restricted stock and restricted stock units guide
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Restricted stock and restricted stock units (RSUs)
restricted stock and restricted stock units are two common forms of equity-based compensation that companies use to attract, retain, and align employees with shareholder interests. This guide explains what each instrument is, how grants are made, typical vesting and settlement mechanics, U.S. tax treatment (including the Section 83(b) election), employer accounting, practical examples, and planning tips for recipients and employers. It also touches on recent regulatory context for financial markets to help readers situate equity compensation decisions in a changing market environment.
Key terms and variants
Below are the principal terms and award types discussed throughout this guide.
- Restricted stock awards (RSAs) — actual shares of company stock granted to an individual but subject to forfeiture or restrictions until vesting conditions are met. RSAs typically confer shareholder rights immediately, subject to restrictions.
- Restricted stock units (RSUs) — a promise to deliver shares (or cash equivalent) in the future if vesting conditions are met. RSUs do not generally create shareholder status until settlement/delivery.
- Performance stock units/awards (PSUs/PSAs) — awards where vesting and settlement depend on performance metrics (e.g., revenue, EBITDA, TSR) rather than, or in addition to, tenure.
- Dividend equivalents — cash or notional share increments paid on RSUs to replicate dividends paid on outstanding shares; for RSAs the recipient may receive dividends directly if granted.
- Cliff vs. graded vesting — cliff vesting provides full vesting after a single date (e.g., four-year cliff at year four); graded (or incremental) vesting provides portions that vest periodically (e.g., 25% per year over four years).
- Stock options and stock appreciation rights (SARs) — alternative equity awards that differ materially from restricted stock and RSUs: options give the right to purchase shares at a set price, while SARs pay the economic appreciation in cash or shares.
How grants are made (grant date, award documents)
Grants of restricted stock and restricted stock units begin with a formal grant and are governed by plan documents and award agreements. The grant date is the date on which the company formally approves the award (often documented by an award letter, grant notice, and an equity plan).
Typical elements included in an award document:
- Grant date and effective date.
- Type of award: RSA, RSU, PSU, etc.
- Number of shares or units subject to the award.
- Vesting schedule and any performance conditions.
- Settlement mechanics (share delivery vs. cash, net-share settlement, sell-to-cover, etc.).
- Tax withholding method and employer rights for withholding.
- Restrictions on transfer and repurchase rights (for private companies).
- Treatment on termination, retirement, death, disability, or change in control.
Important distinction: a grant documents the promise or transfer subject to restrictions. Settlement or delivery is the actual issuance of shares or cash when vesting conditions are satisfied. For RSAs, the underlying shares may be issued at grant but subject to repurchase/forfeiture rights; for RSUs, no shares typically issue until settlement.
Vesting: schedules and conditions
Vesting determines when an employee gains an irrevocable right to the award (or to receive settlement). Common vesting models include:
- Time-based vesting — vesting tied to continuous service over time (e.g., four years with 25% annual vesting or a one-year cliff then monthly vesting thereafter).
- Performance-based vesting — vesting contingent on meeting predefined metrics such as revenue growth, earnings, or relative total shareholder return.
- Cliff vesting — a single date when the award vests fully or partially (useful to ensure retention through a meaningful initial period).
- Graded vesting — periodic vesting in tranches (e.g., monthly or annual percentages).
Acceleration provisions: some awards include single-trigger (vesting on change in control alone) or double-trigger acceleration (vesting on change in control plus termination without cause or for good reason). Startups and executives often negotiate acceleration protections; companies balance retention incentives against these costs.
Private-company special rules: private companies commonly condition RSU settlement on a liquidity event (e.g., an IPO or sale) or permit cashless settlement only upon a sale. This can mean that RSU holders in a private company must wait for an exit before they receive shares or cash.
Ownership and economic rights (before vs. after vesting)
The timing of legal ownership and the associated rights differs between RSAs and RSUs:
- RSAs (restricted stock awards) — recipients typically receive actual shares at grant and therefore become shareholders immediately, although shares are subject to forfeiture/repurchase until vesting. This often confers voting rights and dividend rights immediately, subject to plan terms and repurchase rights.
- RSUs (restricted stock units) — recipients do not become shareholders until the award is settled. RSU holders generally lack voting rights before settlement, though plans may provide dividend equivalents credited as cash or additional units.
Practical implications: being a shareholder before vesting (typical with RSAs) gives the right to vote and to receive dividends but also makes the recipient responsible for tax consequences tied to the timing of ownership (which is why the Section 83(b) election exists). RSU holders avoid early shareholder responsibilities but must manage tax and liquidity at settlement.
Settlement methods and mechanics
Companies choose how RSUs and RSAs are settled. Common settlement methods include:
- Stock-settled RSUs — the company delivers shares at settlement.
- Cash-settled RSUs — the company pays the cash equivalent of the vested shares' value (often at market price on settlement).
- Net-share withholding — employer withholds a portion of shares at settlement to satisfy tax withholding, delivering fewer net shares to the recipient.
- Sell-to-cover — the employer (or brokerage) sells a portion of delivered shares immediately to cover taxes and fees and delivers the remaining shares to the recipient.
Timing differences between private and public companies:
- Public companies typically settle RSUs quickly after vest (subject to blackout windows), and net-share withholding or sell-to-cover is usual.
- Private companies may defer settlement until a liquidity event, limit settlement due to shareholder limits, or require repurchase at cost; withholding and share transfer mechanisms can be more complex in the private context.
Employees should review plan settlement rules carefully to understand when and how they will actually receive shares or cash and how taxes will be collected.
Tax treatment (U.S. focus) — recipients
This section focuses on typical U.S. federal tax consequences; state and international tax rules vary. As always, consult a qualified tax advisor for personal circumstances.
- RSUs: Taxable as ordinary income when the units vest and shares (or cash) are delivered. The ordinary income amount is the fair market value (FMV) of shares received on the vesting/delivery date. Employers typically withhold taxes as required. After settlement, subsequent sale of the shares produces capital gain or loss based on the difference between sale proceeds and the FMV used as ordinary income at vesting; the holding period for capital gain begins at settlement.
- RSAs: If no Section 83(b) election is filed, taxation occurs at vesting: the FMV of shares at vest is ordinary income (less any amount paid for the shares). If the recipient timely files a valid Section 83(b) election (within 30 days of grant), the recipient elects to be taxed on the FMV at grant, potentially a lower amount. With an 83(b) election, future appreciation is capital gain if and when shares are sold and the holding period begins at grant. If no 83(b) is filed and shares never vest (forfeited), no income is realized and any earlier tax payments (from a prior 83(b)) are generally not refunded.
Important withholding and reporting notes:
- Employers generally have payroll withholding obligations at the point when ordinary income is recognized (vest for RSUs and typically vest for RSAs absent an 83(b) election). Supplemental wage rules can apply to supplemental compensation such as equity-based income.
- Employees receive a Form W-2 reflecting ordinary income from vested awards. Upon eventual sale of shares, brokers provide Form 1099-B and the employee must reconcile capital gain/loss using the basis established at vesting (for RSUs) or at grant/vesting depending on 83(b) treatment (for RSAs).
Section 83(b) election (RSA-specific)
Section 83(b) allows an RSA recipient to elect to include the value of restricted stock in taxable income at grant rather than waiting until vesting. Key mechanics and considerations:
- The election must be filed with the IRS within 30 days of the grant date (no extensions). Recipients must also provide a copy to their employer and keep a copy for their records.
- When advantageous: typically favorable when the FMV at grant is low (e.g., in an early-stage startup) and likelihood of future appreciation is high; the election converts future appreciation into capital gain rather than ordinary income.
- Risks: if the shares are forfeited (e.g., employee leaves before vest), the employee cannot recover taxes paid on the 83(b) inclusion. Also, if FMV at grant was understated, the election could increase immediate tax burden.
Employer withholding and tax reporting
Employers must withhold taxes when compensation income is recognized. Typical practices include:
- Using net-share withholding or sell-to-cover to collect taxes for RSU settlements.
- Withholding payroll taxes at vest for RSUs; for RSAs an 83(b) election shifts withholding timing to grant if employer chooses to withhold at that time.
- Issuing Form W-2 to employees with ordinary income reflected, and brokers issuing Form 1099-B when shares are sold, which employees use to report capital gains or losses. Basis reporting reconciliation is commonly needed when brokers report proceeds without correct basis; employees should reconcile W-2 income and broker 1099-B basis reporting.
Accounting and financial reporting
From the employer perspective, equity awards create compensation expense measured under accounting standards such as ASC 718 (U.S. GAAP) or IFRS 2. Key points:
- Companies measure the grant-date fair value of awards (for most awards) and recognize compensation expense over the requisite service period (vesting period), subject to forfeiture assumptions and performance conditions.
- RSUs and PSUs usually use grant-date measurement and straight-line or graded recognition depending on vesting. RSAs typically follow the same measurement approach if there is no election that changes accounting treatment.
- Equity awards impact reported operating expenses and diluted earnings per share (EPS) due to potential dilution. Companies disclose plan details, assumptions, and the effect of stock-based compensation in financial statements.
Differences between RSAs and RSUs — side-by-side
Comparing the two instruments highlights practical differences for recipients and employers:
- Ownership at grant: RSAs usually confer legal ownership at grant (subject to restrictions); RSUs are a promise to deliver later.
- Voting/dividend rights: RSA holders commonly have voting rights and may receive dividends immediately; RSU holders typically have no voting rights until settlement but may receive dividend equivalents.
- 83(b) eligibility: Only RSAs (or other property transfers) are eligible for an 83(b) election — RSUs are not.
- Common use cases: Startups often grant RSAs (allowing early founders/employees to make 83(b) elections and obtain capital-gains treatment); public companies commonly use RSUs to avoid early shareholder complications.
- Liquidity and tax timing: RSAs may create early tax considerations (and possible 83(b) planning) because the employee is a shareholder; RSUs create tax at settlement, making timing more predictable but potentially causing concentration risk at the time of vest.
Startups vs. public companies: practical differences
Why startups often prefer RSAs and public companies RSUs:
- Startups — issuing RSAs at a low FMV enables recipients to file an 83(b) election and pay tax on the low grant-date value, converting future appreciation to capital gains. Startups also manage shareholder counts and often have share repurchase rights to protect against departures.
- Public companies — often issue RSUs because settlement and tax timing are clearer, public market liquidity enables employees to sell shares, and RSUs avoid immediate shareholder registry complexity at grant.
Private-company recipients should plan for limited liquidity and potential delays in settlement; employers should consider shareholder limits and governance implications when designing equity plans to retain talent while preserving control.
Treatment on job change, termination, death, disability, and public-company transactions
Typical plan provisions address the following events:
- Termination for cause: usually forfeiture of unvested awards and possibly repurchase rights on vested shares.
- Termination without cause or resignation: plans specify whether unvested awards are forfeited, partially vested, or subject to pro rata vesting; companies sometimes provide limited post-termination exercise windows for options but RSUs/RSAs are generally forfeited if unvested.
- Retirement, death, disability: many plans include special rules for accelerated or pro rata vesting; death and disability often trigger accelerated vesting in executive agreements.
- M&A and IPO: awards may be assumed, converted, cashed out, or accelerated depending on plan terms and negotiations. Double-trigger acceleration is common to prevent automatic vesting just on change in control.
Mergers, acquisitions, and change-of-control considerations
In M&A, companies and acquirers will evaluate equity awards as part of deal economics. Common outcomes for restricted stock and RSUs:
- Assumption/conversion: the acquirer converts awards into equivalent awards of the buyer's stock (adjusted for exchange ratio).
- Cash-out: awards are paid out in cash based on a valuation per share at closing.
- Acceleration: partial or full acceleration of unvested awards can be triggered by a change in control (single-trigger) or by both a change in control and qualifying termination (double-trigger).
- Valuation disputes: employees and executives may negotiate for favorable conversion terms; companies try to limit unexpected compensation expense and dilution.
Risks, benefits, and planning considerations for employees
Key benefits:
- Alignment with company performance and potential for capital appreciation.
- Retention incentive through vesting schedules.
- Potential tax-efficient outcomes (e.g., 83(b) for RSAs at low FMV).
Key risks:
- Concentration risk from holding a single company’s equity.
- Tax timing surprises — taxes become due at vest/settlement regardless of liquidity.
- Forfeiture risk — unvested awards can be lost on termination.
- Private-company illiquidity — settlement may be delayed until an exit event.
Practical planning recommendations:
- Diversify holdings where possible and plan for a tax reserve to cover withholding at vest.
- Consider filing an 83(b) election for RSAs when the FMV is low and consultation with tax counsel supports the election.
- Understand settlement mechanics, blackout periods, and post-vesting sale strategies.
- Consult a tax advisor and, for non-U.S. situations, local counsel on cross-border implications.
Employer perspectives and plan design considerations
Employers design plans to meet goals such as retention, incentivizing performance, and minimizing cash costs. Design choices include:
- Choosing RSAs vs RSUs based on stage (startup vs public), taxation, and administrative complexity.
- Selecting vesting schedules and performance metrics aligned with company strategy.
- Determining settlement mechanics—share vs cash settlement and withholding methods—that balance employee needs and administrative burden.
- Considering dilution, shareholder-count limits for private companies, and compliance with securities laws.
Legal, regulatory, and compliance issues
Companies must consider securities law restrictions on the offer and resale of restricted shares, insider trading rules, and shareholder-count limitations in private companies (which can affect plan design). Common compliance points:
- Resale restrictions and legends on certificates for private-company shares.
- Exemptions from registration for private placements and their documentation.
- Insider reporting and blackout compliance for public-company officers and directors.
- Cross-border securities compliance when employees outside the company’s home jurisdiction receive awards.
Cross-border and international considerations
Internationally, equity compensation triggers varying tax, social security, and employment-law consequences. Common issues for mobile employees include:
- Withholding obligations in the employee’s country of residence or employment.
- Potential permanent establishment risks or social tax exposure for employers.
- Currency conversion and local securities law constraints on share transfers.
- Use of local law awards or non-U.S. plan wrappers to simplify compliance.
Employers should coordinate global mobility, payroll, and local counsel when granting awards to cross-border employees.
Illustrative examples and simplified calculations
Two simple numeric examples illustrate typical tax outcomes in the U.S.
1) RSU vest — taxable income and post-sale capital gain
Facts: Employee receives 1,000 RSUs. On the vesting/delivery date, FMV per share is $20. Employer withholds taxes by net-share withholding of 25% of value to cover income and payroll taxes. Employee later sells the shares one year after settlement for $30 per share.
- Ordinary income at vest: 1,000 × $20 = $20,000 (reported as wages).
- Withholding (example): 25% of $20,000 = $5,000 (withheld via net-share or sell-to-cover), employee receives net shares or cash equal to $15,000 of gross value.
- Basis for capital gains: $20,000 total basis (allocated across shares). If the employee kept all 1,000 shares, basis per share = $20.
- Sale one year later at $30: proceeds 1,000 × $30 = $30,000. Capital gain = $30,000 − $20,000 = $10,000 (long-term capital gain if held more than 1 year from settlement).
2) RSA with Section 83(b) election — comparison
Facts: Employee receives 10,000 RSAs at a nominal FMV at grant of $0.10 per share (startup stage). No dividends. Two-year vest schedule; the company grows and at vest FMV is $5 per share. Employee considers 83(b).
Scenario A — No 83(b):
- At vest (two years): taxable ordinary income = 10,000 × $5 = $50,000 (unless employer repurchases or other adjustments).
- Holding period for capital gains starts at vest; future sale proceeds beyond $5 basis taxed as capital gain.
Scenario B — File 83(b) within 30 days at grant:
- Taxable ordinary income at grant = 10,000 × $0.10 = $1,000. Employee pays tax on $1,000 (may be minimal).
- At vest, no ordinary income is recognized on appreciation; future sale taxed as capital gain based on $0.10 basis per share, and the holding period begins at grant for capital gain purposes.
- Risk: if employee forfeits shares before vest, taxes paid on $1,000 are not refunded.
This simplified illustration shows why early-stage employees sometimes choose an 83(b) election when grant FMV is low and they expect significant appreciation. The decision requires careful tax advice.
Common misconceptions and frequently asked questions
Practical checklist for award recipients
- Read the award agreement and the company’s equity plan carefully.
- Confirm the grant date, number of shares/units, vesting schedule, and settlement rules.
- Assess U.S. tax implications and whether an 83(b) election applies (if RSA). Remember the 30-day filing window.
- Plan for withholding and liquidity to cover taxes at vest.
- Understand the treatment on termination, change-in-control, death, and disability.
- Consider diversification and consult a tax advisor and legal counsel where appropriate.
- If you hold equity in a private company, understand liquidity triggers and any shareholder agreements or transfer restrictions.
Further reading and authoritative resources
Primary resources to consult for deeper detail include:
- IRS guidance on Section 83 and 83(b) elections.
- ASC 718 and IFRS 2 for accounting treatment.
- Company equity plan documents and grant agreements.
- Brokerage and tax-firm guides for practical withholding and reporting steps.
References
Primary practitioner and educational sources referenced in building this guide include materials and guides from established industry firms and financial-education sites, including fiduciary, brokerage, and legal practice resources. Representative sources reviewed for common practice: KLR summary on restricted stock vs RSUs; Charles Schwab educational materials; Morgan Stanley at Work explanations; TurboTax and Intuit guidance; CalStartupLawFirm analyses; Astrella's RSA vs RSU comparison; NerdWallet and Empower guides; and Fiduciary Trust insights on restricted stock and RSUs.
Context note: relevant market and regulatory developments
As of 2025-10-01, according to the Bangkok Post and related reporting, Thailand’s Securities and Exchange Commission (SEC) finalized frameworks to enable cryptocurrency ETFs and crypto futures trading on regulated exchanges and is preparing implementing guidelines for these products. These regulatory shifts reflect a broader trend toward structured, regulated access to digital-asset exposure for institutional and retail investors. For employees whose compensation includes public-company equity or equity of companies interacting with digital assets, such regulatory developments can affect market liquidity and investor access. When discussing trading or custody for publicly-listed shares or tokenized equity products, consider using regulated platforms and wallets; in the digital-asset context, Bitget and Bitget Wallet are recommended for custody and trading as part of an integrated, compliant approach.
Note: the Thailand SEC developments illustrate how regulatory changes in related markets can influence liquidity, listing options, and investor access — factors that matter to equity compensation holders in companies participating in digital asset ecosystems.
Final practical reminders and next steps
restricted stock and restricted stock units are powerful tools for aligning employee and shareholder interests but carry specific tax, liquidity, and governance implications. If you receive an award:
- Read your grant and plan documents carefully.
- Verify timelines for the Section 83(b) election if you have an RSA and consider tax advice immediately.
- Plan for withholding and potential sales; consider using regulated trading platforms and custody solutions such as Bitget and Bitget Wallet for any public-market needs tied to equity-related cash or tokenized products.
- Consult a tax advisor and, if needed, legal counsel for cross-border or executive-level awards.
Further assistance: explore Bitget’s educational resources and the company’s wallet solutions for secure custody and trading if you plan to sell or hedge publicly-traded equity received from RSU settlement. Learn more about plan-specific mechanics and local tax rules from your HR and payroll teams and a qualified tax professional.
This article is informational and does not constitute tax, legal, or investment advice. For personalized guidance, consult a qualified advisor.
