Restricted Stock Units (RSUs) are a form of equity compensation where companies grant employees the right to receive shares of company stock at a future date, contingent upon satisfying specific vesting requirements such as continued employment for a set period or achievement of performance milestones. Unlike traditional stock options, RSUs represent an actual promise of shares rather than the option to purchase them, and employees receive the full value of the stock at vesting without needing to pay an exercise price.
Why It Matters
For angel investors and venture capitalists, understanding RSUs is critical when evaluating a company's cap table and equity dilution potential. RSUs represent a real liability on the company's books—they will convert to actual shares upon vesting, directly impacting ownership percentages for all shareholders. When conducting due diligence, investors must carefully assess the size of the company's RSU pool (typically 10-20% of fully diluted shares for growth-stage companies) and vesting schedules to accurately model future dilution. Companies with aggressive RSU grants may face significant pressure on their equity structure, potentially requiring additional fundraising rounds that further dilute early investors.
Example
Consider a startup engineer who receives 10,000 RSUs as part of her compensation package with a four-year vesting schedule and a one-year cliff. If she leaves the company after eight months, she forfeits all RSUs and receives nothing. If she stays for one year, 2,500 RSUs vest immediately (25%). The remaining 7,500 RSUs vest monthly over the next three years at approximately 208 shares per month. When each tranche vests, she receives actual shares and must pay income tax on their fair market value at that moment. If the company was valued at $5 per share at grant but grows to $15 per share at her one-year mark, she owes taxes on $37,500 for that first vesting event (2,500 shares × $15), even though she hasn't sold any stock. This tax treatment differs significantly from stock options and represents a key consideration for both employees and investors evaluating compensation structures.