Equity Incentive Arrangements Types Intro--06 Restricted Stock Units (RSUs)

Although looks very similar, Restricted Stock and Restricted Stock Units are structured and used very differently. Unlike Restricted Stocks, RSUs offer the grantee a contractual right to receive shares of stock or the cash equivalent on a future date (once the vesting conditions are met).

Startups rarely grant RSUs, mainly due to tax reasons.

RSUs are taxed on the settlement, following the vesting schedule. If the underlying stock worth a great deal on the settlement date, the grantee employee will owe a large amount of tax (ordinary income rate applies). Especially for stock-settled RSUs, the grantee employee is very likely to face serious financial problems (as in most cases, no secondary market exists for startup stocks).

To make things worse, 83(b) election is not available for RSUs (unlike for Restricted Stocks). Hence RSUs grantees cannot elect to accelerate the timing of recognition of income from the date of settlement to the date of grant.

** This blog provides general information for educational purposes only. It is not intended to constitute specific legal advice and does not create an attorney-client relationship.