Restricted Stock Units (RSUs)
A form of equity compensation where an employer promises to grant company shares to an employee upon meeting vesting conditions.
What is RSUs?
Restricted Stock Units (RSUs) are a form of equity compensation in which an employer promises to grant actual company shares (or their cash equivalent) to an employee once specific vesting conditions are met — typically time-based (staying at the company for a set period) or performance-based. Unlike stock options, RSUs always have value as long as the stock has any value — the employee does not need to pay an exercise price. When RSUs vest, the fair market value of the shares is treated as ordinary income and subject to income tax and FICA withholding. RSUs have largely replaced stock options as the dominant equity compensation vehicle at large public companies, valued for their simplicity and guaranteed value.
Example
An engineer at Google receives 400 RSUs vesting over 4 years (100/year). When the first 100 vest, Google's stock is at $175/share. The $17,500 value is added to the engineer's W-2 as ordinary income, subject to federal, state, and FICA taxes. The engineer now owns 100 shares — their cost basis is $175/share for any future capital gain calculation.