Your Employer
- Talent Attraction and Retention: Helps attract and retain employees while aligning incentives with company performance.
- Cost & Dilution Efficiency: Provides competitive compensation without immediate cash outlays; reflected in fully diluted share counts at grant. However, RSUs may increase the number of outstanding shares over time, which can result in shareholder dilution.
- Accounting Requirements: Expensed under ASC 718 based on grant date fair value.[1]
We Can Help
RSUs can be a valuable component of your compensation but can introduce tax and planning complexities. Key considerations include tax timing, diversification and managing cash flows. A financial advisor can help evaluate how RSUs fit into your broader financial plan and prepare for upcoming vesting events. If you’d like to explore how Modera can support your financial goals, please contact us.
[1] https://www.jpmorganworkplacesolutions.com/insights/what-is-asc-718/
