A restricted stock unit promises future shares or cash; vesting, settlement, withholding, and sale restrictions determine what the employee receives.
A restricted stock unit (RSU) is a compensation award promising company shares or their cash equivalent after specified conditions are met. An RSU is not a share already owned by the employee. Vesting earns the award under its conditions; settlement delivers the shares or cash. Those events can occur on different dates.
The grant date establishes the award under applicable requirements. A common arrangement links each unit to one share, with continued employment required over a stated period.
| Stage | What happens | What should not be assumed |
|---|---|---|
| Grant | The employee receives a conditional award | All units are already owned shares |
| Vesting | The relevant service or performance conditions are satisfied | Cash or shares arrive that day |
| Settlement | The company delivers the required shares or cash | The gross unit count equals the net shares received |
| Sale | Delivered shares are sold, if permitted and a buyer is available | Vesting or settlement guarantees liquidity |
A schedule might vest 25% annually over four years, or combine a one-year cliff with later monthly installments. Performance requirements can change the number earned. Read the actual vesting schedule rather than treating four years as a universal rule.
Private-company awards may require both service and a specified liquidity event. Check whether the event is a vesting condition or a settlement trigger, and what happens if it never occurs.
RSUs generally do not carry shareholder voting rights before share delivery. Dividend equivalents, if provided, are contractual benefits rather than automatic dividends on shares already owned. For a concrete plan example, Andersen Group’s filed equity plan and RSU agreement address settlement separately from vesting, optional dividend equivalents, withholding, and resale restrictions. These are that company’s terms, not a universal RSU contract.
Assume an employee receives 400 RSUs, each settling in one share, with 100 units vesting annually for four years. The first 100 units vest and settle together when the share price is USD 40.
For illustration, the company withholds shares worth 25% of the gross value and remits the equivalent cash for taxes. This assumed rate is only for arithmetic; it is not a statutory rate or an estimate of anyone’s final tax liability.
| First installment | Calculation | Result |
|---|---|---|
| Gross award value | 100 units x USD 40 | USD 4,000 |
| Illustrative withholding | USD 4,000 x 25% | USD 1,000 |
| Shares withheld | USD 1,000 / USD 40 | 25 shares |
| Shares delivered | 100 - 25 | 75 shares |
| Delivered share value | 75 x USD 40 | USD 3,000 |
| Units still unvested | 400 - 100 | 300 units |
The employee earned 100 units, not 75. The difference funded withholding. The remaining 300 units are still conditional and may settle at different prices, or never vest.
In net share withholding, the company retains shares and remits cash. Under sell-to-cover, shares are sold to fund the withholding instead. Award records should identify which occurred; a market sale can involve a different execution price and fees.
A later move from USD 40 to USD 25 would reduce the value of the 75 retained shares from USD 3,000 to USD 1,875. Not paying an exercise price does not protect the award’s value after delivery.
| Feature | RSU | Restricted stock award (RSA) | Employee stock option |
|---|---|---|---|
| What is granted | Promise of future shares or cash | Actual shares subject to restrictions | Right to buy shares |
| Purchase or exercise payment | Generally no exercise price | May involve a purchase payment | Exercise price must be funded or otherwise satisfied |
| What vesting changes | Earns units under the award | Removes specified forfeiture restrictions | Usually makes options exercisable |
| Exposure | Full share value, subject to award terms | Full share value | Appreciation above the exercise price |
| Main distinction | Settlement may follow vesting | Property has already been transferred | Exercise is separate from vesting |
For a simplified comparison, 100 RSUs settling at USD 15 per share have a gross value of USD 1,500. An employee stock option covering 100 shares with a USD 20 exercise price has no intrinsic value at that price, although an unexpired option may retain time value.
Equal unit counts are therefore not equal compensation packages. Compare award terms and value, not simply “100 RSUs versus 100 options.”
For a conventional U.S. employee RSU settled in vested shares, federal compensation income generally arises when shares are transferred, often at vesting. Grant ordinarily does not trigger income if the arrangement complies with applicable rules or an exemption. Cash settlement generally produces compensation income when received.
Deferred settlement requires separate analysis: deferred-compensation and employment-tax rules can affect timing. The IRS equity-compensation audit guide, section G.3 distinguishes the RSU promise from the later stock transfer. It also explains why an 83(b) election cannot be made for the RSU grant itself.
Special deferrals, including Section 83(i) for certain qualifying private-company awards, have separate eligibility requirements; they are not automatic. See IRS Publication 525. State, local, and cross-border treatment may differ.
Continue the example, assuming the USD 4,000 was included as U.S. compensation income, no purchase payment was required, and there are no basis adjustments. The 75 retained shares have a basis of USD 40 each, or USD 3,000.
If those shares are later sold for USD 50 each, ignoring fees:
The gain is USD 750, not the entire USD 3,750 proceeds. IRS Publication 551 explains basis for property received for services. Holding period and other facts determine the sale’s tax treatment. Withholding is a payment toward tax, not necessarily the final bill.
Before treating an award as available money, identify its settlement date and method, forfeiture terms, withholding arrangements, and sale restrictions. Neither a portal valuation nor a quoted grant value guarantees cash proceeds.
RSUs also belong in an issuer’s compensation and dilution analysis. Share-based payment accounting recognizes the relevant service cost; issuing shares can reduce existing holders’ ownership percentages. Cash-settled units instead create a payment obligation.
A fully diluted share count must state how it treats outstanding awards. Do not add every unvested RSU mechanically to basic shares and label the result diluted EPS. Reporting rules and transaction cap-table conventions answer different questions. IFRS 2 provides the IFRS framework for share-based payment accounting.
This article is educational, not personalized investment, tax, legal, or employment advice. Actual rights and tax results depend on the award documents, applicable law, and individual facts.