Restricted Stock Units (RSUs)
A practical guide to what RSUs are, how they vest, when they are taxed, and what makes private-company RSUs different from public-company RSUs.
RSUs are one of the most common forms of equity compensation at larger tech companies. They are also one of the most misunderstood.
The easiest way to think about an RSU is this: it is a promise from your company to deliver stock later if certain conditions are met.
Unlike a stock option, an RSU usually does not require you to pay an exercise price. But that does not mean the tax or liquidity picture is simple.
How RSUs work
An RSU grant usually starts with a number of units. Over time, those units may vest based on continued employment or another condition set by the company.
Once the required conditions are met, the company settles the award by delivering shares or, less commonly, cash.
RSUs vs. stock options
RSUs
- usually no exercise price
- value exists whenever the shares are worth something
- taxes typically arise when the award is delivered or otherwise taxable
Stock options
- require an exercise decision
- only have value if the stock price rises above the strike price
- tax timing depends on the option type and the exercise/sale sequence
Why private-company RSUs are different
At public companies, RSUs often vest and settle on a clear timeline, then taxes are withheld and employees can sell stock in the open market.
At private companies, settlement can be delayed because there may be no liquid market and no easy way to cover withholding. This is why many startups use double-trigger RSUs rather than plain time-based settlement.
That distinction matters: you may feel “vested” on paper while still waiting for a second event before shares are delivered.
When RSUs are usually taxed
For many employees, the taxable event is tied to settlement or when the stock is no longer subject to a substantial risk of forfeiture. The value at that point is often treated as compensation income.
After that, any additional appreciation or decline may affect capital gain or loss when the shares are later sold.
Because timing matters so much, RSUs are often easier to understand when you separate two questions:
What to pay attention to in your grant
- whether the award is single-trigger or double-trigger
- what counts as the second trigger
- whether settlement happens immediately or later
- how the company handles withholding
- what happens if you leave before a liquidity event
- whether the company has a history of tenders or liquidity programs
Common employee mistakes
Treating RSUs like options
There is usually no decision to “exercise” an RSU. The important question is when and how it settles.
Ignoring the tax timing
RSUs can feel simpler than options, but a large settlement can still create a meaningful tax event.
Assuming vesting equals liquidity
At a private company, vesting may be only one step in the process.
Final takeaway
RSUs are often simpler than options from a valuation perspective, but they can be more confusing in private markets because vesting, taxation, and settlement do not always happen at the same time.
If you have RSUs, make sure you understand the trigger structure and the likely path to actual liquidity.
Related guides
Sources and further reading
- IRS Publication 525: https://www.irs.gov/publications/p525