RSU (Restricted Stock Unit)
A promise to deliver company shares upon vesting, more common at later-stage and public companies than early-stage startups.
An RSU is a grant of company shares that the holder receives once vesting conditions are met, without needing to purchase the shares or pay an exercise price, unlike a stock option. RSUs have real value the moment they vest, since no exercise decision or upfront cash outlay is required, making them simpler for the recipient to understand and use.
RSUs are far more common at later-stage private companies and public companies than at early-stage startups, partly because RSUs are taxed as ordinary income at vesting based on the stock's fair market value at that time — which requires the stock to have real, known liquidity value (or the company to cover the tax withholding), something early-stage private companies with illiquid stock generally can't easily support.
RSUs are the simplest equity to understand — stay, vest, receive shares — which is why companies approaching an IPO often favor them over options. The catch is tax: vesting or settlement is a taxable event on the full fair market value, so RSUs at a company whose shares can't be sold would hand employees a tax bill with no way to pay it.
Private companies solve this with double-trigger vesting. Shares are delivered only when two conditions are met: a time-based service condition and a liquidity event such as an IPO or acquisition. Tax is due at settlement, when the shares become sellable. Read the fine print, though — some grants expire if no liquidity event occurs within a set number of years, and some require the employee to still be employed at the liquidity event.
RSUs aren't restricted stock. Restricted stock is actual shares issued up front, subject to vesting, and eligible for a Section 83(b) election. RSUs are only a promise of future shares, so there's no 83(b) election available for them.
Hypothetically, 1,000 RSUs settle when the stock is worth $100 a share. The employee recognizes $100,000 of ordinary income at settlement even without selling, and the employer typically withholds some of the shares to cover taxes, so the employee nets fewer than 1,000.
Early-stage startups should generally stick with stock options rather than RSUs, since options let recipients control the timing of their taxable event (choosing when to exercise) — RSUs make more sense once a company has enough scale and liquidity (or is close to a public listing) to handle the tax and withholding mechanics well.
Why do early-stage startups usually grant options instead of RSUs?
Because options don't trigger a taxable event until exercised, giving the holder control over timing, while RSUs are taxed as ordinary income at vesting regardless of whether the recipient has any way to sell illiquid private stock to cover that tax bill.
What is double-trigger vesting for RSUs?
A structure where shares are delivered only after both a time-based service requirement and a liquidity event, such as an IPO or acquisition, are met. It avoids taxing employees on shares they can't yet sell.
Can I file an 83(b) election on RSUs?
No. An RSU is only a promise to deliver shares later, so at grant there's nothing yet to make the election on. The 83(b) Election entry covers what it does apply to.
What's the difference between an RSU and a stock option?
An RSU delivers shares at vesting with no purchase price. A stock option is the right to buy shares at a fixed strike price, so it requires paying to exercise and can be underwater if the share price falls below the strike.
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