Restricted stock unit
are-ess-YOO
A company's promise to give an employee shares of stock after vesting conditions are met, with no purchase required.
An RSU is a promise to give you shares of stock when they vest. Unlike stock options, you do not have to buy anything. When RSUs vest, you receive actual shares. You owe taxes on the value of the shares at the time they vest.
RSUs are more common at later-stage companies and public companies because they have a clear, immediate value. If the stock price is $50 and you receive 1,000 RSUs, they are worth $50,000 when they vest. Stock options at a pre-revenue startup have uncertain value.
For employees, RSUs are simpler: no strike price, no exercise decision, no risk of the strike price exceeding the current price (which makes options worthless). For companies, RSUs are more dilutive because every vested RSU creates a new share, whereas many stock options are never exercised. Both RSUs and options follow a vesting schedule tracked on the cap table.
Examples
A public company grants RSUs to a new hire.
The offer includes 4,000 RSUs vesting over 4 years. At the current stock price of $100, the grant is worth $400,000. Each year, 1,000 RSUs vest. The employee receives shares worth $100,000 (at current prices) and owes income tax on that amount.
A late-stage startup uses RSUs instead of options.
The company's last valuation was $2B. Stock options with a high strike price are less attractive to new hires. The company switches to RSUs, which have clear value regardless of future price movement. Recruiting becomes easier.
An employee manages RSU vesting and taxes.
When 500 RSUs vest, the company automatically sells a portion to cover tax withholding. The employee receives the remaining shares. If the stock price is $80, the gross value is $40,000. After tax withholding, the employee receives approximately $28,000 in shares.
Frequently asked questions
When are RSUs taxed?
RSUs are taxed as ordinary income when they vest. The taxable amount is the fair market value of the shares on the vesting date. Companies typically withhold taxes by selling a portion of the vested shares automatically.
Are RSUs better than stock options?
RSUs are lower risk: they have guaranteed value as long as the stock price is above $0. Options have higher upside: the spread between the strike price and the current price can be enormous. RSUs make more sense at later-stage companies; options make more sense at early-stage startups.
Related terms
The right to purchase company shares at a fixed price (the strike price), typically granted to employees as part of compensation.
Ownership in a company represented by shares of stock, which entitle the holder to a proportional share of the company's value.
The process by which an employee earns their equity over time, typically over four years with a one-year cliff.
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