Restricted stock units (RSU)

Restricted stock units (RSU)

Authors: Laura Moreno, CPA, Scarlett Pierce
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Read time:  4 minutes
Published date:  26 April 2023
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Updated date:  16 May 2024
Learn about restricted stock units – a form of equity compensation – including how RSUs work, how they are taxed and benefits for employees.

Got questions about RSUs? You’ve come to the right place. In this article, we’ll break down the basics of RSUs, from explaining how this security type differs from share options to walking through hypothetical taxation scenarios. 

What is an RSU?

A restricted stock unit (RSU) is an alternative to a share option, used by companies to compensate employees. Just as a bonus might be paid in cash on a quarterly basis, an RSU grant is paid in shares, on whichever basis it vests.

While share options offer employees the ability, or “option”, to buy shares at a fixed price in future, RSUs are granted as shares. However, you can’t take full ownership of shares granted as RSUs until you meet certain conditions. The vesting schedule and other conditions for an RSU grant are outlined in the RSU agreement that you receive when the RSUs are issued to you.

You don’t normally pay upfront to receive an RSU grant, but when you acquire the vested RSUs as shares, they are considered taxable income and treated as such.

How does vesting work for RSUs?

Timing is key with RSUs: When you acquire the shares and when you sell them are important factors in determining the full value and tax implications of the RSUs.

The most common vesting conditions placed on RSUs are time-based and involve a vesting schedule, which means you earn full rights to the shares over time. Other vesting schedules may be based on certain milestones or achievements related to your performance as an individual or as a company.

Just like share options, RSU shares are not granted to you until they vest. Your RSU grant can have one or multiple vesting triggers.

Single-trigger vesting

If your RSUs have a single-trigger vesting schedule, you only need to satisfy one requirement, typically time-based.

Time-based

Your equity grant vests over time (i.e. the grant vests monthly over four years, with a one-year cliff).

Event-based

Your equity grant vests when a specific event occurs (i.e. you hit an individual target or company milestone, such as an acquisition).

Double-trigger vesting

RSUs can also be subject to double-trigger vesting. A common additional vesting condition for RSUs is a company liquidity event, such as an acquisition or initial public offering (IPO).

In this instance, both conditions must be satisfied for your shares to vest. This has its upsides: it may allow you to delay tax obligations until your shares are liquid enough to sell. That way, you can offset your out-of-pocket payments by selling some or all of your shares at the point of acquisition.

Time-based and event-based

Your equity grant vests when both time-based and event-based conditions are met (i.e. you’ve passed a one-year cliff and your company is acquired).

What happens to my RSUs upon termination?

In the event that you’re let go from a company or decide to leave, your vested and unvested RSUs are treated differently.

Vested shares upon termination

What happens to your vested RSUs after termination depends on the policy laid out by your employer.

If your grant has a single-trigger vesting schedule, you’ll most likely get to keep your vested RSU shares. However, if you have a double-trigger vesting schedule with a so-called “must be present to win” condition, it’s unlikely you’ll keep your shares. That’s because you’ll need to work at the company when the event (for example, an IPO) that triggers vesting takes place.

Unvested shares upon termination

Regardless of liquidation conditions, any RSUs that are unvested are cancelled when you are let go or leave voluntarily. In case of double-trigger vesting all your RSUs would technically be unvested, as the liquidation event is a prerequisite for vesting.

If you’ve been granted RSUs, your grant agreement should explain what will happen to your RSUs in the event that you leave the company – including if and when double-trigger RSUs will expire.

How am I taxed on RSUs?

This article is based on general taxation principles, and your specific taxation will depend on jurisdiction and personal financial situation.

The main thing to know about RSUs and taxes is that you pay ordinary income tax when your RSUs are converted into shares. Some companies choose to convert your RSUs into shares at the point of each vesting event, but it’s more common for companies to convert RSUs on a regular basis, such as annually.

Example one: time-based vesting

Let’s walk through an example. Say you’re granted RSUs when the Fair Market Value (FMV) is £10 per share. Since you didn’t actually receive any shares when the RSU was granted, you’re not responsible for paying taxes. The taxable amount is £0 on the grant date.

Instead, you’ll pay ordinary income tax on the full FMV when the RSUs are converted into shares. Let’s imagine the FMV at that point is £15. If you decide to sell your shares later at £18 FMV, you’ll pay capital gains tax on the difference between the FMV at vesting and the FMV at the time of sale, which in this case would be £3.

Example two: liquidation scenario

Our first example looked at single-trigger RSUs. Seeing as RSUs often have multiple vesting conditions, let’s review how a liquidation condition would affect RSU taxes.

Using the same base figures for the RSUs (granted at £10 FMV, sold at £18), let’s assume you decide to sell your RSUs as soon as they’re fully vested. Since there’s a double-trigger vesting schedule, your shares are only fully vested when both the time-based vesting and event-based vesting conditions are satisfied. Selling them at that point, you’ll pay ordinary income tax on the entire value of the RSU (£18 per share).

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Laura Moreno, CPA: Laura Moreno is a Certified Public Accountant and Tax Delivery Lead at Carta. She has 10 years of tax experience and specializes in working with tech employees on equity compensation.
Scarlett Pierce is Carta’s Product Marketing Manager for the UK and Europe. She joined the team in late 2022 when Carta acquired European equity management startup Capdesk. Prior to Capdesk, Scarlett worked as a digital marketer for brands as diverse as the UK Government, Amazon Alexa and Louis Vuitton.
DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security.  Carta does not assume any liability for reliance on the information provided herein.  © 2023 eShares, Inc. dba Carta, Inc. All rights reserved. Reproduction prohibited.