What are restricted stock and restricted stock units (RSUs), and how do they differ?
Both restricted stock and RSUs are considered "full value" stock grants. This means that you receive the entire value and ownership of each share when it vests. The vesting requirement is what makes the grant "restricted."
Example: You receive a grant of 1,000 shares. At vesting the stock price is $15. You now have company stock valued at $15,000.
This table briefly shows some differences between restricted stock and restricted stock units:
|Time of share issue||Grant (held in escrow)||Vesting or delivery|
|Voting rights?||Yes||Not until after shares are delivered to you|
|83(b) election available?||Yes||No|
|Social Security and Medicare taxes||At vesting||At vesting|
|Income tax (in the United States*)||At vesting||At share delivery|
|Deferral available?||No||Yes, with a proper 409A election|
|Dividend rights?||Yes||No, but company plan may provide dividend equivalents|
* For the tax treatment of restricted stock and RSUs in other countries, see the Global Tax Guide elsewhere on this website.
Explaining The Differences In Detail
The principal traits of restricted stock include the following:
Normally, the grant vests in increments over several years; with cliff vesting, all at once.
During the restricted period (i.e. the vesting period), dividends are paid, and grant-holders have voting rights, like shareholders.
Under Section 83(b) of the tax code, you can elect to be taxed on the value at grant rather than on the value at vesting—a tax flexibility that is not available with RSUs. This election allows you to pay tax on the lower value at grant, and not at vesting when you’re confident the stock price will be higher, and also start the capital gains holding period earlier. To make the election, you need to file it with the IRS within 30 days of the grant.
Some private companies grant early-exercise stock options that are immediately exercisable into restricted stock with its own vesting schedule.
Restricted stock units have many similarities, including that both represent compensation equal to the value of a share of stock. But important differences exist:
The stock itself is not issued or outstanding until the actual release of the shares. Technically, RSUs are an unfunded promise to issue a specific number of shares (or a cash payment) at a future time once vesting conditions have been satisfied. Stock-settled RSUs are much more common than cash-settled RSUs (which are subject to liability accounting), and they are used widely enough to rival the use of standard restricted stock.
Under most RSU plans, such as RSU grants at Amazon, Microsoft, and Intel, the delivery of shares occurs at vesting. These plans are similar in concept to standard time-vested restricted stock. Other RSU plans have a tax-deferral feature that lets you select a date for share delivery, or the company specifies one (e.g. retirement).
Holders of RSUs have no voting rights and, depending on the plan details, may or may not receive dividend equivalents.