Restricted Stock Units

Restricted Stock Units (RSUs) are a company promise to deliver common stock (or cash equivalent) to the employee on a future vesting or liquidity event. They are distinct from stock options (rights-to-buy at a strike price) and restricted stock (actual share ownership from grant), used heavily at late-stage private companies (often via double-trigger structure) and post-IPO public companies. It is the modern equity-compensation mechanic at companies past the seed stage where option grants would create immediate tax exposure for employees.

The mechanic of an RSU grant:

• Grant: the company commits to deliver a specific number of shares to the employee subject to vesting (typically 4 years with a 1-year cliff) and, at private companies, often a second trigger requiring a liquidity event (IPO, acquisition, or tender offer).
• No purchase: unlike options or restricted stock, RSUs don't require the employee to pay anything; the shares are delivered upon vesting.
• Single-trigger vesting (typical at public companies): RSUs vest based on time alone. Upon vesting, the employee receives shares and recognizes ordinary income equal to the fair market value at vesting.
• Double-trigger vesting (typical at late-stage private companies): RSUs vest based on time AND a liquidity event. The time portion vests over the typical schedule, but no shares are delivered (and no tax owed) until the second trigger fires. This prevents employees from owing tax on illiquid stock.
• Tax treatment: ordinary income at vesting/delivery on the fair market value of shares delivered; subsequent appreciation (or loss) is capital gain (or loss) upon sale.

Why late-stage startups use RSUs instead of options: at a high 409A valuation, option strike prices are also high, making exercise expensive for employees ($100,000+ to exercise a meaningful vested grant). RSUs sidestep this: the employee receives shares directly without paying. The tradeoff is tax timing: with options, the employee controls when to exercise (and recognize income); with RSUs, the income recognition happens automatically at vesting. The double-trigger structure: critical at late-stage private companies because single-trigger RSUs would create ordinary income tax owed on illiquid stock the employee couldn't sell to pay the tax. Companies like Facebook in 2007-2011 pioneered the double-trigger structure; it's now standard for late-stage tech companies. The IPO consequence: when a double-trigger RSU company IPOs, all previously time-vested RSUs deliver shares simultaneously, creating a major tax event for employees and often a flood of post-lockup selling pressure.

What founders get wrong: Transitioning from options to RSUs without educating the team on the differences. Existing option-holders often perceive new RSU grants as "different" without understanding the tradeoffs (no exercise cost vs. no timing control over income recognition). The right discipline at the transition: explain the structural differences clearly (RSUs = automatic delivery and automatic income vs. options = exercise decision and timing control), set expectations about IPO-trigger tax events for double-trigger RSUs, and provide resources for tax planning. Companies that handle the transition well retain employee goodwill; companies that don't create resentment when employees discover the tax surprises.

Related: Stock Option · Restricted Stock · Vesting · Common Stock · Cap Table

FAQ

What is a restricted stock unit (RSU)?
A promise by the company to deliver shares of common stock (or the cash equivalent) to the employee on a future vesting event or liquidity event. Distinct from stock options (rights-to-buy at a strike price) and restricted stock (actual share ownership from grant date).

How are RSUs different from stock options?
RSUs don't require purchase (shares are delivered upon vesting); options require exercise at the strike price. RSUs create automatic income recognition at vesting; options give the employee timing control over income recognition. RSUs are common at late-stage private and public companies; options dominate at earlier stages.

What is a double-trigger RSU?
An RSU where vesting requires both time AND a liquidity event (IPO, acquisition, or tender). The time portion vests over the typical schedule, but no shares deliver and no tax is owed until the second trigger fires. Used at late-stage private companies to prevent employees from owing tax on illiquid stock they can't sell to pay the tax.