How Restricted Stock Units Work: The Complete Guide

By Jomathews

Restricted Stock Units

Restricted stock units (RSUs) are a grant that gives you shares of company stock when you meet the conditions specified in your offer letter. You will usually receive this grant on a specific date, and the value of these shares will be determined on the date they were granted. You can usually sell your RSUs when the company’s shares are publicly traded on a given date. After that date, you can still sell your RSUs at their current value at a given date. Depending on the terms of your grant, you may have to hold your RSUs for a certain amount of time before you can sell them. You can think of RSUs as a kind of stock bonus or performance award. Restricted stock units have some similarities with employee stock-option plans. Both involve getting an ownership stake in the company at no upfront cost but with substantial potential upside if the business performs well over time. However, there are also significant differences between the two programs: RSUs and stock options both fall under what’s known as incentives and equity compensation. We’ll look at other forms of equity compensation later in this article. But first, let’s dive into how restricted stock units work, so you can better understand your offer letter and know how to make the most of your RSUs if you receive them again in future job offers.

 

How Restricted Stock Units Work

 

In general, an RSU grant gives you the right to claim company stock in the future. The number of shares you receive depends on the company’s business performance, your role at the company, and when you’re granted the stock. The value of your RSUs depends on the current share price and the number of shares you’re scheduled to receive. You usually don’t receive the shares until the end of a vesting period, which could be as short as six months or as long as a year.

 

When You Get Your RSUs

 

Restricted stock units are not vested immediately. You typically don’t get your shares until the end of a vesting period that is usually 12 months long. During that time, the company has the right to repossess the shares if you leave the company. Restricted stock units are often given as a kind of bonus payment after your annual performance review. The exact timing of your grant is specified in the offer letter you receive when you accept the job. The letter will also specify the vesting period and any other conditions that must be met before you are eligible to claim your shares.

 

The Conditions for Receiving your RSUs

 

Restricted stock units are not guaranteed. Your company may cancel the grant if you don’t reach certain milestones. Restricted stock units are often tied to company-wide goals, such as increasing earnings per share or achieving certain product development milestones. They may also be tied to your performance. Some companies cancel unvested stock awards when executives leave the company. This is most common when the stock is tied to a specific performance goal, such as achieving a certain level of earnings per share.

 

How to Value Restricted Stock Units

 

The value of your unvested RSUs is 100% based on the current share price. If the share price doubles, your unvested shares are worth twice as much. If the price falls by 50%, your shares are worth half as much. Because the value of your shares is tied to the company’s stock price, they’re much riskier than a cash bonus. If the company performs poorly, its share price may fall. If the company does well, your shares may increase in value over time, especially if you are granted the shares at a low price if they are unvested at the time of the grant.

 

Pros and Cons of Restricted Stock Units

 

The biggest advantage of restricted stock units is that they are risk-free. They are similar to options, but unlike options, they do not expire. This makes them a better option for long-term wealth building. Restricted stock units are similar to regular stock options, but they come with a purchase restriction. The purchase restriction could be a certain date or a certain price. You won’t receive any shares of stock immediately when you receive restricted stock units, but they do have an opportunity to increase in value, just like regular stock options. Unlike cash bonuses, you don’t have to pay income taxes on them until you collect the shares. And if the share price declines after you’re granted the shares, you’re not out anything. Restricted stock units carry fewer tax implications than stock options, which are often taxed as ordinary income as soon as you are granted the options. If your company issues RSUs as part of its equity compensation strategy, it may adjust the terms of its stock option plan to minimize the tax impact for the company. Restricted stock units are a good choice for employers who want to offer employees a way to share in the company’s long-term success without incurring significant tax or accounting costs.

 

Equity Compensation Basics

 

Unlike cash bonuses, equity compensation is a risk-taking strategy that directly involves employees in the company’s success. It is a promise to share in the upside of the business. Employers offer equity compensation in the form of stock options and restricted stock units, stock appreciation rights, and employee stock purchase plans. Employees who receive equity compensation are often given the option to defer their income taxes until they sell the stock. This can help them manage their cash flow while they’re still building their careers.

 

Mixing Equity and Cash Offers

 

If you’re in the job market, you may be faced with a choice between two job offers. One company offers you a cash bonus, and the other offers you RSUs. Restricted stock units are always worth more than cash. So if you don’t have a particular affinity for one company over another, a mix of cash and equity could be a good strategy. You can use the cash to pay off any debt, start saving for retirement, or invest in your long-term career goals. The RSUs will increase in value over time.

 

Conclusion

 

Restricted stock units are a form of equity compensation that offers employees a chance to share in the company’s long-term success. Restricted stock units are a form of equity compensation that offers employees a chance to share in the company’s long-term success. RSUs are similar to stock options, but they have some key differences. Typically, employees do not have the right to sell the RSUs, though they can exercise them at a future date. The value of the RSUs will depend on the stock price, but the company has a restriction on how and when it can repurchase them. The company repurchases the RSUs at the original value, usually at a discount from the current market price. Unlike cash bonuses, they are risk-free: the company has no right to take them back. Your company’s stock price determines the value of your unvested shares. If the stock performs well, it could be worth a lot. But they are also tied to your company’s performance, so they’re riskier than a cash bonus. If you are offered a mix of cash and equity as part of your job offer, the equity portion is almost always worth more.