A restricted stock unit (RSU) is a promise from your employer to deliver company shares once you meet vesting conditions, usually staying employed for several years. You pay nothing to receive RSUs, and the full market value is taxed as ordinary income the moment they vest, whether or not you sell.
RSU stands for Restricted Stock Unit. RSUs have replaced stock options as the default equity compensation at public tech companies and increasingly dominate at late-stage private companies. The reason is simple: an RSU has value at any positive stock price, while a stock option is worthless until the share price rises above its strike.
The short version:
- What it is: a contractual promise to deliver company shares after vesting conditions are met; RSUs are not shares until they vest.
- When you are taxed: at vesting, on the full fair market value (FMV) that day, as ordinary income, not at grant, and not only when you sell.
- The withholding gap: employers default to 22.0% federal withholding on RSU income; if your marginal rate is higher, you owe the difference at tax time.
- RSU vs option, in one line: RSUs hold value at any positive price; options only pay if the stock rises above strike. RSUs are lower risk, lower upside.
- What to do at vest: set cash aside for the true tax bill, then decide whether to hold or diversify out of a concentrated position.
What an RSU is, and isn’t
An RSU is deferred equity compensation. If you were offered RSUs in a job package, the dollar figure quoted is a grant value that converts to shares over time, not cash or stock you hold today. Three things to internalize:
- No purchase required. Unlike incentive stock options, there is no exercise price to pay.
- No ownership until vesting. No voting rights, no dividends, and no shareholder status during the vesting period.
- Tax fires at vesting, not grant. The grant itself is a non-event. Vesting creates ordinary income equal to the share price on that day.
The “restricted” part refers to the vesting condition. Once it lapses, the units convert to actual unrestricted shares deposited into your brokerage account.
Definition: A restricted stock unit is a form of equity compensation in which an employer agrees to deliver company shares to an employee after vesting conditions are met; the shares’ fair market value is taxed as ordinary income at vesting, whether or not the employee sells them.
RSUs vs stock options
RSUs and stock options both grant equity upside, but they pay off differently. An RSU converts to shares you own outright at vesting. A stock option only gives you the right to buy shares at a fixed strike price, so it is worthless until the stock trades above that strike.
Assume the company’s stock trades at $100.00 when you join, and you are offered either 1,000 RSUs or 3,000 stock options at a $100.00 strike. The table shows the pre-tax value of each at vesting, by stock price:
| Stock price at vesting | RSU value (1,000 units) | Option value (3,000 @ $100 strike) |
|---|---|---|
| $50.00 | $50,000.00 | $0.00 (underwater) |
| $100.00 | $100,000.00 | $0.00 |
| $150.00 | $150,000.00 | $150,000.00 |
| $200.00 | $200,000.00 | $300,000.00 |
| $300.00 | $300,000.00 | $600,000.00 |
When each wins: RSUs win in flat or down markets: they hold value at any positive stock price. Options win only when the stock rises well above the strike, where their larger share count compounds the gain. This asymmetry is why RSUs took over public tech after the 2000 and 2008 selloffs left thousands of employees holding worthless options.
For most employees at established companies, RSUs are the better risk-adjusted bet. Options reward concentrated upside; RSUs reward staying employed.
How RSUs work end-to-end
Grant
The employer issues a grant agreement specifying:
- Number of RSUs
- Vesting commencement date
- Vesting schedule
- Settlement provisions (when shares are delivered)
- Tax withholding method
No tax. No ownership. Just a contract.
Vesting
The most common structure is a four-year vesting schedule with a one-year cliff: 25% vests at month 12, then the remaining 75% vests in equal quarterly or monthly tranches over the next three years. Leave before the cliff and you get nothing.
For a 4,000-RSU grant on a standard schedule:
- Month 12: 1,000 shares vest (cliff)
- Months 15, 18, 21 …: 250 shares vest each quarter
- Month 48: final 250 shares vest
Performance-based RSUs (PRSUs) layer additional conditions on top: revenue targets, relative total shareholder return (TSR), or milestone completion. Senior executives often hold a mix of time-based and performance-based RSUs under a management incentive plan.
Settlement and tax
When RSUs vest, the employer:
- Reports the full FMV as ordinary income on your W-2.
- Withholds tax: most companies “sell to cover,” where the broker automatically sells enough vested shares to fund withholding and you receive the rest.
- Deposits the net shares in your brokerage account.
After settlement, the shares behave like any other stock. Hold or sell freely, subject to blackout windows. Future appreciation is capital gain; depreciation is capital loss. The vesting-date FMV becomes your cost basis. For employees at private C-corp startups, vest-day issuance also starts the QSBS five-year clock: RSUs that vest now and are sold five-plus years later may qualify for the federal capital-gains exclusion.
RSU taxation: the part that surprises people
This article is general information about restricted stock units, not tax, legal, or financial advice. RSU tax outcomes are fact-specific and depend on your plan, income, and state. Consult a qualified tax advisor before making withholding, sale, or diversification decisions.
Ordinary income at vesting
RSUs vest at FMV, and that entire amount is ordinary income, identical to cash salary. Federal income tax, state tax, Social Security, and Medicare all apply. The statutory basis is IRC §83: the shares are property transferred for services, taxed when they are no longer subject to a substantial risk of forfeiture (i.e., at vesting).
A vesting event of 1,000 shares at $150.00 produces $150,000.00 of taxable ordinary income. In a high-bracket state, federal tax, state tax, and FICA can combine to roughly $70,000.00 of total tax owed on that single vest.
Do you get taxed twice on RSUs?
No. You are taxed once as ordinary income at vesting, when the vest-day FMV becomes your cost basis. After that, you owe tax only on any additional gain or loss when you later sell, and selling at vest produces no second tax, because there is no movement above your basis. The common “taxed twice” worry conflates the single income event at vest with the separate capital-gains event on later appreciation.
Why are RSUs taxed so high?
RSUs are not taxed at a special high rate. The full vest-day value is ordinary income, like salary, so a large vest can push you into a higher bracket and feel punitive. The bigger issue is withholding. The IRS classifies RSU income as supplemental wages, and employers default to a 22.0% flat federal withholding rate under IRS supplemental-wage rules (rising to 37.0% on supplemental wages above $1,000,000.00 in a year). If your true marginal rate is 32.0%-37.0%, that 22.0% default leaves a 10.0%-15.0% shortfall waiting at tax time.
On a $150,000.00 vesting event, a 22.0% withholding default covers $33,000.00, but a 35.0% marginal taxpayer actually owes about $52,500.00 in federal tax, a roughly $19,500.00 gap due in April that was never withheld. Three ways to handle it:
- Increase withholding via W-4 adjustments on your salary.
- Make quarterly estimated tax payments.
- Sell additional shares at vest and earmark the cash for taxes.
Employees at successful companies routinely face six-figure tax bills in vesting years. Plan, or pay underpayment penalties.
Cost basis and the holding period
Your cost basis equals the FMV at vesting. When you eventually sell:
- Sell same day: no additional gain or loss.
- Sell within 12 months: short-term capital gain/loss, taxed at ordinary rates.
- Sell after 12 months: long-term capital gain/loss, taxed at preferential rates.
Because the entire vest-day value already hit you as ordinary income, only post-vest movement creates additional tax.
RSUs vs RSAs (and the 83(b) election)
Restricted Stock Awards (RSAs) and RSUs sound similar but differ structurally:
- RSA: actual shares are issued at grant, subject to forfeiture until vested. The holder has voting rights immediately and can make an 83(b) election.
- RSU: no shares exist until vesting. No 83(b) election is available, and the vest-day FMV is always taxed as ordinary income.
The 83(b) election lets an RSA holder choose to be taxed now on the low grant-date value rather than later on the higher vest-date value, converting future appreciation from ordinary income into capital gain. It must be filed with the IRS within 30 days of the grant.
RSUs cannot make an 83(b) election because, under §83, no property is transferred at grant; only a contractual promise exists until vesting, so there is nothing to elect on. This is the core structural difference: RSAs suit very-early-stage startups where grant-date FMV is near zero (so the 83(b) tax is tiny), while RSUs suit later-stage and public companies where vest-day value far exceeds what grant-date value would have been.
Private-company RSUs
At a private company, RSUs work differently from the public-company default in three ways that matter for value and timing.
No liquid market until an exit. Private shares cannot be sold on an open market. Even after vesting, you generally cannot turn RSU shares into cash until an IPO, an acquisition, or a sanctioned secondary/tender offer.
Double-trigger vesting is common. Many private companies use a double-trigger structure: RSUs require both a time/service condition and a liquidity event (typically an IPO or acquisition) before they settle. This avoids creating a taxable event (and an unfunded tax bill) on illiquid shares an employee cannot yet sell. RSU settlement timing is also constrained by IRC §409A deferred-compensation rules, which is why RSUs typically settle at or near the triggering event rather than on a freely chosen date.
Exit proceeds depend on the preference stack. Your vested RSU shares are common stock, and at an exit, common sits behind preferred liquidation preferences. So the real question is not your grant’s headline value; it is what common actually receives across exit scenarios. Waterfalls models how option pools and grants dilute the cap table and how proceeds flow through the preference stack at exit. It does not administer your RSUs, run withholding, or provide tax advice (your plan administrator and a tax advisor handle those), but it shows what your vested common shares are worth at each outcome.
Managing RSU compensation
The concentration problem
Employees at successful public companies often accumulate RSU positions worth 60.0%-80.0% of their net worth. That is a high level of single-stock concentration. Standard discipline:
- Track total RSU value as a percentage of net worth.
- Set a target: most advisors suggest 10.0%-20.0% maximum single-stock exposure.
- Sell systematically at each vest to maintain that target.
- Diversify into broad-market index funds or whatever your investment policy allows.
Future appreciation is possible, but so is a significant decline, and a concentrated position magnifies the downside.
Job changes and unvested value
Unvested RSUs are forfeited the moment you resign; vested shares are yours forever. If you hold $500,000.00 in unvested RSUs and are weighing a new role, that is $500,000.00 of opportunity cost to factor into the comparison.
Double-trigger acceleration is the most common change-of-control protection: if the company is acquired and you are terminated post-acquisition, some or all unvested RSUs vest immediately. Single-trigger acceleration (acquisition alone) is rare, because acquirers do not want to lose retention leverage on day one.
Tracking and admin
Most companies use equity management platforms (Carta, Shareworks, E*TRADE) to track grants, vesting events, and tax documents. Check yours quarterly, reconcile vesting events against grants, and keep documentation in case of a tax-basis dispute years later.
Frequently asked questions
What does RSU mean in plain English?
RSU stands for Restricted Stock Unit: a promise from your employer to give you company shares in the future, contingent on continued employment (or hitting performance goals). You pay nothing to receive them, and you owe ordinary income tax on the full value when they vest.
Does 1 RSU equal 1 share of stock?
Generally yes, one RSU converts to one share of company stock at vesting/settlement, subject to plan terms. Before vesting, an RSU is a contractual promise, not an actual share, so it carries no voting rights or dividends.
Why are RSUs taxed so high?
They are not taxed at a special high rate. The full vest-day value is ordinary income, like salary, so a large vest can push you into a higher bracket. They also feel high because employers withhold a flat 22.0% by default, which often under-withholds versus a 32.0%-37.0% marginal rate, leaving a balance due at tax time.
Do you get taxed twice on RSUs?
No. You are taxed once as ordinary income at vesting, and the vest-day FMV becomes your cost basis. You then owe tax only on any additional gain or loss when you later sell. Selling at vest produces no second tax.
Are RSUs better than stock options?
Lower risk, lower upside. RSUs hold value at any positive stock price; options can go to zero if the price is below strike. Options can return more if the stock appreciates well above strike. For most employees at established companies, RSUs are the better risk-adjusted bet.
What happens to unvested RSUs if I leave?
You forfeit them; vested shares stay yours. Factor the unvested value into any job-change comparison, since walking away from a large unvested position is a real opportunity cost.
Should I worry about the 22% withholding default?
If your marginal federal rate is above 22.0%, yes. Adjust your withholding, make estimated payments, or sell additional shares at vest to cover the gap and avoid an underpayment penalty.
The bottom line
An RSU is the simplest form of equity compensation to value (it is worth the share price at any positive level), but the simplest to mishandle at tax time. The discipline that matters is procedural: at each vest, set aside cash for the true tax bill (not just the 22.0% default), then decide whether to hold or diversify out of a concentrated position.
For private-company RSU holders, one more question remains: your vested shares are common stock, and what common receives at an exit depends on the preferred preference stack above it. Waterfalls models how grants dilute the cap table and what common shares are worth across exit scenarios: it is a modeling tool, not a plan administrator or tax advisor.