Restricted stock units (RSUs) Guide

This comprehensive guide explains restricted stock units (RSUs): what they are, how grants, vesting, settlement and taxation work, typical plan designs and practical strategies for employees and em...

2024-07-06 08:28:00

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Restricted stock units (RSUs)

Restricted stock units are a form of equity-based employee compensation: a promise to deliver company shares (or a cash equivalent) when specified vesting conditions are satisfied. This article explains how restricted stock units work, why companies use them, the tax and accounting treatment (U.S.-focused), plan structures and common employee questions. Read on to learn how to manage grants, plan for taxes and understand employer considerations — and how Bitget supports compensation and wallet needs like Bitget Wallet for secure holdings.

Overview

At its core, a restricted stock units grant starts with a grant date, follows a defined vesting schedule, and ends with settlement — delivery of shares or cash. Typical plan variations include time-based vesting, performance-based vesting, and share-settled vs cash-settled structures. Employers design RSU programs to retain staff, align employee and shareholder interests, and provide a simpler alternative to options because employees do not need to pay exercise prices.

History and regulatory background

Restricted stock units gained popularity after regulatory and accounting changes reduced the attractiveness of stock options in many settings. Accounting standards requiring recognition of share-based compensation expense, and changing tax rules, prompted companies to favor RSUs for clarity and lower administrative complexity.

In the United States, the key accounting guidance is ASC 718 (formerly FASB Statement No. 123R), which requires companies to measure and record the fair value of share-based payments. For taxation, U.S. payroll and income tax rules treat the value of vested shares as wages subject to withholding and reporting. Employers must also consider securities laws and disclosure obligations when granting RSUs to public-company employees.

Types and common structures

Time-based RSUs

Time-based restricted stock units vest according to service over time. Two common patterns are:

Cliff vesting: no units vest until a specific date (e.g., a 1-year cliff), after which a portion or all units vest.
Graded vesting: units vest in installments over a period (e.g., 25% each year over four years).

Example: A grant of 4,000 restricted stock units with a four-year schedule and annual graded vesting commonly yields 1,000 units vesting on each anniversary after the first year (or sometimes a 1-year cliff followed by monthly vesting thereafter).

Performance-based RSUs

Performance-based restricted stock units vest only if pre-specified performance metrics are met. Metrics can be corporate-level (revenue growth, EBITDA, total shareholder return - TSR), business-unit targets, or individual performance objectives. Vesting may be tied to multi-year goals or relative measures (e.g., outperforming a peer index over three years).

Single-trigger vs double-trigger RSUs

Change-of-control protections often appear in RSU plans. Two common structures are:

Single-trigger: RSUs accelerate and may settle upon a change of control alone.
Double-trigger: RSUs only accelerate if a change of control occurs and the employee is subsequently terminated (or another agreed trigger occurs). Double-trigger provisions are commonly used to balance employee protection with buyer expectations in M&A.

Share-settled vs cash-settled RSUs

Some restricted stock units convert into actual shares (share-settled) at vesting; others are cash-settled — the company pays an amount equal to the value of the shares. Companies choose cash settlement to preserve share capital, simplify accounting in some jurisdictions, or when shares are illiquid (private firms). Share-settled awards transfer ownership and voting rights only after settlement; some plans provide dividend equivalent payments before settlement.

Private-company RSU variants

Private companies often tailor restricted stock units to liquidity constraints. Variants include deferred settlement buckets where vesting occurs but settlement waits for a liquidity event (IPO, sale) or scheduled settlement windows. Private-company plans may include buyback rights, limited transferability, and special tax withholding arrangements to address the absence of a tradable market for shares.

How RSUs work (lifecycle)

Grant documentation and plan terms

A restricted stock units grant is documented by a plan and a grant agreement. Key elements include the number of units, grant date, vesting schedule and conditions, settlement method (share or cash), forfeiture rules, treatment on termination or change of control, and any dividend-equivalent arrangements. The plan also defines administrative authorities for interpretation and modification.

Vesting and settlement

When units vest, each vested unit converts to a share (or cash equal to the fair market value, FMV). Settlement timing may be immediate, managed within a short administrative window, or delayed by plan terms. Employers often implement sell-to-cover or share-withholding to meet tax-withholding obligations at vesting. Settlement may include issuance of restricted stock certificates, electronic shares credited to brokerage accounts, or cash payments.

Forfeiture, transferability, and restrictions

Unvested restricted stock units generally forfeit on voluntary resignation or termination for cause. Plans may provide limited exceptions for retirement, disability, or death. RSUs are usually nontransferable prior to settlement, and vested shares may still be subject to insider-trading blackout periods, company holding policies or lock-ups (especially around IPOs).

Taxation (typical U.S. treatment and practical points)

The following summarizes common U.S. tax treatment for restricted stock units. Tax rules vary by jurisdiction and personal circumstances; employees should consult tax professionals.

Taxation at vesting (ordinary income)

In the U.S., the fair market value of shares received on the vesting of restricted stock units is generally treated as ordinary income and subject to payroll taxes. The amount is reported on the employee's Form W-2 as wages. The tax event occurs at vesting because that is when the employee receives value and the company's right to the shares is no longer conditioned on future service.

Withholding and employer practices

Employers must withhold for income and payroll taxes when restricted stock units vest. Common withholding methods include:

Share withholding: employer retains a portion of vested shares to satisfy taxes.
Sell-to-cover: a broker sells enough shares at settlement to cover tax withholding and transfers net shares to the employee.
Net settlement: employer delivers the net number of shares after withholding, or pays cash net of taxes in cash-settled cases.

Employers may apply supplemental withholding rates for supplemental wage withholding. Employees should verify year-end tax reporting and plan for potential withholding shortfalls if employer withholding is insufficient for marginal tax rates.

Capital gains on subsequent sale

After vesting, any change in value of shares is capital gain or loss. The holding period begins at vest date for determining short-term vs long-term capital gain treatment. Selling more than one year after the vest date generally yields long-term capital gain rates for appreciation; selling earlier typically results in short-term rates applied to the gain.

83(b) election (typical inapplicability)

An 83(b) election allows early recognition of income on restricted stock awards to start the capital gains clock, but it generally does not apply to standard restricted stock units, because RSUs are a promise to deliver stock in the future rather than an actual transfer of a restricted share at grant. Restricted stock awards (RSAs) are distinct and may allow 83(b) elections.

Cross-border and state tax considerations

For employees working in multiple jurisdictions, restricted stock units create allocation challenges. Taxable income is often allocated based on the number of days worked in each jurisdiction during the vesting period. State and foreign withholding, social security coordination, and local reporting rules can complicate net pay and tax filings. Employers typically coordinate with payroll and tax advisors to manage multi-jurisdictional withholding and reporting.

Accounting and financial reporting

From an employer perspective, restricted stock units are accounted for under share-based compensation rules (ASC 718 in the U.S.). Companies estimate the grant-date fair value of RSUs and recognize expense over the vesting period (straight-line or graded attribution, depending on the vesting method). Public companies disclose the nature and extent of share-based compensation, the assumptions used in valuation, and the effect on diluted share counts.

Advantages and disadvantages

Advantages for employees

No purchase required — employees generally receive value without paying an exercise price.
Guaranteed value at vesting (subject to share price) — if the stock has value at vest, RSUs deliver tangible benefit.
Retention incentive — time- and performance-based vesting encourages continued employment and alignment with company performance.

Advantages for employers

Retention and alignment — RSUs tie compensation to shareholder outcomes and help retain employees without complex option exercise mechanics.
Simplicity — RSUs remove the need for grant pricing or employee cash outlays typical of options.
Flexibility — cash-settled RSUs help employers manage dilution and cash-flow considerations.

Risks and drawbacks

Concentration risk — employees may hold large positions in employer stock, increasing personal financial risk.
Tax timing surprises — vesting triggers unexpected tax liabilities for employees without immediate liquidity unless sell-to-cover or cash settlement is used.
Limited liquidity — private-company RSUs may vest but not settle until a liquidity event, restricting employee access to cash.
Dilution — share-settled RSUs increase outstanding shares over time, diluting existing shareholders.

Practical planning and strategies

Diversification and concentration management

Employees should consider diversification strategies when accumulating employer shares from restricted stock units. Common approaches include systematic partial selling at vesting or after a brief holding period to cover taxes and reduce concentration, using planned sales to rebalance portfolios, and dollar-cost averaging into diversified investments. Employers sometimes provide trading windows or liquidity programs to help employees diversify responsibly; for digital-asset-linked compensation, secure custody (for example, Bitget Wallet) is important.

Tax planning strategies

Practical tax planning steps for holders of restricted stock units include estimating withholding needs ahead of vesting, coordinating RSU sales to optimize capital gains treatment, and reviewing potential state or foreign tax obligations for cross-border work. Employees should consult tax advisors on personal circumstances and consider cash reserves or sell-to-cover options to avoid unexpected tax bills.

Employer considerations (plan design)

Employers designing an RSU plan should determine vesting patterns aligned with retention goals, decide on share vs cash settlement, model dilution impacts, and set clear rules for terminations and change-of-control events. Private companies should plan for post-vest liquidity or built-in settlement events. Administrative simplicity and compliance with wage withholding and securities laws should guide plan design.

Treatment on employment events and corporate transactions

Termination, retirement, disability, and death

Plan documents typically specify treatment of restricted stock units on separation. Common patterns are forfeiture of unvested units on voluntary resignation, acceleration or pro-rata vesting for retirement or disability in some plans, and immediate vesting or favorable treatment upon death. Employees should review grant agreements for specific conditions, such as retirement eligibility dates or severance-related acceleration.

Mergers and acquisitions

In M&A, RSUs may be assumed by an acquirer (converted into acquirer equivalents), cashed out at the transaction price, accelerated (single- or double-trigger), or cancelled per the purchase agreement. Buyers and sellers negotiate treatment of equity awards; double-trigger acceleration often requires a termination following a change of control for vesting acceleration to occur.

IPOs and liquidity events

At an IPO, privately held companies typically settle outstanding restricted stock units into tradable shares. Post-IPO, employees may face lock-up agreements or trading windows. Companies often coordinate communications and provide trading guidance to avoid insider-trading violations. Lock-up and market standoff periods can restrict sales for a period after listing.

Valuation, dilution, and capitalization effects

Share-settled restricted stock units increase the number of outstanding shares when settled and therefore dilute existing shareholders. Companies model the fully diluted share count including RSUs to estimate dilution percentage. Grant value is often estimated using the current share price times the number of units, adjusted for expected forfeitures and vesting probabilities. For private companies, valuation requires a 409A or similar valuation to estimate FMV for accounting and tax purposes.

Comparison with other equity instruments

RSUs vs Restricted Stock Awards (RSAs)

Restricted stock awards (RSAs) involve the immediate transfer of actual shares at grant, subject to forfeiture restrictions. Holders of RSAs often have voting rights and may receive dividends from grant date. Because RSAs involve actual property transfer, an 83(b) election is sometimes available to accelerate taxation. In contrast, restricted stock units are a promise to deliver stock later and typically do not qualify for 83(b) elections.

RSUs vs Stock Options (ISOs/NSOs)

Stock options give the right to buy shares at a strike price. Incentive stock options (ISOs) and non-qualified stock options (NSOs) differ in tax treatment. Unlike options, restricted stock units require no exercise price and provide perceived lower downside risk for employees because vested RSUs have intrinsic value as long as the share price is above zero. Options can deliver higher upside leverage but may expire worthless if stock underperforms. Tax timing and complexity also differ between options and RSUs.

Examples and numerical illustrations

Example 1 — Basic tax and cash outcome (share-settled with sell-to-cover):

Grant: 1,000 restricted stock units
Vesting: 100% vests on year 3
FMV at vest: $50/share → gross value = $50,000
Assume combined tax withholding need ~30% → $15,000
Sell-to-cover: Broker sells 300 shares at $50 to cover $15,000 withholding → employee receives 700 shares net
After vest, if employee sells remaining shares immediately, cash received = 700 × $50 = $35,000 (before further taxes on sale); capital gain/loss will be measured from vest date.

Example 2 — Share appreciation after vest (capital gains):

Vested FMV per share (vesting date): $50
Employee holds shares for 18 months, then sells at $80
Capital gain per share = $30; since holding > 1 year, long-term capital gains tax rates apply to the $30 gain

Example 3 — Cash-settled RSU:

Grant: 500 cash-settled restricted stock units
Vesting FMV at vest: $100 → total payout $50,000 recognized as ordinary income for the employee
Employer pays cash and withholds applicable taxes; no dilution occurs because shares are not issued.

Common employee FAQs

When do I pay tax?

You generally pay tax when restricted stock units vest because vested units are treated as ordinary income equal to the FMV of shares delivered.

Can I make an 83(b) election?

Standard RSUs do not typically permit 83(b) elections because the employee does not receive actual shares at grant. Restricted stock awards (RSAs) are different and may allow 83(b) elections.

What happens if I leave before vesting?

Unvested restricted stock units usually forfeit on voluntary departure, unless the plan provides pro-rata vesting for good leavers or retirement-eligible employees. Always check your grant agreement.

How can I cover taxes on vested RSUs?

Employers commonly use sell-to-cover, share withholding or cash withholding. Employees can plan cash reserves or request supplemental withholding if needed. For private-company RSUs, special arrangements may exist to cover tax liabilities on illiquid shares.

Policy, legal and compliance considerations

RSUs implicate securities laws, insider-trading rules and disclosure obligations for public companies. Employers should maintain clear plan documents, insider-trading policies and blackout periods. Communications to employees about equity awards must be factual and compliant with securities regulations. Companies should also track grant lifecycle events carefully for accurate financial reporting and tax filings.

Global considerations and variations

Restricted stock units vary across countries due to local labor law, tax and securities regulation. Some jurisdictions have withholding mechanisms requiring employer action, while others place the tax reporting burden on employees. International assignments raise allocation questions: many employers use day-count methods to allocate vesting income across jurisdictions where the employee worked during the vesting period. Plan design may include country-specific supplements to handle local requirements. For tokenized or digital-asset-linked equity, custody and reporting practices differ by market; companies and employees should engage local counsel and advisors.

As an example of broader regulatory shifts in financial markets that may influence compensation packaging and liquidity options, as of January 15, 2026, according to CryptoTale, Thailand’s Securities and Exchange Commission planned new rules to enable cryptocurrency ETFs and crypto futures trading on the Thailand Futures Exchange (TFEX). The move aimed to provide clearer legal oversight and expand regulated access to digital-asset investment products, potentially affecting institutional custody and liquidity options. The SEC was finalizing operational guidelines, investment limits, and disclosure standards. The regulator also considered market maker mechanisms to support liquidity and was reviewing eligibility and capital requirements for futures trading. The broader point: regulatory frameworks for digital assets continue to evolve globally, and companies considering tokenized compensation or digital-asset exposure should watch local rules closely and consider custodial solutions (for example, Bitget Wallet) and compliant exchange channels.

Glossary

Grant date — the date the company awards restricted stock units to an employee.
Vesting — the point(s) at which the employee earns the right to receive shares or cash under the grant.
FMV (Fair Market Value) — the value of a share used to measure income at vesting.
Sell-to-cover — selling a portion of vested shares immediately to cover tax withholding.
Cliff vesting — a vesting pattern where no units vest until a specified date.
Double-trigger — acceleration requiring two events, commonly a change of control plus termination.
Settlement — conversion of vested units into shares or cash.