Restricted Stock Awards vs Units: A Comprehensive Comparison Guide

Restricted stock awards and units are two popular equity compensation options, but they have distinct differences. Restricted stock awards vest over time, whereas restricted stock units (RSUs) are typically paid out in cash or stock.

Both options are designed to incentivize employees and align their interests with the company's success. However, restricted stock awards often come with more stringent vesting requirements.

Restricted stock awards are typically subject to a vesting schedule, which can range from one to five years. This means that employees must work for the company for a certain period before they can exercise their stock options.

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Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs) are two forms of equity compensation that companies offer to employees. They're often used to attract and retain top talent, but they can be confusing to understand.

A Restricted Stock Unit (RSU) is a form of income or compensation for employees who remain at the company long enough for the stock to vest. Once the employee has reached the length of time necessary for the RSU to vest, the employee receives the shares as part of their compensation.

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RSUs are unfunded promises to a share of stock, giving companies flexibility in how they settle the right. This means a company can choose to settle an RSU in cash rather than shares, avoiding dilution of current shareholders. This can be particularly valuable to executives taking over in a turnaround situation.

On the other hand, Restricted Stock Awards (RSAs) involve actually receiving shares at the outset, but with restrictions on when they can be sold. Income tax is due when the stocks vest, and capital gains tax is due when they're sold.

RSAs and RSUs don't require any cash outlay for the employee, making them more desirable than options. Options require employees to spend cash to exercise their option, whereas RSUs and RSAs don't.

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RSUs can be tailored to fit your organization's objectives with different conditions.

RSUs can be settled in cash rather than shares, giving employees value without diluting current shareholders.

Companies have flexibility in how they settle RSUs, making them particularly valuable to executives in turnaround situations.

RSAs, on the other hand, provide immediate ownership of shares, subject to vesting restrictions.

RSAs are a form of 'restricted stock' where employees can't transfer or sell shares freely until vesting.

Restricted stock is an actual share of stock that the recipient receives, but the rights to sell or transfer the shares are restricted until the vesting period passes.

RSAs entitle the owner to dividend and voting rights, unlike RSUs which can include dividend equivalents but is optional for the company.

RSAs are treated like any other issued and outstanding stock when it comes to entitlement to voting and dividend rights.

RSUs automatically convert into shares of company stock after the vesting period is completed.

RSUs can vest incrementally over time through graded vesting, where employees receive ownership of a portion of the shares each year.

Cliff vesting involves an initial waiting period, followed by a large portion of the RSUs vesting all at once.

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Vesting and ownership are key aspects of restricted stock awards (RSAs) and restricted stock units (RSUs). Single-trigger RSUs simplify the vesting process by requiring only one condition to be met, providing clarity and transparency for employees.

RSAs grant immediate ownership of shares, subject to vesting conditions, whereas RSUs represent a promise to deliver shares or cash equivalent at a future date. The employee does not receive actual shares until the RSUs vest, which typically occurs after a certain period or upon achieving specific performance milestones.

RSAs and RSUs can have different vesting conditions, including time-based vesting and performance-based vesting. Vesting conditions can be similar, but RSUs can also be tied to performance metrics, providing companies with flexibility in how they incentivize and reward their employees.

Here's a comparison of RSAs and RSUs:

Time-based vesting (single-trigger RSUs) is a straightforward process that simplifies the vesting process for employees.

Single-trigger RSUs operate on time-based vesting schedules, which require employees to work for the company for a specified period before gaining access to the stock units.

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This specified period can be, for example, four years with a one-year cliff, as mentioned in the vesting conditions of RSAs and RSUs.

A triggering event occurs when the condition has been met, in which employees are granted full ownership of the RSUs or their cash equivalent.

This clarity and transparency provide employees with a clear understanding of when they will gain access to their equity compensation, making them feel more confident about the value of their equity compensation.

The vesting structure of single-trigger RSUs provides employees with a clear timeline, so they know exactly when they'll gain access to their stock units.

This can be a huge relief for employees, as they can plan their financial future with more certainty.

By understanding time-based vesting, employees can better appreciate the value of their equity compensation and feel more invested in the company's success.

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RSAs give employees immediate voting rights, allowing them to participate in company decisions and feel more involved and committed.

This is because RSA recipients become owners of the stock upon grant, even if subject to vesting conditions.

RSUs, on the other hand, do not grant voting rights until the shares are delivered upon vesting.

This means employees with RSUs have no say in company decisions until the vesting period is complete.

Here's a quick comparison of the voting rights for RSAs and RSUs:

As a result, RSAs can give employees a greater sense of ownership and control over company decisions.

Tax and accounting implications for restricted stock awards (RSAs) and restricted stock units (RSUs) can be complex. For private companies, the company must reasonably estimate the fair value of the stock when an employee is initially granted the RSA or RSU, often done by getting a valuation of the company and dividing by the number of outstanding shares to get share value.

RSUs are taxed as ordinary income upon vesting, calculated based on the fair market value of the shares on the vesting date, while RSAs are taxed as ordinary income when the stocks vest and then capital gains tax when they are sold. RSUs have no 83(b)-election option, making the significant tax burden unavoidable at the end of the vesting period.

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Here are the key tax and accounting implications to consider:

Tax implications of RSUs are straightforward: they're taxed as ordinary income upon vesting, based on the fair market value of the shares on the vesting date. Employees are responsible for income tax payments, including employment taxes, corresponding to the value of the vested RSUs.

Companies may be eligible for tax deductions related to RSUs, particularly for the compensation expense associated with granting them. However, the availability of these deductions can vary depending on factors such as the company's tax jurisdiction and the specific terms of the RSU grants.

RSUs are taxed at vesting, with the value of the shares treated as ordinary income and subject to federal income tax and payroll taxes. Unlike RSAs, there is no 83(b)-election option for RSUs, making the significant tax burden unavoidable at the end of the vesting period.

Here's a comparison of the tax treatment of RSAs and RSUs:

RSUs are considered "full value" awards since employees never have to pay for them. This represents one of the major appeals of RSUs to employees, because RSUs always have value once vested, even if the stock price plummets.

RSU and RSA Accounting Implications can be complex, but understanding the basics is crucial for companies offering equity compensation packages.

Private companies must reasonably estimate the fair value of the stock when an employee is initially granted an RSU or RSA. This is often done by getting a valuation of the company and dividing by the number of outstanding shares to get share value.

For public companies, valuation is unnecessary since the fair value of an RSU or RSA is just the current stock price.

Companies must make certain required disclosures, including the nature and terms of the arrangements, the effect of compensation expense on the income statement, and how the initial fair value measurement was made on grant date for private companies.

If an employee leaves the company before the vesting date or forfeits their right to the shares, no compensation expense is required to be recognized, and any previously recorded compensation expense and deferred compensation would be reversed.

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Restricted stock awards and units can be a complex topic, but it's essential to weigh the benefits and drawbacks before making a decision. RSUs can simplify the compensation process and motivate employees, but they also have some significant drawbacks.

RSUs are generally simpler to understand and administer compared to stock options, with straightforward vesting schedules that eliminate the need for employees to exercise options and purchase shares. They retain value even if the company's stock price declines after the grant date, which is a significant advantage.

On the other hand, RSUs can create tax liabilities for employees upon vesting, reducing the net value of the RSUs granted by companies. They also lack flexibility compared to other forms of equity compensation, such as stock options.

Here are some key benefits and drawbacks of RSUs to consider:

RSUs offer several benefits to both companies and employees. They simplify the compensation process by having straightforward vesting schedules, eliminating the need for employees to exercise options and purchase shares.

RSUs retain value even if the company's stock price declines after the grant date. This is a significant advantage over stock options, which may become worthless if the stock price falls below the exercise price.

Delayed stock dilution is another benefit of RSUs. By deferring the issuance of shares until a later date, RSUs delay stock dilution to existing shareholders, which can benefit companies that aim to avoid immediate impacts on ownership percentages.

RSUs contribute to promoting pay equity within organizations by offering employees equity compensation based on their contributions and performance rather than solely on their base salary.

Having a sense of ownership and pride in their role can increase employee satisfaction levels. This can result in higher retention rates and lower turnover costs for companies.

RSUs can provide employees with a sense of ownership and pride in their role, increasing their satisfaction levels and leading to higher retention rates and lower turnover costs.

Here are the top benefits of RSUs:

RSUs can be a bit inflexible, with fixed vesting schedules and conditions that can limit a company's ability to tailor their compensation packages to individual employees.

One of the main drawbacks of RSUs is the lack of flexibility they offer. This can make it difficult for companies to adjust their compensation packages as needed.

Tax liabilities can be a significant concern for employees who receive RSUs. Upon vesting, employees may face tax obligations that can reduce the net value of the RSUs granted by the company.

As with other forms of equity compensation, issuing RSUs can lead to shareholder dilution, which can be a concern for existing shareholders.

RSU recipients generally lack voting rights or other privileges until the RSUs have vested, which can be a drawback for some employees.

Here are the five main drawbacks of RSUs:

RSUs are an optimal choice for companies like late-stage start-ups and public companies, where managing dilution is a concern. This is because RSUs don't dilute existing shareholders when exercised, unlike stock options.

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RSUs are particularly beneficial for public companies, as they don't require employees to take any action to obtain stock. Employees receive their shares automatically when vesting conditions are met, which can be especially valuable for companies with employees who may not have the financial means to exercise stock options.

Another advantage of RSUs is that they don't require employees to make a stock purchase, which can be a significant upfront financial commitment for some employees.

RSUs can be especially beneficial for companies with employees who may not have the financial means to exercise stock options, as they don't require any cash outlay for the employee.

Here are some key differences between RSUs and RSAs:

RSUs are a great option for companies that want to provide a straightforward equity compensation plan for their employees. They're simpler to understand and manage than RSAs, and don't require employees to worry about making tax elections at the time of grant.