In this post, you'll find everything you need to know about Restricted Stock Awards (RSA):
How RSAs work
Tax considerations
Pros
Cons
Restricted Stock Awards (RSA) is a term coined in Silicon Valley, it's a cornerstone of the venture-building playbook there. In Norway, we often call this "bundne aksjer", or shares with restrictions. For simplicity, we'll stick with RSA.
RSAs are a popular way to incentivize early employees. The mechanic is straightforward: the company grants shares, but with certain restrictions attached, because the employee still needs to earn the right to keep those shares after they've been issued. This gives people a real reason to stick around.
RSAs are commonly used by young companies and are an important part of the compensation structure; they let the business keep cash compensation lower in the early days when cash is usually tight. The employee is compensated and motivated by the potential upside if the share price rises over time.
In that sense, an RSA can be thought of as an investment in the company, where the recipient happens to be an employee who was given the chance to buy shares at a favorable price. The difference is that employees have to return any unvested shares if they leave early or haven't met the conditions to keep them. This protects the company and helps prevent what's often called "dead equity", a messy cap table that causes frustration and makes it harder to raise outside capital.
How do RSAs work? 🤝
When an employee is granted (or offered) a Restricted Stock Award, they have to decide whether to accept or decline it.
In principle, the shares can be given for free, but in most cases they carry a price. Because this instrument is most often used in a company's early days, the price can be very favorable, even after taking on outside investment, if that was done through a convertible structure. We'll cover this in more detail in a separate post.
After accepting the grant and paying (where applicable), the employee has to wait for the grant to vest before the restrictions lift. The period during which the shares are subject to restrictions is called the vesting period.
There are two main types of vesting: time-based and milestone-based. In early-stage companies, time-based vesting is by far the most common. If the employee leaves before the vesting period is complete, the company has the right to buy back the unvested shares at the same price the employee originally paid. It's also normal for the shares to vest gradually over the vesting period.
An example: an employee receives RSAs with a 4-year vesting schedule, vesting quarterly. They'd need to stay 4 years to earn the right to keep all the shares. If they leave after one year, they'd keep whatever has vested by then - 1/4 of the grant. The graph below also shows a 12-month cliff, meaning nothing vests until the first year is complete.
Tax considerations 🧾
If RSAs are given for free, this counts as a benefit arising from the employment relationship and is taxed immediately as regular income.
If RSAs are offered at a share price below fair market value, the difference between the market price and the price paid is taxed on the same basis.
If RSAs are purchased at fair market value, no immediate tax applies.
Any subsequent gain on the shares is taxed as capital income (typically lower than regular income tax).
If the shares are held through a holding company, any gain may fall under the exemption method (fritaksmetoden).
For the company: if RSAs are given for free or at a discount, the company is required to pay employer's social security contributions (arbeidsgiveravgift) where applicable.
Pros of RSAs 👍
Shareholder from day one: You receive and own the shares on the grant date.
Voting rights: As a shareholder, you generally have voting rights.
Dividends: As a shareholder, you generally have the right to receive dividends.
Lower tax rate: Often lower tax overall (see above).
Deferred tax: If the shares are bought at market price, no tax is triggered until a gain is actually realized, unlike the basic rules for options.
Favorable price: You may be able to buy the shares at a very favorable price in the company's early days.
Cons of RSAs 👎
Upfront payment: If the RSA has a purchase price, that has to be paid on the grant date.
Immediate tax hit if free or discounted: If RSAs are given for free or at a discount, that triggers an immediate tax liability for the recipient. And because the shares are restricted, they can't be sold to cover the tax bill.
Risk: Because the recipient pays in when the shares are acquired, there's a real risk of losing that capital if the company fails.
For the company: If RSAs are given for free or at a discount, the company is required to pay employer's social security contributions (arbeidsgiveravgift) where applicable.
Two types of "restricted stock"
Don't confuse Restricted Stock Awards (RSA) with Restricted Stock Units (RSU). The difference: RSUs are a promise to receive shares in the future (once vested), at no cost. Special tax rules apply in that case. You can read more about Restricted Stock Units in this post.
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