Restricted Stock Units (RSUs) represent a company's promise to deliver shares to an employee after vesting requirements are met. Unlike options, RSUs always have value if the stock has any worth. They have become the dominant form of equity compensation at many companies.
How RSUs Work
Employees receive RSU grants specifying a number of units and vesting schedule. As units vest, they convert to actual shares. Vesting typically occurs over three to four years, often with a one-year cliff. At vesting, employees receive shares without paying an exercise price.
RSUs vs. Options
RSUs provide value regardless of stock price movement, while options only profit if price increases above exercise price. RSUs are simpler to understand and value. They provide more certain compensation but less upside potential. Companies increasingly prefer RSUs for broader employee populations.
Tax Considerations
RSUs are generally taxed as ordinary income at vesting, based on fair market value of shares received. Some jurisdictions allow tax deferral to sale. Tax withholding requirements at vesting create cash flow considerations. International RSU taxation adds substantial complexity.