RSU (Restricted Stock Unit)
A Restricted Stock Unit (RSU) is an employer promise to deliver shares of company stock — or a cash equivalent — to an employee upon the satisfaction of a vesting schedule and, in some cases, additional performance conditions. Unlike stock options, RSUs have value as long as the underlying stock has any positive price, because they represent a right to receive shares outright rather than the right to purchase them at a set price.
RSUs became the dominant form of equity compensation at large public companies in the United States following the accounting rule change enacted by the Financial Accounting Standards Board in 2004 (FAS 123R, now ASC 718), which required companies to expense the fair value of all stock options on their income statements. Because RSUs have simpler and more predictable accounting treatment and deliver guaranteed value to employees even if the stock price stagnates, many companies shifted away from stock options toward RSUs in the mid-2000s.
From a tax perspective, RSUs are treated as ordinary compensation income at the vesting date. Unlike restricted stock (actual shares subject to forfeiture risk), RSUs are not considered property at the grant date because they represent an unfunded promise rather than a transfer of stock. Therefore, the Section 83(b) election — which requires a transfer of property — is not available for RSUs. When the RSU vests and shares are delivered to the employee, the full fair market value of the shares on the delivery date is recognized as ordinary income and subject to federal and state income tax withholding, as well as Social Security and Medicare taxes.
Employers typically satisfy the withholding obligation by withholding a portion of the vesting shares and remitting the proceeds to tax authorities (net settlement or sell-to-cover). For a high-income employee whose marginal federal rate is 37% plus applicable state taxes plus the 3.8% net investment income tax on investment income (though vesting income is earned income, not investment income), the after-tax value of vesting RSUs can be substantially less than the gross share value.
After vesting, the tax basis in the shares is equal to the fair market value included in ordinary income. Any subsequent gain or loss on a sale is short-term or long-term capital gain depending on the holding period measured from the vesting date. Employees who sell immediately at vesting have no capital gain or loss; those who hold appreciate in the post-vesting period, provided the stock rises, may ultimately benefit from the lower long-term capital gain rate, but they also accept market risk.
Double-trigger RSUs are common at pre-IPO companies. These RSUs require both a time-based vesting condition and a liquidity event trigger (such as an IPO or acquisition) before they convert to shares. This structure prevents employees from owing tax on illiquid shares in a private company. Once the company goes public, the shares become liquid, and the double-trigger provision typically lapses, causing a large block of RSUs to vest simultaneously — an event that can create significant income tax obligations for long-tenured employees.