Glossary term
Restricted Stock Unit (RSU)
A restricted stock unit, or RSU, is an equity compensation award that delivers company shares or cash after vesting conditions are met.
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What Is a Restricted Stock Unit?
A restricted stock unit, or RSU, is an equity compensation award that delivers company shares or cash after vesting conditions are met. Before vesting, the employee usually does not own the shares outright. The award becomes valuable when it vests and the company settles it under the plan terms.
RSUs are common at public companies, late-stage private companies, and technology firms. They can be easier to understand than stock options because there is usually no exercise price, but they still create tax timing, concentration risk, vesting, and job-change questions.
Key Takeaways
- An RSU is a promise to deliver shares or cash later, not direct stock ownership on the grant date.
- Vesting may depend on continued service, performance targets, or both.
- RSUs usually become taxable compensation when they vest and shares or cash are delivered.
- After shares are received, future gains or losses are usually investment gains or losses.
- Leaving a job before vesting can cause unvested RSUs to be forfeited.
How RSUs Work
A company grants RSUs under an equity compensation plan. The grant describes the number of units, vesting schedule, settlement method, and other conditions. If the employee satisfies those conditions, the units vest and are settled in shares, cash, or sometimes a combination.
Unlike a stock option, an RSU normally does not require the employee to pay an exercise price. If shares are delivered, the employee receives stock value at vesting. That can make RSUs easier to understand than options, but not risk-free. The stock price can fall before vesting or after the employee receives the shares.
RSUs Compared With Stock Options
Feature | RSU | Stock Option |
|---|---|---|
Basic right | Receive shares or cash after vesting | Buy shares at a set exercise price |
Value if stock falls | May still have value if shares are worth more than zero | May become worthless if market price is below exercise price |
Typical tax timing | Often taxed when shares vest and are delivered | Depends on option type and exercise or sale timing |
Main planning issue | Withholding, sale timing, and concentration risk | Exercise timing, tax treatment, and liquidity |
RSUs can retain value even if the stock price falls, as long as the stock still has value when the award vests. Options need the stock price to exceed the exercise price before they have economic value.
Taxes and Withholding
RSUs are generally taxed as compensation when they vest and are settled. The taxable amount is usually based on the fair market value of the shares or cash received. Employers commonly withhold shares or cash to cover income tax and payroll tax withholding, but withholding may not equal the worker's final tax liability.
After settlement, the employee owns shares. Future gains or losses are usually investment gains or losses. The employee's cost basis generally starts with the value included in income at settlement. If the employee sells immediately, there may be little additional gain or loss. If the employee holds, the stock can rise or fall like any other concentrated holding.
What Happens When You Leave a Job
Job changes are one of the biggest RSU planning moments. Vested RSUs usually belong to the employee, though selling or transferring shares may still be subject to trading windows, blackout periods, insider-trading policies, or company rules. Unvested RSUs are commonly forfeited when employment ends unless the plan or separation agreement says otherwise.
That distinction matters during layoffs, resignations, retirements, and acquisitions. A worker who is close to a vesting date may have a very different financial picture than someone whose next vesting tranche is months away. Review the grant agreement, equity plan, and separation documents before assuming the award will continue.
Planning Around Employer Stock
RSUs can quietly concentrate a household's income, benefits, taxes, and investments in the same employer. A rising stock price can make that concentration feel rewarding, but a job loss and falling share price can arrive together.
Employees should understand vesting dates, blackout windows, trading policies, withholding elections, and whether selling shares after vesting better fits their broader portfolio. Holding employer stock should be an intentional portfolio decision, not just the default result of compensation.
Readers leaving work can start with What Happens to Stock Options and RSUs When You Leave a Job?. Readers comparing company equity with the rest of a portfolio can use How to Decide Whether a Stock Belongs in Your Portfolio.
The Bottom Line
A restricted stock unit is an equity compensation award that can become real income when it vests and settles. RSUs can be simpler than stock options because there is no exercise price, but they still require careful planning around taxes, withholding, vesting, job changes, sale timing, and employer-stock concentration.