Detailed Comparison of RSUs and RSAs
In any discussion of equity compensation, you’ll commonly hear the words "Restricted Stock” and acronym “RSU.” Restricted Stock Units (RSUs) are so common that they overshadow another form of equity compensation, Restricted Stock Awards (RSAs).
Although these two types of restricted stock sound similar, there are important differences when comparing RSUs vs RSAs and those differences can affect how they are taxed, when they vest, and how they are valued.
The purpose of this article is to explore the differences and similarities between RSUs and RSAs so that you have a better understanding of them.
Differences Between RSUs and RSAs
There are 6 major differences between RSUs and RSAs. Some of these differences are more impactful than others, but it’s important to be aware of each of them.
Difference #1 - How the Underlying Shares are Held
The first major difference between RSUs and RSAs is how the shares are given at the very beginning of the grant.
A grant of RSUs is a promise from your employer that they’ll eventually give you company stock after you’ve met all the vesting conditions.
A grant of RSAs, on the other hand, provides you with shares on day one, but along with those shares your employer basically says, “Hey, you can’t sell these and they aren’t really yours until they’ve vested.” In essence, the shares are yours, but you’ll forfeit them back if you don’t meet certain requirements.
This difference may seem slight, but it affects many of the other differences that we will discuss next.
Difference #2 - Ability to Complete an 83(b) Election
As we’ve discussed previously in another article, whereas RSUs are not eligible for an 83(b) election, RSAs are eligible (which can create some confusion).
An 83(b) election is an election you make which indicates to the IRS that you’d like to pay taxes on your RSAs now (before they vest) vs later (when they vest). Since RSAs are usually granted when a company’s price per share is really low, paying taxes on your RSAs starts the clock for long-term capital gains treatment on future gains. Should the stock price jump, you’ll be able to sell it all with long-term capital gains instead of paying ordinary income taxes as RSAs would have vested over time.
The IRS requires that you submit an 83(b) election form 30 days from the grant date, so if this is something you want to do, you’ll need to prioritize it.
Difference #3 - Requirement to Purchase Shares
RSUs are different from RSAs (and other forms of equity compensation) because you don’t need to purchase them from your employer. When RSUs vest, you receive shares of the company minus any shares that are withheld to cover taxes.
RSAs can work similarly, but it’s common for employers to require you to purchase them for some nominal value (like 1 cent per share).
Difference #4 - Maturity of the Company Granting the Equity
The next major difference between RSUs and RSAs is that usually the companies granting RSUs are much more mature and are either publicly traded or have a goal to soon be publicly traded.
RSAs, on the other hand, are typically granted by companies that haven’t been around very long, haven’t received a ton of funding, and aren’t particularly close to having an IPO.
Difference #5 - Tax Code Governing the Equity
The tax treatment of RSUs and RSAs is governed by entirely different sections of the tax code.
RSUs fall under Section 409A of the Internal Revenue Code. This section lays out the rules for deferred compensation.
RSAs, on the other hand, are subject to Section 83 of the tax code. This section addresses the taxation of property transfers in connection with services.
This minor difference between what section governs which equity type may not seem like a big deal, but it is significant. With RSAs, it is the transfer of property that makes you eligible to complete an 83(b) election. With RSUs, you’ve only received a contractual right to shares, but you don’t officially own anything yet.
Difference #6 - Likelihood of Qualifying for QSBS
We haven’t written much about Qualified Small Business Stock (QSBS), but it’s an EXTREMELY beneficial classification of equity if you and the company you work for both meet the qualifications for it. (We’ve linked Carta’s summary of QSBS because we haven’t yet written anything about this equity classification.)
If you and your company meet those qualifications, you can exclude up to $10M of capital gains from your taxes at some time in the future when you sell. There may even be some unique planning opportunities to exclude even more. (2nd and 3rd-time founders usually learn more about this piece of the tax code after their first liquidity event.)
So what does this have to do with RSUs and RSAs?
If you’ve received RSUs, it’s highly unlikely that the equity attached to those RSUs will qualify for QSBS. There are rules which dictate the timeframe in which a company can qualify as a Qualified Small Business (QSB), and usually by the time a company is granting RSUs, they’ve long since passed the time when they were QSBS-eligible.
If you’ve received RSAs on the other hand, there’s a high likelihood that if the company you work for is considered a qualified small business, you're probably holding equity that will be eligible for QSBS. A company has to check a lot of boxes in order for shareholders to take advantage of QSBS, but it’s one major benefit of receiving RSAs early on.
Regardless of the equity, if you think there’s a chance you have equity that qualifies for QSBS, it’s worth checking with the company to see if they have a record of when equity stopped being QSBS-eligible and it’s worth asking a CPA you trust.
Similarities Between RSUs and RSAs
The similarities between RSUs and RSAs are just as important as the differences, so we’ll discuss 5 of the most important similarities next.
Similarity #1 - Some Form of Vesting is Usually Required
The first similarity between RSUs and RSAs is that when employers grant them, they usually attach some sort of vesting schedule that dictates when you will officially own the stock. Vesting schedules are often seen primarily as a retention tool, but they also help to align the employees’ interests with the interests of the company.
Think about it: If employees receive a bunch of company stock with no strings attached, they'd be free to leave while still remaining shareholders in the company. This could potentially create an imbalance in the interests within the company.
Vesting schedules are not always required by companies. There are rare cases in which companies will grant employees RSAs or RSUs without a set vesting schedule, but typically, both RSUs and RSAs will come with some sort of vesting schedule attached.
Similarity #2 - Taxes if No 83(b) Election is Filed
If no 83(b) election is ever filed with a grant of RSAs, the tax effect is almost identical to receiving a grant of RSUs.
Assuming no 83(b) election is filed, RSAs will be taxable as vesting conditions are met and RSAs are no longer subject to “substantial risk of forfeiture,” which just means that certain conditions have been met so you no longer have to give back the shares you’ve been given.
If you have a typical vesting schedule where 25% of your grant vests each year, you’ll owe taxes based on the value of the company and how many shares you have vesting.
Similarity #3 - To Whom They Can Be Granted
RSUs and RSAs can be granted to both employees and non-employees. This means that if you’re a contractor for a company and are not considered an employee, you may still be able to request equity compensation as part of your payment.
For example, Beyonce performed for Uber in 2015 and, rather than receive solely cash compensation, she negotiated to receive Uber equity instead. It was not disclosed to the public whether she received NSOs or RSUs, but we’d be willing to bet that it was one of the two.
Similarity #4 - Benefit from Company Stock Price Increase
As with other forms of equity compensation, RSUs and RSAs both give their holders an opportunity to financially benefit from increases in company value.
So, which type of equity compensation provides greater opportunity - RSAs or RSUs?
Companies that grant RSAs are typically much younger. This may offer greater opportunities for growth and may provide some tax benefits, but may also provide less certainty and stability in the long run.
RSUs are usually granted by more mature companies, which can mean less room for exponential growth, but stock values are likely to be more steady and consistent.
Similarity #5 - How They are Valued on a Pre-tax Basis
The pre-tax value of RSUs and RSAs is calculated by taking the total number of RSUs or RSAs you have, multiplied by the current share price of the company.
# RSAs x Current Share Price = Pre-tax Value
# RSUs x Current Share Price = Pre-tax Value
As mentioned, sometimes there’s a small price that needs to be paid with RSAs, but it’s usually a small amount that won’t affect the value too much.
Thoughts on Managing RSUs and RSAs
Both RSUs and RSAs are great forms of equity compensation. We strongly recommend negotiating for whichever type is offered by the company you work for. (Here’s our article on negotiating RSUs.)
RSAs are more “lottery ticket-like” compared to RSUs. RSAs can provide you with equity that has a lot of room for growth and may provide you with some great tax benefits. The downside is that 95% of companies' RSAs won’t end up being worth much in real dollars. It’s great to have value on paper, but eventually that value has to be able to translate into real dollars that can be used elsewhere or at least have the ability to be leveraged for other things.
RSUs at a public company are usually the easiest to pull value from because when they vest, they’re easier to sell. Depending on how many RSUs you receive each year and depending on your situation, you’ll want to figure out how many RSUs to keep/sell as you keep receiving more.
RSUs at a private company require a lot of patience. If you have RSUs at a private company, it’s likely they haven’t been released to you and you’ll need to wait until some kind of liquidity event. Waiting for that event can be very frustrating. Most people try to stay until some liquidity event, but if you decide to leave and forfeit your RSUs, you’ll want to be sure to negotiate for equity at your new company.
We hope you’ve found this comparison of RSUs and RSAs helpful. If you ever have any questions about your equity, we’re happy to share our thoughts. Thanks for reading!