RSU and RTU: The Difference Between Traditional and Unconventional

Casey Fenton

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September 7, 2023

Equity compensation options come aplenty. You can take your pick from the traditional and unconventional, such as stock options, Restricted Stock Unit and Restricted Token Unit or RSU and RTU. The difference between the two options might be small, but may prove to be more beneficial for your company.

In this article, we will delve into the basics of RSUs and RTUs, the difference from stock options, their tax treatments, accounting considerations, and more. By the end of this guide, you will be equipped with the knowledge necessary to make informed decisions when structuring non-cash remuneration plans for your employees.

Overview of Restricted Stock Units and Restricted Token Units

Restricted Stock Units (RSUs) and Restricted Token Units (RTUs) are forms of equity compensation granted by companies to their employees. They provide employees with the opportunity to own a stake in the company, aligning their interests with the company's long-term success.

Equity compensation, which is also called stock-based compensation, or share-based compensation, is a powerful tool used by early-stage companies to attract, retain, and motivate employees. It involves granting employees a share in the company's ownership, allowing them to benefit financially from the company's success. The most common type of share-based compensation is stock options, though there are many types to choose from.

RSUs represent a promise to deliver a specific number of company shares to the employee at a future date. Unlike common stock options or stock awards, RSUs do not grant immediate ownership of the shares. Instead, they are subject to vesting schedules, which determine when the shares are accessible to the employee.

On the other hand, RTUs are a relatively newer form of equity compensation that leverage tokens or digital assets rather than traditional company shares. RTUs provide employees with the right to receive a specified number of tokens in the future, based on predetermined conditions and vesting periods.

Restricted Stock Units

Restricted Stock Units (RSUs) are a form of equity compensation commonly used by private companies to reward and retain their employees. RSUs represent a promise to deliver a specific number of company shares to the employee at a future date, typically upon the fulfillment of certain conditions, such as the completion of required performance milestones.

While RSUs do not grant immediate ownership of the shares, they do provide employees with a vested interest in the company's stock value. Take note, however, that RSUs have no tangible value until the stocks are exercised.

RSUs have distinct features that make them an attractive compensation option:

  • Grant of Future Shares: When an employee is awarded RSUs, they are granted the right to receive a specific number of shares in the future, typically based on the fair market value of the company's stock at the time of grant.

  • Vesting Schedules: RSUs are subject to vesting schedules, which specify the timeline and conditions under which the shares will become fully owned by the employee. Vesting periods can range from a few months to several years, with commonly used structures such as cliff vesting (where shares vest in full after a specific period) or graded vesting (where shares vest gradually over time).

  • Dividend Equivalent Rights: RSUs may also include dividend equivalent rights, allowing the employee to receive the cash equivalent or additional RSUs equivalent to the dividends that would have been paid if they owned the underlying shares during the vesting period.


Grant Date and Vesting Schedule

The grant date of RSUs is the date on which the company formally awards the RSUs to the employee. It is significant for determining the fair market value of the shares at that specific point in time.

Vesting schedules outline the timelines and conditions for the RSUs to become fully vested. It is crucial to establish a well-defined vesting schedule that aligns with the company's objectives, employee engagement and retention goals, and performance expectations.

Tax Treatment and Considerations

Understanding the tax treatment of RSUs is essential for both employees and employers. Let's explore the key tax considerations associated with RSUs:

  • Taxable Income and Ordinary Income: RSUs are subject to taxation as ordinary income upon vesting. The fair market value of the vested RSUs on the date of vesting is considered taxable income for the employee. It is important to note that RSUs do not provide the same tax advantages as qualified Incentive Stock Option (ISO).

  • Alternative Minimum Tax (AMT): The value of RSUs at the time of vesting may also be subject to the Alternative Minimum Tax (AMT). The AMT is an alternative tax system that ensures individuals with higher income levels pay taxes at a minimum amount.

  • Capital Gains Tax: If an employee sells the vested RSU shares at a later date, any appreciation in value may be subject to capital gains tax. The tax rate will depend on the holding period and the individual's tax bracket at the time of sale.

Accounting Treatment and Reporting

From an accounting perspective, RSUs are typically considered a liability on the company's balance sheet until they are fully vested and settled. Once the RSUs vest, they are no longer a liability but are treated as a reduction of equity.

Companies must adhere to Generally Accepted Accounting Principles (GAAP) when accounting for RSUs. This includes accurate tracking of RSU grants, vesting schedules, fair value measurements, and appropriate disclosure in financial statements.

Comparison to Common Stock Options

RSUs and stock options are both popular forms of equity compensation, but they have distinct differences. While RSUs grant employees the right to receive shares at a future date, stock options provide employees with the option (but not the obligation) to purchase company stock at a predetermined exercise price. 

One key difference between RSUs and stock options is the ownership aspect. RSUs represent an actual ownership interest in the company's stock, while stock options provide the opportunity to buy stock but do not grant immediate ownership.

Additionally, the taxation status and accounting considerations for RSUs and stock options vary. RSUs are subject to ordinary income tax upon vesting, while stock options may trigger taxes upon exercise, depending on the type of options and specific tax regulations.

Restricted Token Units

In today's rapidly evolving business landscape, token-based compensation has emerged as an innovative approach to share-based compensation. Restricted Token Units (RTUs) offer an alternative to traditional forms of equity awards, such as restricted stock units (RSUs), restricted stock awards, and stock options. RTUs utilize blockchain technology and digital tokens to provide employees with a stake in a company's success.

Token-based compensation aligns with the growing popularity of blockchain and cryptocurrency technologies, offering unique benefits and considerations for both companies and employees. Let's delve into the definition, characteristics, and implications of RTUs.

Definition and Characteristics of RTUs

RTUs represent a promise to deliver a specified number of digital tokens to employees at a future date, subject to certain conditions. These tokens can have various characteristics, depending on the specific token design and the company's objectives. Here are some key characteristics of RTUs:

  • Tokenized Ownership: RTUs provide employees with tokenized ownership in a company. Instead of traditional stock shares as in the case in stock options and RSUs, employees receive digital tokens that may represent equity or other rights within the company.

  • Blockchain and Smart Contracts: RTUs leverage blockchain technology, utilizing a smart contract to enforce the terms and conditions of the token-based remuneration plan. A smart contract ensures transparency, traceability, and automation of processes, reducing administrative burdens.

  • Token Utility: RTUs can have utility beyond mere ownership. Depending on the company's business model and token design, RTUs may provide access to specific products or services, voting rights, dividend participation, or other benefits.

Token Options vs. Traditional Stock Options

While both token options and traditional stock options provide employees with the opportunity to acquire company equity, there are notable differences between the two.

Stock options grant employees the right to buy company stock at a predetermined price, known as the exercise price or strike price. In contrast, token options provide employees with the ability to acquire digital tokens, often at a predetermined price denominated in cryptocurrency.

Token options and traditional stock options differ in terms of underlying assets, exercise mechanisms, and the potential for liquidity and value realization. Token options may offer increased flexibility and accessibility, particularly in industries that embrace blockchain technology and tokenization.

Token-Based Awards and Token Compensation

Token-based awards encompass various forms of token-based compensation beyond RTUs. Companies may offer token grants, token bonuses, or other forms of token-based incentives to employees. These awards can serve as a means to recognize and reward contributions, align employee interests with company goals, and foster a sense of ownership and engagement.

Token compensation can be particularly relevant in industries that heavily rely on blockchain technology, digital assets, or decentralized networks. By providing employees with exposure to the company's tokenized ecosystem, organizations can foster a deeper understanding and commitment to the underlying technology and business model.

Tax Implications and Considerations

The taxation status of RTUs can be complex, as it often involves navigating the evolving landscape of cryptocurrency taxation. The tax implications may vary depending on factors such as the classification of tokens, the jurisdiction, and the specific tax regulations applicable.

It is crucial for both employees and employers to consult with tax professionals who specialize in cryptocurrency taxation to ensure compliance and optimize tax planning strategies. Proper documentation and record-keeping are essential to accurately report and account for the tax implications of token-based compensation.

Accounting Treatment and Reporting

The accounting or auditing treatment of RTUs follows Generally Accepted Accounting Principles (GAAP) and specific guidance from accounting standard-setting bodies. The fair value of RTUs is recorded as a liability on the company's balance sheet until the tokens are delivered or the liability is settled.

Companies should work closely with accounting professionals who have experience in token-based compensation to ensure accurate and compliant financial reporting.

Key Differences between RSUs and RTUs

So what’s the main difference between Restricted Stock Units (RSUs) and Restricted Token Units (RTUs)? The distinction lies in the underlying asset. RSUs grant ownership of traditional company stock, while RTUs provide ownership of digital tokens, often associated with blockchain technology and cryptocurrency.

Legal and Regulatory Considerations

When implementing RSUs and RTUs, companies must navigate securities laws and regulations, as well as the Internal Revenue Code (IRC) requirements.

Securities Laws and IRC

RSUs are typically subject to securities laws as they involve the issuance of company shares. The Securities and Exchange Commission (SEC) regulates the issuance and trading of securities, ensuring compliance with disclosure requirements and investor protection.

RTUs, depending on their characteristics, may also fall under securities regulations. Companies must analyze whether the tokens offered as part of RTUs are classified as securities and comply with the applicable securities law or laws.

Regarding tax regulations, both RSUs and RTUs have specific provisions under the IRC that dictate their tax treatment upon vesting or delivery. Compliance with these regulations is essential to avoid penalties and ensure accurate reporting.

Employment Laws and Financial Advisor Involvement

Employment laws play a role in both RSUs and RTUs, as these equity remuneration plans are typically part of an employee's overall compensation package. Companies must consider labor and employment policies, such as those related to discrimination, equal pay, and employee rights, when designing and implementing these plans.

In some cases, involving a financial advisor can be beneficial for employees who receive RSUs or RTUs. Financial advisors can provide guidance on the financial planning aspects, tax implications, and investment strategies related to these share-based compensation plans. However, companies should ensure that the involvement of financial advisors complies with any legal and regulatory requirements.

Liquidity and Value Realization

Liquidity and the ability to realize value differ between RSUs and RTUs.

Similar to stock options, RSUs typically provide employees with the potential for liquidity and value realization upon vesting. Once stock options and RSUs vest, employees have the option to sell the underlying shares on the open market, potentially realizing gains based on the market value at that time.

RTUs, especially those associated with emerging cryptocurrencies or token ecosystems, may present different liquidity scenarios. The ability to convert tokens into cash or trade them on established exchanges may vary, depending on the token's market availability and liquidity. Employees with RTUs may need to wait for liquidity events, such as token sales, initial coin offerings (ICOs), or an initial public offering (IPO), to realize the full value of their token-based compensation.

Company Perspective and Employee Retention

From a company’s perspective, the choice between RSUs and RTUs can impact employee engagement and retention.

RSUs and stock options, which offer ownership in the form of traditional company stock, may be more familiar and attractive to employees, particularly those who value a direct stake in the company's success. RSUs align employees' interests with those of existing shareholders, fostering a sense of ownership and potentially enhancing employee loyalty and retention.

RTUs, especially in industries leveraging blockchain technology, may appeal to employees who are enthusiastic about the potential future growth and utility of digital tokens. The prospect of participating in a tokenized ecosystem may attract individuals interested in the technological advancements and potential financial upside associated with cryptocurrencies and blockchain.

Best Practices and Considerations

As a CEO or small business owner, it is essential to implement best practices and consider various aspects when designing your employee compensation plans. Communication and education for employees, alignment with company goals and strategies, compliance with securities laws and employment regulations, and collaboration with financial advisors are key considerations that can optimize the effectiveness of your equity remuneration programs.

Communication and Education for Employees

Effective communication and education are vital when implementing RSUs or RTUs as part of a stock award program. Companies should prioritize clear and transparent communication to ensure employees understand the details, benefits, and potential risks associated with these plans.

Regular communication should cover topics such as the purpose of the share-based compensation program, the eligibility criteria, vesting schedules, tax implications, and any relevant updates or changes. Companies tend to use various channels such as employee meetings, newsletters, intranet portals, or dedicated communication platforms to disseminate information.

Education is equally important to help employees grasp the nuances of RSUs and RTUs. Companies should provide resources and training sessions to enhance employees' understanding of stock-based compensation, including the differences between RSUs and RTUs, tax implications, valuation methods, and any legal or regulatory requirements.

Alignment with Company Goals and Strategies

When implementing RSUs or RTUs, it is essential to align these employee remuneration plans with the company's broader goals and strategies. The stock-based compensation program should support the company's vision, mission, and long-term objectives.

By tying employee compensation to strategic objectives, companies can incentivize employees to contribute to the company's growth and success. This alignment helps foster a sense of shared purpose, motivating employees to work toward common goals.

Compliance with Securities Laws and Employment Regulations

Compliance with securities laws and employment regulations is critical to avoid legal and regulatory issues. When offering RSUs or RTUs, companies must adhere to applicable securities laws, ensuring proper registration or exemption requirements are met.

Employment regulations, such as those related to discrimination, equal pay, and employee rights, should also be considered to ensure equity and fairness in the implementation of these plans. It is crucial to consult with legal professionals knowledgeable in securities laws and employment regulations to navigate these complex areas successfully.

Collaboration with Financial Advisors

Engaging with financial advisors can provide valuable guidance and expertise when designing and implementing employee compensation programs involving RSUs or RTUs. Financial advisors can assist employees in understanding the tax implications, investment strategies, and financial planning aspects related to their non-cash compensation.

Companies should collaborate with financial advisors who have experience in stock-based compensation and a deep understanding of the specific nuances of RSUs and RTUs. These advisors can help employees make informed decisions, optimize their financial strategies, and effectively manage their remuneration benefits.

Regular communication between the company, employees, and financial advisors can ensure a comprehensive and integrated approach to share-based compensation. This collaboration can help employees maximize the benefits of RSUs or RTUs, make well-informed financial decisions, and plan for the long-term impact of their non-cash remuneration.

Conclusion

In conclusion, understanding the differences between RSUs and RTUs is essential for CEOs and small business owners seeking to design equitable and effective compensation plans. By considering factors such as the nature of compensation, legal and regulatory aspects, liquidity and value realization, and employee retention, you can make informed decisions that align with your company's goals and vision.

Embrace the future of share-based compensation, embrace growth, and create a prosperous path for your business and employees. Remember, knowledge is power, and when it comes to equity compensation, informed decision-making can be a catalyst for success.

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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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