Restricted Stock Units (RSUs)
A promise to deliver shares of stock as they vest, taxed as income on each vesting date.
Definition
RSUs are a commitment by the company to give you actual shares of stock on each vesting date. Unlike options, you do not pay a strike price; the shares are simply delivered to you. RSUs are taxed as ordinary income at the fair market value on the vesting date. RSUs are more common at later-stage startups and public companies because they have value even if the stock price drops, whereas options can go underwater.
Why it matters
RSUs always have some value (unlike options that can go underwater), but you owe taxes every time shares vest. At private companies, this creates a problem: you owe taxes but may not be able to sell shares to cover them. This is called the RSU tax trap.
Example
You receive 10,000 RSUs vesting over 4 years. Each quarter, 625 shares vest. If the FMV is $20 when shares vest, you receive 625 shares worth $12,500 and owe income tax on $12,500. At a 40% effective rate, that is $5,000 in taxes.