How do Restricted Stock Units work?
Restricted Stock Units (RSUs) are a form of equity compensation commonly used by companies to reward employees.
1. Grant: When an employee is awarded RSUs, they receive a specified number of units, which represent the right to receive shares of company stock in the future. The grant typically outlines the vesting schedule and any performance or time-based conditions that must be met for the RSUs to vest.
2. Vesting: RSUs are subject to a vesting schedule, which determines when the units become “unrestricted” and the employee gains ownership rights to the shares. Vesting schedules can be based on time (e.g., three years with one-third vesting each year) or performance milestones.
3. Settlement: Once RSUs vest, the employee is entitled to receive shares of company stock or the cash equivalent, depending on the company’s policy. The shares are typically delivered directly to the employee’s brokerage account or held in a separate RSU account until the settlement date.
4. Taxation: RSUs are subject to taxation upon vesting. When RSUs vest, the fair market value of the shares is included in the employee’s income as ordinary income, and taxes are withheld accordingly. Subsequent gains or losses from the sale of the shares are treated as capital gains or losses.
5. Rights and Restrictions: While RSUs represent the right to receive company stock, they do not grant any voting rights or dividends until the shares are actually delivered. Additionally, RSUs may be subject to forfeiture if the employee leaves the company before the units vest or other conditions are met.
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