April 5, 2022
When it comes to employee equity compensation, private companies have a lot of options to choose from. Two of the most common are restricted stock awards (RSAs) and restricted stock units (RSUs).
This post will break down the key differences between RSA and RSU to help you decide which option is best for your company. Let's get started!
Restricted stock is a form of equity compensation. The structure can either be a restricted stock award or a restricted stock unit. The differences between the two employee equity structures can have an influence on how valuable the equity will be.
Company shares granted from restricted stocks may not be sold or transferred for a certain period. The restricted period typically lasts several years, and only when the vesting schedule has been met can the equity be sold or exercised.
Restricted stock may be subject to forfeiture if the holder fails to meet certain vesting conditions, such as remaining employed with the company for a certain number of years.
Restricted stock awards allow the recipient to own shares of the company's stock upon granting but with certain restrictions on when and how those shares can be sold. The restricted stock award typically has a time-based vesting schedule, which is the length of time that the recipient must work for the company before being able to exercise the shares.
The restricted stock award is often used to recruit highly valued, in-demand candidates to work with a company and reward key employees for meeting certain milestones.
The awards may be given to new hires as part of the signing bonus or to existing employees who have been with the company for five or ten years, for instance. RSAs can be an effective tool for retaining and motivating employees and can also be used to align employees' interests with those of shareholders.
Once someone is granted RSAs, that person has to make a decision to accept the grant or decline it. If the employee chooses to accept the grant, a purchase price typically applies, and the employee may need to pay it to the employer for the grant.
Following the acceptance of the grant and settlement of the payment according to the RSA agreement, the employee has to wait for the grant to vest. The vesting period may be time- or performance-based. This means there may be a restricted period from the RSA grant date or a performance-based milestone, typically tied to a specific achievement.
When the grant vests, the receipt can either be shares of the company stock or a cash equivalent, which will also depend on the RSA agreement.
RSAs have certain advantages from a corporate standpoint.
All of these factors can contribute to a company's overall success.
As companies look for ways to attract and retain key employees, RSAs have become increasingly popular. However, companies should be aware of a few disadvantages to using this type of compensation.
For these reasons, restricted stock awards should be used carefully and only when they are the best compensation for the company and its employees. Aside from these, you should also take note of legal considerations, such as capital gains tax and ordinary income tax.
Restricted stock units are stock-based compensation plans companies grant to their employees. Unlike traditional stock options and restricted stock awards, which typically require employees to buy company shares, RSUs grant the shares when the vesting requirements are met.
RSUs typically vest over time, meaning that employees must remain with the company for a certain amount before selling the shares. They may also require the performance of specific company goals to fully vest, such as a merger, acquisition, IPO, or any other landmark event.
RSUs can be an attractive form of compensation for employees since they provide a direct ownership stake in the company when they fully vest without requiring them to purchase stocks. They may also be worth more than traditional stock options, as they don’t have the potential to go underwater or lose their value.
RSUs can have a single-trigger or double-trigger vesting schedule.
The vesting schedule for single-trigger RSUs is often time-based, but may also be a single company performance goal or liquidity event. The recipient or employee may need to be with the company for the whole predetermined period so the grants vest. RSUs are typically offered by public companies, as they don’t have an immediate impact on the cap table, unlike RSAs.
Double-trigger RSUs (also known as pre-IPO grants) are most suitable for early-stage company equity. More private companies are offering double-trigger RSUs as employee equity as they present a number of advantages, especially compared to other forms of employee equity compensation.
The first vesting requirement for double-trigger acceleration may be a time-based goal. The second “trigger” is a liquidity event, such as an acquisition or initial public offering (IPO). Upon meeting the two vesting requirements and when the double-trigger RSUs fully vest, they’re paid out as shares of stock.
Learn more about double trigger RSUs.
RSUs give the employee the right to receive shares of the company stock at some future point, typically when that employee meets certain vesting conditions, e.g. remaining with the company for a certain period of time and/or attainment of a company liquidity event.
RSUs do not carry this risk since the units are typically vested immediately. The employee has the right to receive the shares regardless of whether the stock price goes up or down.
As a result, RSUs can provide stability and security for employees receiving them. In addition, restricted stock units can be an effective tool for attracting and retaining top talent.
Because they are typically vested immediately, RSUs give employees a greater incentive to stay with the company for the long term. As a result, RSUs can help companies to build a solid and stable workforce.
Disadvantages of RSUs
Although restricted stock units (RSUs) offer some benefits to employees, also consider the potential drawbacks before offering them as part of your company's compensation package.
One disadvantage of RSUs is that they may be subject to vesting requirements, which means that your employees may only receive the total value of their award once a certain number of years have passed. Additionally, RSUs may be subject to forfeiture if they leave your company before they vest, which means they could forfeit a significant portion of their compensation.
Another potential downside of RSUs is that employees may be required to pay ordinary income tax at a higher rate than other forms of equity compensation, such as stock options. Finally, suppose your company's stock value decreases after employees receive their RSUs. In that case, they may end up with a less valuable award than they would have had with another form of equity compensation.
Stock awards are a great way to take advantage of the 83(b) election, which allows employees to report awards as ordinary income in that year and then start a capital gain holding period. The alternative would be paying taxes when it's fully vested, but by doing so now, these may only apply up to 35%.
Restricted stock units are not eligible for an 83(b) election because there is no actual transfer of shares when the grant occurs. On the vesting schedule, the value of the employee's stock will be taxed as ordinary income. After they sell the shares, there's likely to be either an increase or decrease in capital.
Vesting periods are time-based or performance-based. This means the employee will get their shares after a certain period, depending on what type it is and how long they've been loyal to the company.
Many companies have vesting schedules that require employees to work at the company for a certain period before receiving their shares.
Restricted stock units do not pay dividends until they vest.
The employee will be able to exercise voting rights beginning immediately, as they are an owner of the stock.
Restricted stock units do not carry voting rights until they become vested.
If you're ready to learn more RSU and how Upstock can make it simpler for you to distribute employee equity, we’d love to hear from you! Get started with a demo to learn how Upstock makes it easy to offer your workers equity.
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