A promise to deliver shares at a future date, typically when a vesting condition is met. Unlike options, RSUs do not have a strike price. You do not pay anything to receive the shares. Common at larger companies (post-IPO or late-stage). Taxed as ordinary income when they vest.
RSU (restricted stock unit)
noun — A contractual right to receive shares of company stock upon the satisfaction of specified vesting conditions, typically time-based service. No shares are issued at grant — the unit is a promise, not actual stock. At vesting, shares are delivered and the full market value is taxed as ordinary income. Distinguished from RSAs (shares issued at grant with repurchase rights) and stock options (rights to purchase at a set price). Most common at public companies and late-stage private companies with near-term liquidity events.
Why it matters
RSUs have become the dominant form of equity compensation at large technology companies because they are simpler for employees to understand and always have value (unlike options, which can be underwater). When companies like Google, Amazon, or Microsoft talk about equity compensation, they are almost always referring to RSUs.
For employees evaluating job offers, understanding RSU mechanics is essential. A $200,000 RSU grant vesting over four years sounds valuable, but the after-tax value depends on when shares are sold relative to any price changes and on your marginal tax rate at vesting. An employee in the highest federal bracket receiving $50,000 in RSUs per year could lose 37% or more to income taxes plus state taxes before selling a single share.
For startups considering the transition to RSUs, it typically makes sense only after the company has a liquid market for its shares. Until then, the ordinary income tax hit at vesting — with no ability to immediately sell shares to cover taxes — makes RSUs a poor choice for most private companies. Double-trigger RSUs solve this problem but add complexity.
How it works
When you receive an RSU grant, the company promises to give you a specific number of shares once you meet the vesting conditions. Most RSUs vest on a time-based schedule, such as 25% per year over four years. Some companies use a back-loaded schedule where more shares vest in later years. When RSUs vest, the company delivers actual shares to you and withholds a portion (typically 22-37%) for taxes.
The full market value of the vested shares is taxed as ordinary income. For example, if 250 RSUs vest when the stock price is $100 per share, you have $25,000 in taxable income. The company might withhold 60 shares to cover your tax obligation and deliver the remaining 190 shares to your brokerage account. After vesting, any future appreciation is taxed as capital gains when you sell.
One key difference from stock options is that RSUs do not require any action from the employee. Options must be exercised (and paid for), but RSUs simply convert to shares automatically at vesting. This eliminates the risk of employees forgetting to exercise or being unable to afford the exercise cost. The downside is that employees cannot time their tax event the way option holders can — vesting triggers the tax regardless of market conditions or the employee's cash situation.
| Feature | RSU | Stock option (ISO/NSO) | RSA |
|---|---|---|---|
| When shares delivered | At vesting | At exercise (after vesting) | At grant |
| Employee cost | None | Strike price at exercise | Nominal purchase price |
| Tax at vesting | Ordinary income on FMV | None (ISOs); spread (NSOs) | None (if 83(b) filed) |
| Value if stock flat | Full share value | Zero (underwater) | Full share value |
History and origin
RSUs emerged in the early 2000s as a response to the stock option accounting scandals and the dot-com crash. When millions of stock options became worthless as tech company valuations collapsed, companies began searching for equity instruments that would always have value for employees. The FASB's new accounting rules (SFAS 123R), effective in 2006, also required companies to expense stock options on their income statements — eliminating one of options' prior accounting advantages.
Microsoft was one of the first major technology companies to switch from stock options to RSUs en masse, announcing the change in 2003. Google followed with a hybrid approach. Over the following decade, RSUs became the standard equity vehicle at virtually every large technology company, replacing options as the primary form of employee equity compensation at public firms.
The rise of late-stage private companies (unicorns) in the 2010s brought RSU complexity to pre-IPO startups. Companies like Uber, Airbnb, and Lyft experimented with RSU structures before their IPOs, often using double-trigger arrangements to delay the tax event until liquidity was available. Today, double-trigger RSUs are a common tool for pre-IPO companies looking to offer RSU-style compensation without the private company tax problem.
Frequently asked questions
What is an RSU?
An RSU (Restricted Stock Unit) is a company's promise to deliver actual shares to an employee when specified vesting conditions are met. Unlike stock options, RSUs have no exercise price — the employee simply receives shares upon vesting. RSUs are taxed as ordinary income at the time of vesting based on the shares' fair market value at that date.
How is an RSU different from a stock option?
Stock options give the employee the right to buy shares at a set price (the strike price). If the stock price is below the strike price, options are "underwater" and worthless. RSUs deliver shares automatically at vesting with no purchase required — they always have value as long as the stock has value. This simplicity makes RSUs easier for employees to understand and eliminates the risk of options being underwater.
How are RSUs taxed?
When RSUs vest, the fair market value of the vested shares is treated as ordinary income and taxed at the employee's marginal income tax rate. The company withholds taxes (typically 22-37%) at vesting, often by withholding a portion of the shares to cover the tax obligation. After vesting, any additional appreciation before the shares are sold is taxed as capital gains.
Why are RSUs common at large companies but not startups?
RSUs create a tax liability at vesting regardless of whether the employee can sell the shares. At a public company, employees can immediately sell shares to cover taxes. At a private startup, there is typically no liquid market, so employees could owe taxes on paper gains with no way to sell shares to pay the bill. For this reason, RSUs rarely make sense for private companies below late-stage.
Can I sell RSU shares immediately after vesting?
At public companies, yes — shares are deposited into your brokerage account at vesting and can generally be sold immediately (subject to any blackout periods or lock-up agreements). At private companies, the same transfer restrictions that apply to other equity apply to RSU shares after vesting, typically requiring company approval for secondary sales.
What is a double-trigger RSU?
A double-trigger RSU requires two conditions to vest: (1) time-based service vesting and (2) a liquidity event such as an IPO or acquisition. Double-trigger RSUs are common at private startups that want to grant RSUs but avoid creating a tax liability until employees can actually sell shares. The second trigger prevents the tax problem that arises when private company RSUs vest without a liquid market.
What happens to RSUs if I leave the company?
Unvested RSUs are forfeited when you leave. Vested RSUs where shares have already been delivered remain yours. If RSUs have vested but shares haven't yet been delivered (in a double-trigger structure where the liquidity event hasn't occurred), the treatment varies by agreement — some plans allow departing employees to retain vested units pending the liquidity event, others cancel them at departure.
Learn more
- Types of startup equity explained
- Vesting explained: cliffs, schedules, and acceleration
- Vesting schedules explained: cliff, graded, and the 4-year standard
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