RSU stands for Restricted Share Unit. It is a type of equity compensation granted to employees, typically as a part of their overall compensation package.
Key Characteristics of RSUs
- Granted to employees with a specified vesting period
- Vesting is typically based on time, rather than company performance
- Once vested, RSUs are converted into shares of company stock or the cash equivalent
- Commonly used by both public and private companies
Purpose of RSUs
RSUs serve several purposes for companies:
- Encourage employee retention by offering future financial rewards
- Align the interests of employees with those of shareholders, as employees become partial owners of the company
- Provide a straightforward and predictable form of equity compensation
How RSUs Work
1. Grant: Employees are granted RSUs, typically at the time of hire or as part of a performance bonus.
2. Vesting Period: RSUs have a vesting schedule, usually tied to the employee’s length of service with the company (e.g., 3 or 4 years).
3. Vesting: Upon completion of the vesting period, RSUs convert into company shares or their cash equivalent.
4. Settlement: The employee receives shares or cash, which they can then sell, subject to any trading restrictions or tax implications.
Comparison to Other Equity Compensation
RSUs differ from other forms of equity compensation:
- Unlike stock options, RSUs do not require the employee to purchase shares; they are granted automatically upon vesting.
- Unlike Performance Share Units (PSUs), RSUs vest based solely on time, not company performance.
- RSUs have value as long as the underlying shares have value, making them less risky than stock options.
Considerations for Employees
Employees granted RSUs should consider:
- The vesting schedule and the timeline for receiving shares
- The potential value of RSUs based on the company’s stock price at the time of vesting
- Tax implications, as RSUs are typically taxed as income upon vesting
- Any trading restrictions that might apply after receiving the shares
In summary, RSUs are a form of equity compensation that offers employees a predictable and straightforward path to becoming company shareholders, making them a popular tool for employee retention and alignment of interests with the company’s long-term success.