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Restricted Stock and Restricted Stock Units: The Basics

Restricted Stock and Restricted Stock Units: The Basics

Do you know your RSU’s?

Does your employer provide restricted stock or restricted stock units (RSUs)? Unlike stock options, this type of equity is always worth something, even if the price of the stock dramatically drops. What do you need to know about these options? This post shares the basics, from general concepts and differences between grant types to vesting schedules and taxes.

General Concepts of Restricted Stock and Restricted Stock Units

 Restricted stock units are almost identical to restricted stock; both are restricted ways of granting equity to employees. They’re “restricted” because they are dependent on a vesting schedule (such as length of employment or performance goals) and the company can impose limits on transfers or sales. The good news is they always hold some sort of value, even when the stock price drops.

Restricted Stock vs. Restricted Stock Units

 If they’re so similar, what is the difference between these types of equity?

Restricted stock is a grant of shares made directly to the employee. Generally he or she cannot transfer the shares until the vesting requirements (such as performance goals) are satisfied; as long as the employee is with the company the grant will not expire or be forfeited. During the restricted, or vesting, period, the employee has voting rights and receives dividends paid by the company. It’s also possible to shift the moment of taxation from the vesting date to the grant date.

Restricted stock units, on the other hand, are simply a bookkeeping entry. The shares are not issued until the vesting conditions have been satisfied, so RSU holders don’t have shareholder voting rights or receive any dividends unless the company chooses to pay dividend equivalents on RSUs.

Vesting Schedules for Restricted Stock and Restricted Stock Units

Vesting schedules for restricted stock and RSUs can be based on amount of time worked at a company and/or performance in the position. Sometimes vesting is accelerated by the board of directors or events like a merger (your plan would provide more detail about this). Vesting can occur little by little based on markers (called a “graded” vesting schedule) or all at once after completing the amount of time and/or performance (called “cliff” vesting).

Paying Taxes on Restricted Stock and Restricted Stock Units

Taxes are paid on restricted stock when the restrictions lapse, which is generally when the vesting requirements have been met. For RSUs, taxes are paid when you receive the shares at vesting. As part of your income, the shares are subject to federal and employment tax in addition to state and local taxes, all of which are determined based on the market value of the shares at vesting.

Some companies offer employees a few different options to pay the taxes that are due at vesting, including taking the amount that is due from the newly vested shares, deducting the amount from the employee’s salary or more. If you’re interested in this, make sure you ask your employer what options are available.

If you have questions about your restricted stock or RSUs, please contact us. We love to help employees and employers make the best choices possible regarding different types of equity and more.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today.

Photo Credit: compujeramey

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