It is very important for you, either as a founder or employee of a firm, to know how a RSA vs RSU function as incentives for employees in the company. Restricted stock options are very different from normal stock options. Regular stock options offer you the right to purchase a limited number of shares at a predefined price. But in this case, you do not become the owner of the shares until you have bought them.

On the other hand, with restricted stocks, you own the shares from the first day they are issued. A common restriction on these restricted stock include a vesting schedule, where the shares are earned over time. This type of plan incentivizes employees to stay with the company longer.

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And if an employee leaves the company early, the company can repurchase the stock back. As mentioned above, a restricted stock award RSA is a type of restricted stock. It is a grant of the company stock where the rights of the recipient are restricted until the shares are completely vested or there is a lapse in the restrictions. To help you understand the concept better, let us take an example. Tony works in a company and receives RSAs.

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He is one of the first five employees in a startup company. And since the company does not have enough capital to pay high salaries, they offer Tony RSAs as a part of his employment package. These RSAs are also given to Tony on the grant date. Normally, RSAs are issued to the early employees before the company enters its first equity financing round, where the FMV of the common stock is low.

But it all depends on the nature of the offer, and the conditions of the restrictions. So, the employee might end up purchasing them even after they are granted the shares. A restricted stock unit RSU on the other hand is compensation offered to an employee as company stock , and received later when the vesting is complete, unlike RSAs given on the grant date. The restricted stock units are issued to an employee through a vesting plan and distribution schedule. The employees then get the shares when they meet the requirements in the plan.

The requirements can include achieving performance milestones or staying with the company for a particular length of time. To help you understand this better, let us take another example. Larry is another employee in the same firm as Tony, but joins seven years later.

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At this point, the company has become very successful and the share price has increased. Along with a great salary, the company decides to offer Larry with RSUs as a part of their offer.

How do Restricted Stock Unit Plans work?

The RSU is common stock and would be delivered at a future date, based on the performance conditions and vesting schedule in the plan. So, Larry would not get the shares until the conditions are met. Unlike RSAs, when an employee is granted an RSU, it is a promise to the employee from the company to give the shares at a later date. Exactly when Larry would receive the RSU shares can be a specified date in the future, a liquidation event, a vesting date or a combination of these.

The future date is set when the RSUs are granted. Additionally, unlike an RSA, the RSU holder does not have to pay anything to own the shares, apart from any relevant taxes.

What Is the Difference Between a Restricted Stock Unit and a Restricted Stock Award?

First off, an RSA is a grant which gives the employee the right to buy shares at the FMV, at no cost, or at a discount. On the other hand, an RSU is a grant valued in terms of company stock, but you do not actually get the shares until the restrictions lapse or vest. As soon as these conditions are met, the shares are given to the employee in the form of stock or cash as outlined in the plan.

But that is not all. There are a lot of tax compliance and legal differences between the two, as below:. Moreover, the employee of the company has to pay the minimum taxes as determined by the employer upon vesting. Vesting means that the person getting the shares will have to earn the shares over a period of time. The person who gets RSA shares owns them, but the vesting for RSAs affects whether the company can repurchase the shares if the person leaves the company. A lot of companies have vesting schedules in place to avoid a case where an employee joins the company, gets their RSA award, and then leaves the company instantly after getting the award.

The moment the company grants the RSUs, they are promising to issue those shares later on as per the vesting schedule. These might also be subject to other conditions in the company in order for the RSUs to vest. For example, a liquidation condition states that the company has to be acquired or undergo an IPO before the shares would vest. The employees would need to satisfy the time-based vesting schedule and the liquidation condition before their shares would be vested.

Each has been explained below. Just note that both Tony and Larry are partially vested upon termination. Tony keeps all of his vested shares during a termination event. Nonetheless, the unvested shares are subject to a company repurchase, where the company can purchase the shares back from Tony. And in such a case, companies usually repurchase the shares at the same price at which the employee paid for them. Note that the company has the right, but not the obligation, to repurchase the shares from the employee. What is a restricted stock unit?

Restricted stock units are a promise made to an employee by an employer to grant a given number of shares of the company's stock to the employer. Generally, RSUs are granted based on a vesting schedule, meaning the employer must continue to work at the company for a specified period of time before the full value of the RSUs can be awarded. In some cases, particularly for higher ranking executives, RSUs can also be tied to performance goals either individually or at the corporate level, and they can also contain covenants that can terminate the RSUs if the employee is terminated for cause.

Generally, an RSU represents stock, but in some cases an employee can elect to receive the cash value of the RSU in lieu of a stock award. Once RSUs are exercised and become actual shares of the company's stock, those shares come with standard voting rights for the class of stock issued. However, before the RSUs are exercised they carry no voting rights.

This makes sense because the RSUs are themselves not actually stock, and therefore don't carry the same rights inherent to the stock itself. RSUs are taxed as ordinary income as of the date they become fully vested, using the fair market value of the shares on the date of vesting. What is a restricted stock award? Restricted stock awards are similar to RSUs in many ways, but have their own unique differences as well. Like RSUs, restricted stock awards are a way for the company to reward employees with stock in addition to their cash compensation.

Restricted stock typically vest over time and can be subject to termination if the employer is fired, quits, or fails to meet any performance objectives as stipulated in the stock award program. However, the similarities largely stop there. Restricted stock awards come with voting rights immediately because the employee actually owns the stock the moment the award is granted. This is in contrast to RSUs, which represent the right to stock, as opposed to owning the stock but with restrictions. Also, restricted stock awards cannot be redeemed for cash, as some RSUs can be.

The tax treatment of restricted stock awards comes down to a choice by the employee. The employee can pay taxes similarly to an RSU award, with the fair market value of the restricted stock counted as ordinary income on the day of vesting.

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However, thanks to a rule called Section 83 b , restricted stock award holders can also elect to pay the ordinary income tax based on the fair market value of the stock on the day it is granted. This feature is beneficial to many highly compensated executives because it provides them with greater choice in their tax planning. Sometimes, restricted stock awards require that the employee pay a certain amount in order to accept the restricted stock.

In essence, the employee is paying for the shares, typically at a discount.