Restricted Stock Units (RSUs) are a form of equity compensation where the recipient has the right to receive free shares at some point in the future, once certain vesting conditions are met.
In other words, an RSU holder isn't a shareholder until the RSUs have vested and been settled in actual company shares. Until that point, they have no voting rights and no right to dividends.
RSUs are one way to give employees an ownership stake in the business. As with other equity programs, the vesting period exists to motivate the employee to stay. If they leave before vesting is complete, they lose the right to receive those shares. This protects the company from what's often called "dead equity", a messy cap table full of former employees still holding stock, which causes frustration and can make it harder to raise outside investor capital.
How do RSUs work? 🤝
When someone is granted RSUs, they decide whether to accept or decline the grant. To convert the RSUs into actual shares, they need to meet the vesting conditions. That window of time is called the vesting period.
There are two main types of vesting: time-based vesting and performance-based (or conditional) vesting. In early-stage companies, time-based vesting is by far the most common. If the employee leaves before the vesting period is up, they lose the right to the free shares. It's also normal for RSUs to vest gradually across the full period.
An example: an employee receives RSUs with a 4-year vesting schedule, vesting quarterly. To settle all the RSUs, they need to stay for the full 4 years. If they leave after one year, they keep whatever has vested by then, 1/4 of the grant, assuming no other clauses apply. The graph below also shows a 12-month cliff, meaning nothing vests at all until the first year is complete.
Tax considerations 🧾
Because the recipient takes no risk and receives the shares for free, this is normally treated as a taxable benefit, taxed as income when the RSUs convert into shares. Not at the time of the grant.
For the company: the business is required to pay the employer's social security contributions (arbeidsgiveravgift) on that amount.
Pros of RSUs 👍
No cost: RSUs are free to receive, and the shares themselves cost nothing when they vest.
No upfront risk: The recipient doesn't pay anything on the grant date, so there's no initial downside. After vesting, the tax impact does need to be factored in.
Fewer shareholders on the books: For the company, that means fewer people to report to, collect votes from, and so on.
Cons of RSUs 👎
Not yet a shareholder: The RSU holder isn't a shareholder until the RSUs vest and are settled.
No voting rights until settlement.
No right to dividends until settlement.
Tax: All gains are taxed as income, which is typically higher than the capital gains tax.
The company has to pay the employer's social security contributions on the employee's benefit.
Cash squeeze: When RSUs convert into shares, the recipient owes income tax. If the shares aren't liquid at that point, meaning, easy to sell, the recipient can end up with a large tax bill and no ready cash to pay it. This is a common headache at private companies.
Two types of "restricted stock"
Don't confuse Restricted Stock Awards (RSA) with Restricted Stock Units (RSU). The difference: with an RSA, the recipient owns the share (with restrictions) from the grant date. With an RSU, it's a promise to receive shares in the future, once vested, at no cost.
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