Restricted Stock Unit (RSU)
A Restricted Stock Unit is a form of equity compensation where a company commits to issuing shares to an employee or investor upon meeting specified conditions, most commonly a vesting schedule over several years. RSUs represent a contractual right to receive shares, but the recipient doesn't own actual shares until vesting occurs.
How RSUs Work
When granted an RSU, you receive a promise of shares at no upfront cost. The shares vest according to a predetermined schedule—often quarterly over a 3-4 year period. Upon vesting, the company transfers actual shares to your account, and you can immediately sell them or hold them. The value of RSUs is tied directly to your company's stock price at the vesting date.
Why RSUs Matter for Investors
RSUs are significant in startup investing and employee compensation because they:
- Provide guaranteed equity stakes without requiring additional capital investment
- Align employee interests with company success
- Offer tax implications that differ from stock options
- Create retention incentives through vesting schedules
- Give investors exposure to company growth without early cash requirements
RSU vs. Stock Options
The key difference between RSUs and stock options is that RSUs have intrinsic value from grant date, while options only gain value if the stock price rises above the strike price. RSUs also typically don't require you to purchase shares, whereas options require exercise at a predetermined price.
Tax Considerations
RSUs are taxed as ordinary income at their vesting date, based on the stock's fair market value. This differs from common stock, which may receive capital gains treatment. Investors should plan for tax liability when RSUs vest.
Example
Suppose you receive 400 RSUs from a startup valued at $25 per share. With a 4-year vesting schedule, 100 shares vest quarterly. After one year, 100 shares vest and convert to actual stock worth $2,500 (assuming the price stays the same). You now own those shares and can sell them or hold for potential appreciation.