What are Restricted Stock Units (RSUs)?

Articles > Startups

What are Restricted Stock Units (RSUs)?

June 23, 2021         Liv Chum

Restricted stock units (RSUs) are a form of stock based compensation where a company grants an employee with shares to the company. This method of issuing stock to employees is ‘restricted’ as stocks are issued through a ‘vesting plan’ and ‘distribution schedule’. Consequently, employees will not receive the RSU until the vesting period ends. This period can vary in length as some companies may make the period last several months or even years. It is not until the vesting period ends that the RSUs become just like any other shares of company stock. 

Difference between an RSU and stock option

RSU

  • Grants individuals with actual stocks / shares 
  • Taxes only apply to RSU once the vested period has ended 

Stock option

  • Gives individuals an opportunity to buy a certain number of stocks in the future at a discounted price 
  • Regardless of what an individual does with the share (eg. sell, hold), stock options are always taxed as income – even if there is a gain made when a share is sold 
  • The value of the stock option fluctuates with the constant changes in stock price

Benefits 

There are many advantages which both companies and employees can attain through using RSUs which includes:

  • Incentivising employees to stay long term and increase the share value as this is added as reward for the employee’s performance or time in the company 
  • More stability than options as RSUs will always have value regardless of the fluctuation in stock price 
  • Individuals having the option of either selling or holding these shares as the RSU becomes an actual share when vested 
  • The vesting period assists in delaying the dilution of shares


Limitations 

There are also slight disadvantages that occur with implementing RSUs. This ranges from: 

  • The fact that with RSUs, individuals don’t have voting rights until the shares get issued to you after the vesting period 
  • An individual facing a loss if they leave  before the vesting period ends – this is because the shares will be forfeited back to the company
  • Individuals must pay an income tax on the RSU as it is considered income once vested – this can leaves individuals with a massive tax to pay if they enter high/ the highest marginal tax rate if companies don’t withhold stock to cover taxes
  • Individuals also pay capital gains tax on RSUs when it becomes vested and is sold by the employee
    • The capital gains tax is 30% in Australia

In Summary

RSUs are a form of compensation provided by a company to their employees in the form of stocks. Whilst RSUs can be easily distinguished from RSUs, there are many benefits and limitations to both companies and employees which should be weighed out when a company is deciding which form of compensation is most optimal for their employees. If you have any questions regarding RSUs, fill in the contact form or contact us at 1300 337 997.

About Liv Chum

Liv is one of OpenLegal's paralegals. Liv is a passionate student of the law, with a real interest in the way that business and legal requirements intersect.