Restricted Stock Units Terms to Know
Restricted stock units (RSUs) are so common today that we often skip over all the terms associated with them. The purpose of this article is to simply explain the top terms that you’ll want to know if you have restricted stock units.
Restricted Stock Unit Term #1 - Grant Agreement
The first RSU term you’ll want to know is the Grant Agreement.
A grant agreement lays out all the conditions and terms related to your RSUs. It describes many of the terms that we’ll be explaining in this article.
It will usually state how many RSUs you’re getting, how long it’s going to take for them to vest, and any other conditions that may apply. If you ever have questions about your specific grant of RSUs, the grant agreement is a great place to look.
Restricted Stock Unit Term #2 - Grant Date
The Grant Date is the date on which your Grant of RSUs becomes effective. It’s essentially the date that the company okays the decision to give you RSUs.
Restricted Stock Unit Term #3 - Vesting Schedule
The Vesting Schedule lays out how long you need to continue to work for your company in order for your RSUs to officially be released to you. It also describes what other conditions need to be fulfilled for the RSUs to be released to you.
Vesting schedules vary from company to company, can vary based on the role, and can vary based on the overall purpose of the grant.
Typically vesting schedules are 4 years long, but we see schedules in the 3-5 year range all the time. You’ll want to make sure you’re aware of just how long your RSU vesting schedule is going to take.
Restricted Stock Unit Term #4 - Vesting Commencement Date
The Vesting Commencement Date is the date on which the clock on your vesting actually starts. It’s usually the same day as the grant date, but can be before or after the grant date depending on the situation.
If there is a difference, this is the date you’ll want to count from when figuring out when RSUs will officially vest and be released to you.
Restricted Stock Unit Term #5 - Cliff Vesting
Cliff Vesting is a type of vesting that can happen within a vesting schedule. Rather than your RSUs being released to you equally for every day you work at the company, the company will say something like, “Work here for one year and receive 25% of your RSU grant on the one-year anniversary.”
The frequency in which your RSUs vest is dictated by the vesting schedule.
You can see vesting occurs at a rate of 25% per year. Or you can see 25% vest after one year, then 6.25% after each quarter following.
The idea of doing longer, more spread-apart vesting is that it helps with employee retention.
Restricted Stock Unit Term #6 - Vested/Unvested
Vested means you’ve received the RSUs and you now own company shares.
Unvested means that you’re still waiting to achieve the vesting conditions and you have not received the actual shares yet.
It’s important not to rely too heavily on unvested RSUs because they can be gone in an instant if you’re laid off or you need to quit suddenly.
Restricted Stock Unit Term #7 - Double-Trigger
The phrase “Double-Trigger RSU” refers to having two vesting conditions.
If your company is publicly traded, usually the only condition you have to meet is the length of time worked.
If your company is still private/not publicly traded, then it’s common for companies to require (1) some length of service and (2) an IPO or acquisition.
This can be particularly difficult for employees at private companies because if the company never goes public then they’ll be left with unvested RSUs that don’t actually have value yet.
Restricted Stock Unit Term #8 - Refresher
The RSU term, Refresher, is when companies grant RSUs annually. You’ll often hear it used like, “I received a refresher grant of RSUs.”
Since equity is a big part of employee compensation, RSUs can be granted every year to keep employees motivated. The thought is that by giving employees stock, they feel motivated to help do things that ultimately improve the company’s stock price.
Restricted Stock Unit Term #9 - Vest Date
The term, Vest Date, refers to the date that your RSUs are released to you. Based on the vesting schedule, you’ll usually only see a portion of your RSUs come to you.
For tax purposes and personal tracking purposes, it’s an important date.
When RSUs vest and are released, they are fully taxable to you. This means that you will owe taxes based on the number of RSUs that vested times the value per share of the company.
Restricted Stock Unit Term #10 - Ordinary Income
This term isn’t at all exclusive to RSUs, but it’s a term you should be familiar with. Ordinary Income is income that will be taxed at ordinary tax rates - which is what your salary and bonuses are taxed at.
When RSUs vest they become taxable to you at Ordinary Income rates, which basically means that it’s like receiving a cash bonus and immediately investing the money into your company.
This is also important because we’ve seen the false statement that RSUs aren’t taxed until you sell.
Restricted Stock Unit Term #11 - Tax Withholding
Tax Withholding is the amount of money that gets set aside from your RSUs. If you have 100 RSUs vesting, you might see only 78 get released to you because the other 22 were set aside/sold for tax purposes.
Employers have a requirement to withhold taxes on the money they pay employees, so there will usually be some form of withholding on your RSUs when they vest.
RSUs have a federal statutory withholding rate of 22% and usually that’s what employers will withhold unless you make over $1M, then the rate jumps to 37%.
What’s important about knowing the tax withholding is that if you make over $100k, there’s a good chance that the 22% standard withholding isn’t enough.
Restricted Stock Unit Term #12 - Trading Windows
The next RSU term you’ll want to be familiar with is Trading Windows. Trading Windows are periods of time in which employees are allowed to buy or sell company stock.
There are laws that say you’re not allowed to buy or sell company stock if you have insider information and trading windows help employees avoid accusations of insider trading.
Trading windows will vary based on the company, but they usually last about a month and they open up following a public earnings release.
Restricted Stock Unit Term #13 - Capital Gains
The last term you should be familiar with if you have restricted stock units is Capital Gains.
Capital Gains/Losses are what you incur when you sell your RSUs. If the price of your shares has gone up since the vest date, you have an unrealized capital gain. If the price goes down after the vest date, then you have an unrealized capital loss.
Once you sell, you’ll have a realized capital gain or loss.
Depending on how long you’ve held the shares for, the transaction will either be considered short-term or long-term. Long-term status is achieved if you’ve held shares for a full 365 days. Short-term status applies anytime shares are sold before the full year.
Short-term capital gains are taxed at ordinary income tax rates, long-term capital gains are taxed at their own rate schedule, and it’s less than ordinary rates.
Remember, capital gains only apply to RSUs at sale. At vest, everything will still be ordinary income.
Restricted Stock Unit Terms Conclusion
This is probably the longest article on RSU terms on the internet, but we wanted to provide you with as many relevant terms as possible. We love helping people make the most of their equity, and especially RSUs as you can tell.
If you have any questions about your RSUs, please let us know. We’re happy to help.