What Are Restricted Stock Units? How They Are Different From Other Stock Options?

Employee stock options have become hugely popular in the recent times, specifically within the culture of startups and venture-backed firms. However, there are a lot of factors, terms and other calculations that are a part of this stock culture.

One of these can be referred as restricted stock option or restricted stock unit (RSUs). These are offered by the employee to an employer as part of a compensation package. However, there is a catch: the employee does not receive the stock immediately, but only after they have satisfied certain conditions laid down by the employer. The condition often elates to the employee staying with the company for a specific period of time and achieving required performance milestone before they are granted all the stocks.

Why Employees Give Restricted Stock Units?

Whenever an employee feels that a particular individual is of high value to their company’s growth and business plans they want to reward them, but also want to ensure that they stay with the firm for a minimum period. And therefore, these types of stocks come with a time limit (commonly known as a vesting schedule). Due to this nature, these stocks are defined as Restricted.

By offering a promise of future financial benefit, they are able to retain key talents for their business. When the employee knows that the future gain with their stocks depends on how the company performances, they ensure their best possible performance, befitting the company’s objectives. The employee also gets benefitted, as over the time, post the vesting period, if the value of the company increases, they can gain huge financial gains.

Restricted Option After Vesting

There are two factors that need to be considered after the vesting period:

Ownership Of The Stock

After the vesting period, the employee becomes the sole owner of the stocks. They have the privilege of retaining or selling employee stock options, or converting them to cash, or receiving dividends.

Taxation

The RSUs are taxed as soon they are vested, and are taxed at ordinary tax rates. In several cases, the employer withholds some of the stock units as payment for taxes. In other cases, the employer may let the employee retain the RSUs and give the option to pay the taxes with cash.There is no risk of forfeiture and therefore the owner of the stock pays income tax on the received value. 

The rules and complexities differ with different companies. You need to go through a detailed assessment an analysis of the plan specifics to plan for your finances, not only when it concerns the restricted options, but also with NSO stock options, and so, to gain favorable results.

Posted in: NSO stock options,Selling employee stock options