RSUs decoded

Have you been offered RSUs or heard talk about them, and are wondering how they work?  If so, read on.

RSU stands for Restricted Stock Unit, and RSUs are basically a promise by an employer to grant a set number of shares of the company to the employee according to a vesting or forfeiture schedule.  Once the vesting and forfeiture requirements have been met, the shares are delivered to the employee.   Here’s an example: say you are granted 100 RSUs subject to a four-year vesting schedule, with 25% of the RSUs vesting each year.  If you stay with the company for a year and meet all requirements set forth in your RSU agreement, you will get 25 shares of the company at the end of the first year.  If you stay a second year, you’ll get another 25 shares at the end of the second year, and so on.

RSUs are becoming increasingly popular as a form of equity compensation tool.  Employees tend to like them because unlike stock options, where you still have to buy the shares once the option vests, with RSUs employees are granted actual shares of the company as soon as the RSUs vest.  One thing RSU recipients should know is that each time RSUs vest and the recipient is granted shares, the recipient will generally recognize ordinary income on the market value of the shares.

Like stock options, RSUs don’t confer any voting or other shareholder rights upon the holder, because they do not represent actual shares of the company.  However, once RSUs vest and shares are issued, the RSU holder becomes a stockholder with regular stockholder rights.

In short, if you’ve been offered RSUs, be glad, especially if your company is doing well – they can be a very valuable benefit.  Just don’t forget that you’ll owe taxes when the RSUs vest.

- Claire Kalia

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