Restricted Stock Units
RSU, or restricted stock unit, is compensation in the form of the company’s stock offered to employees.
RSU, or restricted stock unit, is compensation in the form of the company’s stock offered to employees. They are issued through a distribution schedule and vesting plan as soon as the employee achieves the required performance milestone or by staying with the company for a specific period of time. Even though the employees get an interest in the company stock, the RSUs have no tangible value until they are vested.
As soon as the RSUs vest, they are assigned a FMV (fair market value) and are deemed as income by the IRS. Due to this, a part of the shares are withheld by the company to pay income taxes. The rest of the shares are given back to the employee when they are vested, allowing the person to sell or keep them as they wish.
In case the employee decides to keep the shares until all have been vested completely, and the stock of the company rises, they would get the capital gain minus the value of the shares that were withheld for income taxes, less capital gains tax. The RSUs also permit the company to delay issuing shares until the vesting schedule is complete, which helps them in delaying the dilution of the shares.
Other than these benefits, there are also many limitations of RSUs. One main limitation is that they do not offer dividends as the actual shares are not allocated. Moreover, the amount gained from the RSUs are included in the gross income for tax purposes and is accepted when they have been vested. Since RSUs are not tangible, the employees are not allowed to pay the taxes for it before they are vested, as allowed for by other equity compensation plans. Also, in case an employee leaves before the vesting schedule ends, they forfeit the remaining company shares.
In case you want to know more about RSUs, Eqvista can help in explaining them in details to you. You can also download our cap table application to track all the shares of your company. Contact us to know more today!