Restricted Stock Units (RSUs): What They Are, Pros and Cons
RSUs are company shares you receive from your employer as part of your overall compensation.
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What are restricted stock units?
RSUs are company shares that employers provide to employees as part of their overall compensation.
How do they work?
There are three key stages to RSUs.
Grant: Your employer promises to give you a certain number of shares of company stock at some point in the future.
Vesting: The shares become yours after you’ve been employed a certain period of time or other requirements are met.
- Time-based vesting: You receive your RSUs over a predetermined period of time as long as you remain with the company (e.g., after your first year on the job, you receive 25% of your promised shares per year for four years).
- Performance-based vesting: In addition to any time-based vesting requirements, you might have to wait until the company achieves some performance goal (e.g., a private company goes public via an initial public offering).
Selling: How easily you can sell your shares depends on whether you work at a public or private company. You may be able to sell your shares as soon as they vest. Or you can hold onto them to reduce your capital gains tax.
» Understand the basics? Learn more with our guide to RSU taxes.
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.
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. Because 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.
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AD Advertisement How do RSUs 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 the shares, typically after a certain number of service years. Here are examples of common vesting schedules:
- Graded vesting schedule: Here, grants vest periodically 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 company 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.
» Learn more: RSUs vs. stock options
Tax liability of RSUs
RSUs have three stages: granted, vested, sold. Here’s what to know about how RSUs are taxed in each stage.
- When RSUs are granted, you’ll likely have no tax consequences, because you don’t technically own the shares yet. Shares don’t become rightfully yours until you meet the vesting requirements and any other conditions.
- 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.
- Give back some of the shares: Some companies may offer to offset your tax liability by reducing the shares received by the amount of tax owed. 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.
- Pay 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.
- Sell to cover: You may sell some of the newly vested shares to cover the tax bill.
🤓 Nerdy Tip
The amount of surrendered shares or cash withheld is based on an estimate of tax liability and may not completely offset the actual tax owed. Employees could be hit with additional tax consequences at tax time, depending on their tax situation. RSUs come with a certain degree of flexibility, which can make them an appealing incentive. Employees can sell vested shares to fund other priorities, such as contributing to retirement accounts, paying off debt, funding a house down payment or contributing 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.
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.
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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 that 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.
Are RSUs worth it?
RSUs require no purchase on your part and can be a valuable part of your compensation. That’s especially true if your company’s stock price rises and you’re able to take advantage by selling your shares. (You can use our total compensation calculator to see what RSUs add to the value of a job offer.)
But it may take years to fully claim the benefit. And if you leave the company before your RSUs vest, it could mean you’ll forfeit those shares.
Here are some pros and cons to consider with RSUs.
Pros
No purchase necessary.
Retain some value unless the share price goes to $0.
Follow a predictable vesting schedule.
Vested shares are yours, even if you leave the company.
Cons
May take years to vest.
You lose shares that haven’t vested if you leave the company.
The tax consequences and future value can be complicated, especially at private companies.
» Run the numbers: Try our RSU calculator.
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- 1. IRS. U.S. taxation of stock-based compensation received by nonresident aliens - YouTube video text script. Accessed Oct 29, 2025.
- 2. Baker McKenzie. Double-trigger RSUs and the question of the seven-year term. Accessed Oct 29, 2025.
- 3. IRS. Equity (stock)-based compensation audit technique guide. Accessed Oct 29, 2025.
- 4. Fidelity. Restricted Stock Units (RSUs). Accessed Oct 29, 2025.
