A Restricted Stock Unit (RSU) is a contractual promise from your employer to deliver company shares once you meet vesting conditions — usually continued employment over a multi-year period. You don’t pay anything to receive RSUs, you don’t own shares until they vest, and the moment they do vest, the IRS treats the full market value as ordinary income.
RSUs have replaced stock options as the default equity compensation in public tech companies and increasingly dominate at late-stage private companies. The reason is simple: an RSU has value at any positive stock price. A stock option doesn’t.
What an RSU is — and isn’t
An RSU is deferred equity compensation. Three things to internalize:
- No purchase required. Unlike incentive stock options, there’s no exercise price to pay.
- No ownership until vesting. No voting rights, no dividends, 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.
RSU vs stock option, in one example
Assume the company’s stock trades at $100 when you join, and you’re offered either 1,000 RSUs or 3,000 stock options at a $100 strike.
| Stock price at vesting | RSU value | Option value (strike $100) |
|---|---|---|
| $50 | $50,000 | $0 (underwater) |
| $100 | $100,000 | $0 |
| $150 | $150,000 | $150,000 |
| $200 | $200,000 | $300,000 |
| $300 | $300,000 | $600,000 |
RSUs win in flat or down markets. Options win when the stock substantially appreciates above strike. This asymmetry is why RSUs took over public tech companies after the 2000 and 2008 selloffs left thousands of employees holding worthless options.
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 TSR, milestone completion. Senior executives often have a mix of time-based and performance-based RSUs.
Settlement and tax
When RSUs vest, the employer:
- Reports the full FMV as ordinary income on your W-2
- Withholds tax (most companies sell shares “to cover” — the broker auto-sells enough shares to cover withholding, you receive the rest)
- Deposits net shares in your brokerage account
After settlement, the shares behave like any other public stock. Hold or sell freely (subject to blackout windows). Future appreciation is capital gain; depreciation is capital loss. The vesting-date FMV is your cost basis. For employees at private C-corp startups, vest-day issuance also starts the QSBS five-year clock — meaning RSUs that vest now and are sold five+ years later may qualify for the federal capital-gains exclusion.
Tax: the part that surprises people
Ordinary income at vesting
RSUs vest at FMV — that entire amount is ordinary income, identical to cash salary. Federal, state, Social Security, Medicare all apply. A typical vesting event of 1,000 shares at $150 produces $150,000 of taxable income, which combined with state taxes and FICA hits roughly $70,000 of total tax owed in a high-bracket state. The same logic applies to performance shares granted under a management incentive plan — ordinary income recognition at vest, regardless of whether you sell.
The 22% withholding trap
The IRS classifies RSU income as supplemental wages. Most employers default to 22% federal withholding. If your actual marginal rate is 32-37%, you have a 10-15% shortfall waiting at tax time. On a $150,000 vesting event, that’s roughly $15,000-$22,500 you owe in April that wasn’t withheld.
Three ways to handle it:
- Increase withholding via W-4 adjustments on your salary
- Make quarterly estimated tax payments
- Sell additional shares immediately at vest and earmark cash for taxes
Employees at successful companies routinely face $50K-$200K+ tax bills in vesting years. Plan or pay penalties.
Cost basis and the holding period
Your cost basis = FMV at vesting. When you eventually sell:
- Sell same day: no additional gain or loss
- Sell within 12 months: short-term capital gain/loss (ordinary rates)
- Sell after 12 months: long-term capital gain/loss (preferential rates)
Because the entire vest-day value already hit you as ordinary income, only post-vest movement creates additional tax.
RSAs vs RSUs (one common confusion)
Restricted Stock Awards (RSAs) and RSUs sound similar but differ structurally:
- RSA: actual shares issued at grant, subject to forfeiture until vested. Holder has voting rights immediately. Eligible for an 83(b) election — pay tax now on (low) grant-date value, capture all appreciation as capital gains.
- RSU: no shares exist until vesting. No 83(b) election available. Always taxed as ordinary income on vest-day FMV.
RSAs make sense at very early-stage startups where grant-date FMV is near zero. RSUs make sense at later-stage and public companies where vest-day value is much higher than grant-date value would have been. Most companies choose one or the other based on stage.
Managing RSU compensation
The concentration problem
Employees at successful public companies often accumulate RSU positions worth 60-80% of their net worth. That’s catastrophic single-stock concentration. Standard discipline:
- Track total RSU value as a percentage of net worth
- Set a target (most advisors suggest 10-20% 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
The “but the stock might keep going up” objection is real. So is the asymmetric downside if it doesn’t.
Job changes
Unvested RSUs are forfeited the moment you resign. Vested shares are yours forever. If you have $500K in unvested RSUs and you’re considering a new role, that’s $500K of opportunity cost to factor into the comp comparison. At private companies, the value calculation also depends on the share-class structure — see waterfall analysis for how preferred liquidation preferences can shrink common-share proceeds at exit.
Double-trigger acceleration is the most common protection: if the company is acquired and you’re terminated post-acquisition, some or all unvested RSUs vest immediately. Single-trigger acceleration (acquisition alone) is rare because acquirers don’t 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. Keep documentation in case of any tax-basis disputes years later.
Frequently asked questions
What is an RSU in plain English?
A promise from your employer to give you company shares in the future, contingent on you continuing to work there (or hitting performance goals) for a specified period. You pay nothing to receive RSUs. You owe income tax when they vest.
Do RSUs cost anything?
No upfront cost. But ordinary income tax on the full FMV at vesting can be 30-50% depending on your bracket and state.
Are RSUs better than stock options?
Lower risk, lower upside. RSUs always have value at any positive stock price; options can go to zero if the price is below strike. Options can return more if the stock significantly appreciates above strike. For most employees at established companies, RSUs are the better risk-adjusted bet.
When do I pay taxes on RSUs?
At vesting, on the FMV that day, as ordinary income. Then again on any gain or loss when you sell.
What happens to unvested RSUs if I leave?
You forfeit them. Vested shares stay yours.
Can I sell RSUs immediately after vesting?
For public companies: yes, outside blackout windows. For private companies: usually no liquid market until acquisition or IPO.
Should I worry about the 22% withholding default?
If your marginal federal rate is above 22%, yes. Adjust withholding, make estimated payments, or sell additional shares at vest to cover the gap.