Restricted Stock Units: Better Than Options?

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 4,036 reviews

Jump to Section

Need help with a legal contract?

Post Project Now

Post Your Project (It's Free)

Get Bids to Compare

 Hire Your Lawyer

What Are Restricted Stock Units (RSUs)?

Restricted stock units (RSUs) are a form of employee compensation where an employee is granted stock from a company. Restricted stock units have a grant date, but will not be owned by the employee until sometime in the future when they become fully vested.

RSUs fall underneath the restricted stock umbrella, and differ from restricted stock awards (RSAs) because the employee does not own the stock immediately after the grant.

Restricted stock units are also different than employee stock options primarily because the employee does not need to purchase the stock in the future. RSUs become owned by the employee once they vest.

Here is an article about restricted stock.

Restricted Stock Units vs. Stock Options

Restricted stock units are different than employee stock options for two primary reasons:

Difference 1: Restricted stock units are owned by employees once vested

Like stock options, restricted stock units have a vesting schedule that is either time-based, milestone-based, or a combination of both. Once the RSUs have vested, the employee owns the stock outright.

Stock options are different because they simply give the employee an option to purchase the stock at an exercise price, or strike price, which was set at the time of the options were issued.

Here is an article on incentive stock options.

Difference 2: Stock options can have preferential tax treatment

Restricted stock units are owned by the employee once vested and are taxed at the ordinary income rate. Incentive stock options, however, can be taxed at the capital gains rate if the employee complies with the qualifications.

Here is an article on incentive stock options.

Given the difference between the ordinary tax rate and capital gains rate, this can make a big difference in tax liability. RSUs, however, can be taxed at a capital gains rate, but only if the employee holds on to the shares, they appreciate, and then sells them.

For example, if an employee is granted $5,000 worth of RSUs, holds on to them and sells them once worth $6,000. The employee would need to pay ordinary tax rates on the $5,000 and capital gains rates on the $1,000 ($6,000 - $5,000).

Meet some lawyers on our platform

Ryenne S.

135 projects on CC
View Profile

Michael K.

70 projects on CC
View Profile

Daniel R.

11 projects on CC
View Profile

Wendy C.

2 projects on CC
View Profile

How Restricted Stock Units Work

Restricted stock units are essentially a stock grant to an employee from a company in the form of compensation. They are called ‘restrictive’ because the employee does not immediately own the stock when the grant is made. Rather, the employee needs to fulfil certain achievements.

RSUs have a vesting schedule which is typically tied to time, milestones, or both. Once the RSUs are vested, the employee owns the stock.

Vesting and Restricted Stock Units

Employees will need to achieve certain criteria in order to earn the ownership of the RSUs. Vesting is a legal term that means to gain a right to a present or future payment. In this situation, when an employee meets their vesting obligations, they earn the right to their shares.

There are three different types of vesting:

  • Time-based Vesting: Time-based vesting is when an employee needs to stay with their employer for a certain amount of time in order to earn their shares. For time-based vesting, you will often see a ‘one-year cliff' which means, if an employee leaves before one year, they will receive no shares. Once they achieve the first year, then shares typically vest quarterly or monthly.
  • Milestone-based Vesting: Milestone-based vesting is different than time, since an employee will earn the right to their shares after they complete certain value-creating achievements.
  • Hybrid Vesting: A hybrid vesting schedule is a mix of both time and completing value-creating achievements.

Here is an article on vesting stock.

Restricted Stock Awards (RSAs)

Another form of restricted stock is called restricted stock awards, or RSAs. RSAs are also not stock options and differ from RSUs primarily because the employee owns the shares when granted the RSAs.

On a high level, RSAs are shares given to employees without any sort of vesting schedule. Since the employees own the shares immediately, they also gain voting rights.

The Difference between RSUs and RSAs

RSUs and RSAs are two types of restricted stock that have many similarities. Below are the main differences:

  • RSAs are owned by the employees when they are granted. RSUs typically have a vesting scheduled tied to time or milestones.
  • RSUs do not give employees voting rights immediately. Since RSAs are owned by the employee when granted, they immediately gain voting rights.

Here is an article on further differences between RSUs and RSAs.

ContractsCounsel Restricted Stock Units Image

Image via Pexels by Andrea

Selling Your Restricted Stock Units

Restricted stock units are regulated by the Securities Exchange Commission (SEC) since they are typically given to executives that have inside information about a company. Thus, they are subject to insider trading laws. It is important to follow the right steps to sell your RSUs.

Below are some general steps you can take when selling your restricted stock:

  • Step 1: Understand the SEC holding period requirements.
  • Step 2: Comply with federal reporting obligations.
  • Step 3: Be mindful of the amount of stock you can sell within a certain window of time.
  • Step 4: Remove the stock legend.
  • Step 5: Execute a normal brokerage transaction.
  • Step 6: Get in touch with SEC with required filing.

Here is an article on how to sell restricted stock.


Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

Restricted Stock Units and Tax

Restricted stock units are taxed differently than stock options. For stock options, tax liability is triggered when the options are exercised. For RSUs, tax liability is normally triggered when the shares vest.

RSUs are taxed at the normal income rate when vested. In other words, if you receive RSUs worth $10,000 and they fully vest, the value of the shares ($10,000) will be taxed at the ordinary income rate. If you choose to liquidate some stock but hold some stock as well, then you may need to pay capital gains tax on the profit gained by holding onto the stock.

Here is a link to an RSU tax calculator.

Are RSUs taxed twice?

Many people think RSUs are taxed twice. While RSUs can appear to be taxed twice, they actually are not. In short, once RSUs vest, you owe ordinatry tax on the value of the vested shares. If you choose to hold on to the shares (not sell them), then you may be taxed on the profit you earn if they shares go up before you sell them.

In other words, if your RSUs vest and are worth $5,000. Your tax liability will be fore $5,000 of income and will be taxed at the ordinary income rate. Let’s say you sell $2,000 worth of stock to help pay taxes and hold onto $3,000. If you sell the stock one year from now and the stock increased to $3,500, you made a profit of $500 and will only pay capital gains taxes on the $500.

Given the $500 was not part of the initial RSUs, you will not be paying tax twice.

Here is an article on restricted stock and taxes.

Getting Help With Restricted Stock Units

Restricted stock and other employee stock purchase plans are complicated. If you need help, post a project on ContractsCounsel’s platform to find a lawyer to review your stock-based compensation agreement.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

David H. on ContractsCounsel
View David
5.0 (1)
Member Since:
March 10, 2022

David H.

Technology Contract Attorney
Free Consultation
Get Free Proposal
Michigan (virtual practice)
12 Yrs Experience
Licensed in MI
Western Michigan University - Thomas M Cooley Law School

Michigan licensed attorney. A compelling combination of technology, sourcing, sales, and legal experience. Over 20 years in technology positions negotiating technology engagements and contracts. General practice legal experience. Significant IT contracts experience (from IT sourcing/procurement) with the State of Michigan and Zimmer Biomet (Fortune 500). Excellent people, negotiation, and writing skills; keen eye for continuous improvement. Trusted business partner co-leading or supporting cross-functional integrated business/IT projects.

Michael C. on ContractsCounsel
View Michael
5.0 (1)
Member Since:
March 17, 2022

Michael C.

Managing Member
Free Consultation
Get Free Proposal
Remote
12 Yrs Experience
Licensed in NY, TX
Wake Forest University School of Law

A seasoned senior executive with experience leading the legal and compliance functions of healthcare entities through high-growth periods. I have experience managing voluminous litigation caseloads, while also handling all pre-litigation investigations for employment, healthcare regulatory, and compliance matters. Similarly, I have led multiple M&A teams through purchase and sale processes, including diligence and contract negotiations. Finally, I have extensive contract review experience in all matters, including debt and equity financing, healthcare payor contracting, vendor and employment agreements, as well as service and procurement agreements.

Rebecca R. on ContractsCounsel
View Rebecca
5.0 (2)
Member Since:
March 16, 2022

Rebecca R.

Attorney
Free Consultation
Get Free Proposal
St. Petersburg, FL/Nashville, TN
22 Yrs Experience
Licensed in TN
University of Tennessee College of Law

An experienced commercial contracts attorney with sales, leasing, NDA, SEC compliance, corporate governance, commercial real estate, and employment experience. Also well versed in internal and external policy document and manual creation.

Gregory F. on ContractsCounsel
View Gregory
5.0 (1)
Member Since:
March 23, 2022

Gregory F.

Attorney
Free Consultation
Get Free Proposal
Atlanta, Georgia
25 Yrs Experience
Licensed in GA, NY
University of Pennsylvania

Greg Fidlon has been practicing exclusively in employment law since 1998. He represents and advises clients in all aspects of the employment relationship. In addition to his litigation work, Greg regularly negotiates and drafts corporate policy handbooks, employment contracts, separation agreements and restrictive covenants. He also develops and presents training programs and has spoken and written extensively on labor and employment law topics.

Sunnita B. on ContractsCounsel
View Sunnita
4.9 (23)
Member Since:
March 28, 2022
Jessee B. on ContractsCounsel
View Jessee
Member Since:
March 14, 2022

Jessee B.

Attorney | Creative at Law
Free Consultation
Get Free Proposal
Tennessee
10 Yrs Experience
Licensed in TN
The University of Memphis—Cecil C. Humphreys School of Law | Juris Doctor, Law)

Whether you're thinking of starting your own business and not sure how to bring your vision to life, or you're a business owner, creative professional, creator, influencer, artist, musician, startup, nonprofit, or entrepreneur who wants to grow your business and protect your content and brand—I can help. Get experienced legal counsel, quality representation, and creative solutions customized to fit your unique needs. Services include: entity formation, business issues, planning, financing, and strategy; contract drafting, review, and negotiation; intellectual property protection; copyright and trademark filing; startup and nonprofit setup and guidance; real estate matters; property purchase, sale, and leasing; assistance with legal issues related to content creation, branding, design, writing, film, music, art, entertainment, social media, e-commerce, marketing, advertising, data and privacy compliance, and more. Questions? Let's work together. Reach out and say hello.

Stephanie C. on ContractsCounsel
View Stephanie
Member Since:
March 8, 2022

Stephanie C.

Attorney
Free Consultation
Get Free Proposal
Niceville, FL
3 Yrs Experience
Licensed in AL
Southern University Law Center

Alabama Licensed Attorney offering Freelance Services for Wills, Trusts, Probate, Family Law Documents, Criminal Matters, and Real Estate Closings.

Benjamin V. on ContractsCounsel
View Benjamin
Member Since:
March 10, 2022

Benjamin V.

Attorney
Free Consultation
Get Free Proposal
Colorado
4 Yrs Experience
Licensed in CO
Columbus School of Law, Catholic University of America

My practice involves counseling businesses and individuals on a variety of contracts, such as business formation, technology/IP, real estate, leases, and even domestic relations agreements. Much of my practice is dedicated to litigation. As such, I approach contract and transactional work from a litigation perspective by advising clients of the risks involved in failing to develop proper contracts. It takes more than knowledge of the law to be a good lawyer. A good lawyer is honest and forthcoming with clients and has a counseling ethos. And, to me, a good lawyer stands in the shoes of the client when considering how to best serve that client. Whether my client is a business or an individual, I am passionate about helping my clients understand their rights, responsibilities, risks, and possibilities.

Mark D. on ContractsCounsel
View Mark
Member Since:
March 15, 2022

Mark D.

Attorney
Free Consultation
Get Free Proposal
Dallas/Houston Texas
28 Yrs Experience
Licensed in CO, TX
Thomas M Cooley Law School

Partnering with business clients to keep their greatest asset - their employees - from becoming their biggest liability. Mark accomplishes this by working with in-house counsel and human resource professionals of several Fortune 50 companies, as well as many smaller public and privately held profit and not for profit organizations, to provide advice and counsel on the day to day employment and workforce practice issues encountered by those organizations. For over fifteen years Mark has been Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization. He is licensed and practices in both Texas and Colorado and has focused his practice for the last 20 plus years on defending companies in employment and labor related matters. During this time Mark has had extensive experience in handling and responding to a wide range of local, state and federal employment issues that impact the management and operations of businesses in a wide range of industries. Mark's experience includes appearances before state and federal agencies and regulatory boards, litigation in both state and federal courts, defense of class actions and appearances before courts of appeal. While Mark regularly handles matters in litigation, he has a high regard for handling every issue with the best interest of the client’s business. Mark is a published author and regular speaks on labor, employment and workplace practice topics. Whether it be an investigation by the Occupational Safety and Health Administration (OSHA), the Wage & Hour division of the U.S. Department of Labor, or other state agency; an Equal Employment Opportunity Commission (EEOC) or state agency charge claiming a violation of local, state or federal employment or labor laws; or the need for direction on a hiring, termination or business operational issue involving employees, Mark has extensive experience in handling these and many other employment and labor issues.

Joann H. on ContractsCounsel
View Joann
Member Since:
March 23, 2022

Joann H.

Attorney at Law
Free Consultation
Get Free Proposal
Miami
23 Yrs Experience
Licensed in FL, NY
University of Buffalo School of Law; SUNY at Buffalo School of Law

I practiced law for the past 22 years in Immigration, Bankruptcy, Foreclosure, Civil Litigation, and Estate Planning. I am interested in downsizing to a more workable schedule to allow the pursuit of other interests.

Pankaj R. on ContractsCounsel
View Pankaj
Member Since:
March 25, 2022

Pankaj R.

Owner
Free Consultation
Get Free Proposal
Los Angeles/Inland Empire
14 Yrs Experience
Licensed in AZ, CA
University of Arizona Rogers College of Law

I advise clients in the areas of business, trademarks, real estate, employment, and finance. My overarching goals are to unite creative people and companies to assist them in making sound legal and business decisions. I have been fortunate enough to build a fast-growing, 21st-century law firm with an amazing staff by my side. Our focus is not just on providing invaluable legal insight but creating a better all-around client experience. We provide unique subscription pricing and flat-fee options for our clients, providing billing transparency and enhanced value to all of our wonderful clients. Focus areas: contract drafting, negotiations, research, trademarks international law, entertainment, business development, entity choice; business: manager, team builder, leader, motivator. Speaking Engagements: National Business Institute (NBI) - "Business Contracts 101"

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call