What are Restricted Stock Units (RSUs)?
RSUs represent a promise or grant to provide stock to an employee as part of their compensation. Companies can offer Restricted Stock or RSUs, but most prefer RSUs for their flexibility.
To prevent employees from taking stock or RSUs and immediately leaving the company, both are typically subject to a vesting schedule that specifies when the employee will actually receive the shares. Vesting schedules require the successful completion of a certain term of service and/or specified work performance.
How Do RSUs Work?
RSUs can come with various restrictions. Some are subject to only a vesting schedule and may be referred to as ‘single-trigger’ RSUs. A vesting schedule might, for example, be a three-year arrangement that issues a specified number of shares upon the completion of a certain period of service. An employee who leaves the company prior to a vesting date forfeits the portion of their share allocation that is unvested.
Other RSUs, called ‘double-trigger’, may include additional conditions that must be fulfilled. An additional requirement might be that the employee successfully completes a certain work assignment such as developing a new product or writing a software program, in order to receive shares.
Additional restrictions might have other performance requirements or limits on the sale or transfer of the stock. The RSU contract may also dictate whether the employee gets actual stock or the cash equivalent.
RSU Vesting Schedule
A vesting schedule requires the employee to work for a certain period of time to enjoy the full value of the grant.
Different types of vesting schedules include:
- Graded vesting: Certain percentages of the total grant vest as specified periods of time elapse.
- Cliff vesting: 100% of the grant vests upon the completion of a stated service period.
- Performance-based vesting: The stock allocation is tied to a product or service launch.
- Liquidity event vesting: An event such as an IPO, merger, or acquisition triggers some or all of an RSU grant.
Employment termination generally calls for future allocations to cease, but there can be exceptions built into the grant for circumstances such as death, disability, or retirement.
Sale of RSUs
RSUs are granted directly to individuals and cannot be sold or transferred to anyone else. Once shares become vested, they become transferable. If the shares are publicly traded, they can be sold at any time. If the employer is still a privately-held company, RSU-granted shares may not be sold as easily since there is no readily available secondary market.