What are Restricted Share Units (RSUs)?

Restricted Share Units (RSUs) are a form of company equity compensation that represent ownership interest through the promise of shares after a specific vesting period. Unlike stock options, RSUs do not require an upfront payment to purchase the shares. Instead, employees receive the shares upon vesting without any purchase cost.
Published on
March 15, 2024
Updated on
March 15, 2024

Restricted Share Units (RSUs) are a common form of equity compensation, particularly in the tech industry, where companies use them to attract and retain top talent. RSUs offer employees a stake in the company's ownership without requiring any upfront cost to purchase the shares. Here's a detailed look at RSUs and how they work:

How do Restricted Share Units (RSUs) Work?

• RSUs are typically granted to employees as part of their overall compensation package.

• Upon the grant of RSUs, employees do not own the shares outright. Instead, they receive the shares at a later date, known as the vesting date.

• The vesting period is the duration an employee must wait before gaining ownership of the RSUs.

• Once the RSUs vest, employees receive the shares or the cash equivalent of the shares, depending on the company's structure.

Why are Restricted Share Units (RSUs) Beneficial?

RSUs offer several benefits to employees:

• Alignment of Interests: RSUs align the employees' interests with that of the company by making them part-owners.

• Retention Tool: RSUs incentivize employees to stay with the company for the long term due to the vesting schedule.

• Downside Protection: Since RSUs have value even if the stock price decreases, they provide some level of downside protection compared to stock options.

When do Restricted Share Units (RSUs) Vest?

The vesting of RSUs can be based on various criteria, such as:

• Time-Based Vesting: RSUs vest after a certain period, e.g., four years, with a one-year cliff where no units vest before the first anniversary.

• Performance-Based Vesting: RSUs may also vest based on achieving predetermined performance goals set by the company.

Conclusion

Understanding Restricted Share Units (RSUs) is crucial for employees looking to comprehend their equity compensation packages. By knowing how RSUs work, when they vest, and their benefits, employees can make informed decisions regarding their financial planning and employment choices.

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