Restricted Stock Units (RSUs): What They Are, Pros and Cons

What is an RSU?

Restricted stock units (RSUs) are a type of employee equity compensation that grants employees a specific number of company shares, subject to a vesting schedule and potentially other stipulations^[0]

Companies use RSUs as an incentive to attract and retain talent. If the company performs well and the share price takes off, employees can receive a significant financial benefit. This can motivate employees to take ownership of the company’s success. Since employees need to satisfy vesting requirements, RSUs encourage them to stay for the long term and can improve retention.

RSUs, along with other forms of equity compensation, can be complex and require detailed planning for employees to reap the greatest reward.

How do restricted stock units work?

With RSUs, the promised stock units aren’t transferred to you — and have no value — until certain conditions are met. Employers can offer RSUs with different restrictions. Typically, there are two types.

1. Single-trigger RSUs: time-based vesting

Single-trigger RSUs are subject to only a time-based restriction. The vesting schedule dictates when the employee gets ownership of the shares, typically after a certain number of service years. Here are examples of common vesting schedules:

• Graded vesting schedule: Here, the employee gets periodic grants vest over the course of a few years. For example, say you’ve been granted 1,500 RSUs with a vesting schedule of 20% after one year of service and then equal quarterly installments thereafter for the next three years. This would mean that after staying with your company for a year, 300 shares become yours. For the next three years, you receive another 100 shares for every quarter that you remain employed by the company.

• Cliff vesting schedule: All grants vest at once. In our example, all 1,500 shares vest after three years.

2. Double-trigger RSUs: performance-based goals

Double-trigger RSUs include some kind of additional condition that must be fulfilled along with vesting.

This second trigger is often related to performance. This can mean the company must reach certain milestones — such as a product or service launch — or undergo a liquidity event such as a merger, acquisition, initial public offering, direct listing or SPAC listing. Double-trigger RSUs are common among private companies^[0]

Tax liability of RSUs

RSUs have three stages: granted, vested, sold. Here’s what to know about your tax liability in each stage.

When RSUs are granted, you’ll likely have no tax consequences, because you don’t technically own the shares yet^[0]

When shares vest, typically you’ll owe taxes on the value of your vested shares. The value of your vested shares equals the number of shares times the fair market value of the shares at the time they vest. This value is taxable as income to you, and your company is required to withhold the required taxes.

When you sell your shares, you may have tax consequences if the sale results in a capital gain. Holding shares for over a year before selling qualifies as a long-term capital gain, which is generally taxed at a lower rate than a short-term capital gain.

» Concerned about capital gains? Discover strategies to reduce capital gains tax

Covering RSU taxes at vesting

There are three ways to pay your taxes when your RSUs vest.

1. Withholding shares: Some companies may offer to offset your tax liability by reducing the shares received by the amount of tax owed^[0]

   Fidelity. Restricted Stock Units (RSUs). Accessed Jul 25, 2025.

   View all sources

   . For example, if 300 of your RSUs vest and they’re worth $10 a share, you’ll have $3,000 of taxable income. Assuming a 22% tax bracket, the tax bill would be $660. You could elect to receive only 234 shares, using 66 shares to cover your tax bill.

2. Paying out of pocket: If your company doesn’t provide this perk — or if you opt out of it — you’ll have to use cash to cover taxes.

3. Selling to cover: You may also opt to sell newly vested shares to cover the tax bill. 

Selling vested shares

RSUs come with a certain degree of flexibility, which can make them an appealing incentive. Employees can sell vested shares to fund other priorities — using the cash to contribute toward retirement accounts, pay off debt, fund a house down payment or contribute to a child’s college savings account.

How readily you can sell your stock to generate cash depends on if your employer is a public or private entity.

» MORE: Is trading employee equity a good idea?

RSUs at public companies

If your employer is a publicly traded entity, its shares trade on a stock exchange and you might be able to sell your shares at any time.

Some employees may want to hold on to their shares out of company loyalty or because they believe in the company’s future prospects. Keep in mind that having too much exposure to one company or stock can increase the risk in your portfolio. You may choose to sell shares and produce cash to fund other financial goals or to diversify your investments.

RSUs at private companies

If your employer is a nonpublic entity, there is no readily available marketplace to sell your shares. This means you may need to fund taxes out of pocket, and it explains why some companies issue double-trigger RSUs with a liquidity event provision — when a liquidity event occurs, it offers an opportunity to sell shares. Employees can use that sale to fund the tax liability.

If your employer offers a single-trigger RSU, you may need to sit tight and hope for a liquidity event. Some liquidity events, such as IPOs or SPAC listings, have lock-up periods, which means you won’t be able to sell your shares right away.

Even though you may need to wait for an exit opportunity, the future benefit may be worth the wait if your company is growing and the value of your shares rises over time. If you’re confident that your company’s shares will be worth more once it becomes public and you have enough cash to cover the taxes, you may want to consider holding your shares and paying taxes out of pocket in hopes of a larger payoff down the road.

Employee equity compensation can be complex. It can make sense to find a financial advisor to formulate a strategy that fits your personal financial circumstances.

Pros and cons of RSUs