RSU, or Restricted Stock Units, is a type of equity compensation commonly used by companies as a way to reward their employees. RSUs grant employees the right to receive a specified number of company shares at a future date, subject to certain conditions.
Here is how RSUs work:
Grant: The company grants RSUs to an employee, typically as part of their compensation package. The grant specifies the number of shares that the employee is entitled to receive.
Vesting: RSUs typically vest over a period of time, which means that the employee must remain with the company for a certain period before they can exercise their right to receive the shares. Vesting schedules vary by company, but the most common schedule is over a four-year period, with 25% of the RSUs vesting after one year and the remainder vesting monthly or quarterly over the next three years.
Cliff: Some companies include a “cliff” in their vesting schedule, which means that the employee must remain with the company for a certain period of time before any RSUs vest. For example, a company might have a one-year cliff, meaning that the employee must stay with the company for at least one year before any RSUs vest.
Restrictions: RSUs typically come with restrictions that prevent the employee from selling or transferring the shares until certain conditions are met. For example, some RSUs may be subject to a lock-up period, during which the employee cannot sell the shares. Other restrictions might include a requirement that the employee meet certain performance targets before the RSUs vest.
Taxes: When RSUs vest, the value of the shares is considered taxable income to the employee. The employer will typically withhold taxes from the employee’s paycheck to cover this tax liability. The employee may also be subject to capital gains tax when they sell the shares, depending on how long they hold onto the shares.
RSUs are a popular form of equity compensation because they align the interests of the employee and the employer. RSUs give employees a stake in the company’s success, which can motivate them to work harder and help the company achieve its goals. At the same time, RSUs can help companies attract and retain talented employees by offering them a valuable form of compensation.