RSU Vesting Schedule: How Restricted Stock Units Vest

RSU vesting schedules determine when restricted stock units convert to actual shares that employees own and can sell. Most companies use time-based schedules with a one-year cliff followed by monthly or quarterly vesting over three to four years, creating predictable equity compensation timelines.

Understanding Vesting vs Settlement

Vesting and settlement represent two distinct stages in the RSU lifecycle that impact taxes and ownership. Vesting occurs when you meet the schedule requirements and earn the right to receive shares. Settlement happens when the company actually transfers shares to your brokerage account, typically within 30-90 days after vesting.

This separation matters significantly for taxes. You owe income tax at settlement, not vesting, based on the share price when shares transfer. Companies often withhold 22-37% of shares for tax payments, reducing the number of shares you receive.

Vesting vs Settlement Comparison:

Standard Four-Year Schedule with Cliff

The four-year vesting schedule with one-year cliff represents the technology industry standard. This structure provides 25% of shares at the one-year mark, then vests the remaining 75% over 36 months.

The one-year cliff reduces turnover costs for new hires who don't succeed. The three-year tail maintains retention incentives through critical project cycles and prevents employees from leaving immediately after cliff vesting.

Standard Four-Year Schedule Example:

1,000 RSUs granted on January 1, 2024

Monthly vs Quarterly Vesting

Vesting frequency determines how often employees receive shares after the cliff period. Monthly vesting provides shares every 30 days, while quarterly vesting releases shares every three months. The choice impacts cash flow, tax planning, and liquidity.

Monthly vesting advantages:

• Faster liquidity - Access shares 60-90 days sooner than quarterly schedules
• Better tax planning - Smaller, more frequent tax events spread throughout the year
• Improved cash flow - Regular share releases for sale if needed

For a $120,000 annual RSU grant, monthly vesting provides approximately $10,000 in shares each month after the cliff. This regularity helps with financial planning and reduces concentration risk.

Vesting Frequency Comparison:

Cliff and Acceleration Triggers

A cliff period requires continuous employment before any RSUs vest. Standard cliffs last 12 months, meaning zero shares vest if you leave before completing one year. After the cliff, you receive all accumulated shares for that period at once.

Double-trigger acceleration requires two events: a company acquisition and involuntary termination or constructive discharge within 12-18 months post-acquisition. This structure balances employee protection with acquirer retention needs.

Double-trigger acceleration example:

Employee with 4,000 unvested RSUs (2 years remaining) at $50/share

• Company acquired for $75/share
• Acquisition occurs (first trigger)
• Employee terminated without cause within 12 months (second trigger)
• Result: 4,000 shares vest immediately at acquisition price

Performance-Based Vesting

Performance-based RSU vesting ties share release to specific company or individual achievements rather than time alone. Company-level performance RSUs vest based on corporate metrics like revenue, EBITDA, stock price, or strategic milestones.

Common performance vesting metrics:

• Revenue targets - Specific annual recurring revenue (ARR) or growth rates
• Profitability goals - EBITDA margins or operating income thresholds
• Stock price performance - Relative or absolute total shareholder return
• Strategic milestones - Product launches, market expansion, or acquisition integration

Performance RSUs typically use tiered vesting where different achievement levels release different share percentages. Exceeding targets may vest 100-200% of target shares, while missing goals vests 0-50%.

Performance Vesting Tier Example:

2,000 Target RSUs with Revenue-Based Vesting

Impact of Employment Changes

Employment status changes significantly impact RSU vesting and ownership.

Voluntary resignation terminates all unvested RSUs immediately. Once you leave, the company cancels remaining grants and you forfeit any shares that haven't vested, regardless of how close you are to the next vesting date.

Resignation timing example:

Employee with 1,000 RSUs, monthly vesting, next vest in 5 days

• Resign today: Forfeit 83.33 unvested shares (~$4,165 at $50/share)
• Resign after vesting: Keep all vested shares, forfeit remaining
• Financial impact: $4,165 lost for leaving 5 days early

Strategic resignation timing checklist:

• [ ] Review all vesting schedules (initial grant + refresh grants)
• [ ] Identify next vesting dates for all active grants
• [ ] Calculate total value of shares vesting in next 30-90 days
• [ ] Time resignation for 1-2 days after major vesting events

Involuntary termination generally results in the same forfeiture of unvested RSUs as voluntary resignation. However, executives and senior employees often negotiate severance packages that include partial or full acceleration of unvested grants, typically vesting 3-12 months of additional RSUs.

Termination for cause represents the most severe employment ending, typically resulting in immediate forfeiture of all unvested RSUs. Some companies also clawback recently vested shares within 90-180 days of termination for cause.

Retirement provisions allow continued vesting after departure for employees meeting age and tenure requirements, typically age 55+ with 10+ years service or age 60+ with 5+ years service. Retirement-eligible employees may vest 100% of remaining RSUs on their retirement date or continue vesting on the original schedule for 1-3 years post-retirement.

Tax Implications and Planning

RSU vesting triggers immediate tax obligations based on the fair market value of shares at settlement. Ordinary income recognition taxes RSUs at your marginal rate, typically 22-37% for most professionals. The taxable amount equals the fair market value of shares on the settlement date multiplied by the number of shares vesting.

Tax calculation example:

100 RSUs vest on March 15, 2025

• Stock price at settlement: $75.00
• Gross value: 100 shares × $75 = $7,500
• Federal tax (32%): $2,400
• State tax (6%): $450
• FICA (7.65%): $574
• Total tax: $3,424
• Net shares after withholding: ~54 shares

Withholding methods vary by company. Share withholding (sell-to-cover) is most common—the company withholds sufficient shares to cover tax obligations, and you receive remaining shares in your brokerage account. Alternatively, you can make cash payment from personal funds to receive all vested shares, beneficial if you want to maximize share ownership.

Withholding Method Comparison:

Capital Gains Planning

After settlement, RSUs become regular shares with cost basis equal to the fair market value at settlement. Any subsequent appreciation or depreciation generates capital gains or losses when you sell.

Holding shares for more than one year after settlement qualifies gains for preferential long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income rates (22-37%). This spread can save 7-17 percentage points on taxes.

Capital gains example:

100 shares settle at $50, you hold 18 months, sell at $75

• Original settlement value: $5,000 (taxed as ordinary income at vesting)
• Sale value: $7,500
• Capital gain: $2,500
• Long-term capital gains tax (15%): $375
• vs Short-term (ordinary income, 32%): $800
• Tax savings from waiting: $425

Managing Vested Shares

Once RSUs vest and settle, they become regular shares requiring active management decisions.

Immediate sale strategies eliminate company stock concentration risk. Selling immediately at settlement treats RSUs like cash bonuses, converting equity to liquid assets for deployment in diversified portfolios. This conservative approach works best for employees with significant equity exposure through multiple RSU grants.

Hold and diversify approach enables long-term capital gains treatment on appreciation while maintaining some company exposure. This requires disciplined diversification limits—set maximum concentration thresholds (e.g., 15% of net worth) and sell excess shares quarterly to maintain target allocations.

Hold strategy implementation:

1. Set concentration limit - Maximum % of portfolio in company stock
2. Hold for 12+ months - Qualify for long-term capital gains rates
3. Rebalance quarterly - Sell shares exceeding target allocation
4. Reinvest proceeds - Deploy to diversified index funds or bonds

Tax-loss harvesting opportunities enable selling shares below cost basis to generate capital losses that offset capital gains from other investments or reduce ordinary income by up to $3,000 annually. This strategy requires tracking cost basis by vest date since each settlement creates a distinct tax lot with its own basis.

10b5-1 trading plans allow pre-scheduled RSU sales during blackout periods and provide insider trading defense. These plans automatically sell shares according to predetermined rules, removing discretion and insider information concerns. Setting up a 10b5-1 plan requires 90-day waiting periods before first trade execution under 2022 SEC rules.

Frequently Asked Questions

What happens to unvested RSUs if I quit?

Unvested RSUs are immediately forfeited when you voluntarily resign. The company cancels all shares that haven't vested by your last day of employment. Only shares that vested and settled before your departure remain yours. Always check vesting schedules before resigning to avoid forfeiting shares vesting days after your planned departure date.

How are RSUs taxed when they vest?

RSUs are taxed as ordinary income at the fair market value on the settlement date, typically 22-37% federal plus state and local taxes. Companies withhold taxes by keeping a portion of vested shares or requiring cash payment. You owe income tax regardless of whether you sell shares, based purely on receipt at settlement.

Can I negotiate my RSU vesting schedule?

Most employees cannot negotiate vesting schedules, which follow company-wide standard policies. However, executives and senior hires may negotiate accelerated schedules, shorter cliffs, or acceleration upon termination as part of employment agreements.

What is the difference between vesting and settlement dates?

The vesting date is when you satisfy schedule requirements and earn the right to receive shares. The settlement date is when shares actually transfer to your brokerage account, typically 30-90 days after vesting. Tax obligations trigger at settlement, not vesting, based on the share price at settlement.

Conclusion

RSU vesting schedules are the foundational framework for understanding when equity compensation becomes actual shares you own. Standard four-year schedules with one-year cliffs provide predictable timelines, though the timing of voluntary separations can create significant financial impacts. Strategic planning around vesting dates, understanding tax withholding methods, and building systematic diversification strategies enable employees to maximize after-tax value from equity compensation while managing concentration risk.