What you should know about Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) gained popularity as a form of employee compensation in the late 1990s and early 2000s. The use of RSUs increased as companies sought new ways to attract and retain talent, especially in the technology and startup sectors. RSUs better align the interest of employees with those of shareholders, as employees receive the benefits of stock ownership without having to make an upfront investment. Over time, RSUs have become a common, and in some cases, a significant component of employee compensation.

With that said, what should you know about RSU?

Restricted Stock Unit (RSUs) are a promise from a company to give the employee shares of stock after a specified waiting or “vesting” period. Typically, the vesting period requires the employee to fulfill specific conditions before gaining ownership of the designated shares. There is a risk on the employee’s behalf of forfeiture of the shares if the employee leaves the company before fulfilling the specific vesting period.

Additionally, tax implications are a very important consideration when determining the timing of selling RSUs. The vesting of RSUs is taxed as ordinary income. Upon the sale of shares, the subsequent gains (or losses) are subject to capital gains tax.

We believe careful review of RSU grant agreements is essential to understand vesting, settlement, and performance conditions. It is critical for employees to consider them as part of their overall Financial Plan to make effective decisions in addressing their RSUs.