RSU

Full Definition

Restricted Stock Units (RSUs) are a company's contractual promise to deliver shares of company stock to an employee upon satisfaction of vesting conditions (typically time-based service requirements, sometimes combined with performance conditions). Unlike stock options—which require payment of an exercise price and only deliver value if the stock price exceeds the grant-date price—RSUs deliver their full current value upon vesting with no exercise cost. An RSU grant for 1,000 shares that vests when stock is at $50 delivers $50,000 of value; the same grant delivers $80,000 if stock has risen to $80 by vesting date, or $30,000 if it has declined to $30. RSUs therefore deliver value across a wider range of outcomes than options, making them more certain compensation. RSU taxation occurs at vesting: when RSUs vest, the full value of the delivered shares is taxable as ordinary income at the employee's marginal rate. This creates a tax liability at vesting even if the employee doesn't sell the shares. Most RSU programs offer tax withholding through share netting—the company withholds a portion of the vesting shares (typically 22-37% depending on the employee's tax bracket) to cover the tax liability, delivering the net shares to the employee. This share-netting approach avoids requiring employees to pay cash taxes on RSU income, simplifying the tax management compared to options where employees must fund both exercise price and income tax. RSUs have become the dominant equity compensation vehicle for mid-to-large technology companies, largely replacing options in vesting grants for non-executive employees. For public companies, RSUs provide straightforward economics: employees receive shares worth a defined dollar value at grant date (at the current stock price), vest over 4 years, and receive shares they can immediately sell. For private companies, RSUs are more complex because shares cannot be sold—vested RSU holders own illiquid equity without the ability to fund tax obligations from proceeds. Private company RSUs typically have "double-trigger vesting" (requiring both time passage and a liquidity event to vest) to avoid employees owing tax on illiquid shares.

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