Restricted Stock Units (RSU)
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Table of Contents
What Are Restricted Stock Units (RSU)?
Many competitive companies offer restricted stock units (RSUs) to new hires as part of their total rewards package to differentiate themselves amidst stiff market competition. Employees and job seekers alike are eager for RSUs to be part of their offer. RSUs are company issued stock units that are not completely transferable from the company to the individual until set conditions or restrictions have been met. RSUs are often offered by companies backed by venture firm capital. RSUs function as an employer promise to grant restricted stock at a specified point in the future.
Should Companies Offer Restricted Stock Units (RSU)?
RSUs can be a powerful hiring and retention tool for companies looking for competitive ways to bring in and keep top talent. RSUs, however, are not the silver bullet solution to solving hiring and retention problems as they seem to be. Before offering RSUs as part of your total compensation package, it’s important to understand how they work to help determine if they are a smart move for your organization.
Benefits of Offering Restricted Stock Units (RSUs)
- Flexible option. RSUs have a vesting schedule over the course of several years. This makes them a flexible option for companies that want to attract top talent but want to avoid the risk of a new employee taking the stock and immediately leaving. RSUs offer a way to offer a new employee a competitive compensation package while incentivizing them to stay and invest in the organization through its goals.
- Appreciation. The primary draw of RSUs is the allure of a company growing significantly and having stock prices soar and appreciate. Anyone who owns some of that stock could make a lot of money if they stick around and ride to the top. RSUs gain part of their attraction from other major companies like Apple, Google, Microsoft and Amazon who went from humble beginnings to massive, publicly traded organizations with high stock prices. People are eager to join a privately held, venture capital backed firm that could become the next “Apple.”
- Ownership. RSUs give an employee ownership stake in the company, which can give them a sense of belonging and purpose. Since RSUs appreciate based on company performance, employees are incentivized to work hard to help the organization reach their goals.
- Early Investment. RSUs offer early stage, venture capital backed startups a competitive way to attract talent, even when competing with more established companies. These younger companies may not be able to directly compete with the salaries of publicly traded organizations, but offering RSUs allows younger companies to give employees the opportunity to “stake a claim.” Many people are interested in that.
Disadvantages of Offering Restricted Stock Units (RSU)
- Long vesting periods. RSUs tend to work phenomenally as a talent attraction tool, but sometimes do little for employee retention because of long vesting periods. Because of the vesting periods, or the period of time before an employee can take the stock (typically 4-5 years), RSUs may not be enough to keep an employee with a company if they are allured by higher starting salaries from competitors. Essentially, RSUs have a strong initial charm but may lose their luster before the intended maturation time.
- Complexity. RSUs initially sound enticing to potential hires, but they can be complex and difficult to fully understand. This makes it difficult to keep employees engaged.
- Conditions. Some RSUs have a single condition: the fulfillment of a certain length of time. Other RSUs require an additional trigger, like the fulfillment of another requirement such as a task or project. This is not necessarily a disadvantage to the company because it can provide another assurance that the employee will provide financial value, but it can be a disadvantage to the employee, who may see the company as setting hoops to jump through.
How Do Restricted Stock Units (RSU) Work?
Even though RSUs can sound complicated initially, they are easy enough to understand after you grasp the basic mechanisms. Here are a few of the tenets of how RSUs work:
RSUs have a single or double trigger. A single trigger is usually a certain period of time called a vesting schedule. The vesting schedule typically happens gradually over time and is not usually all or nothing. RSUs may vest 20% per year over five years or offer similar vesting schedules. A double trigger is a secondary requirement for the employee receiving the stock in addition to the first trigger. These double triggers may be a specific project, task or performance requirement.
One of the defining characteristics of RSUs is the vesting schedule. There are several different types of vesting schedules.
- Graded vesting. In this type of vesting schedule, a certain percent of the granted stock is vested each year until the entire stock is granted.
- Cliff vesting. With cliff vesting, it’s all or nothing: 100% of the stock is vested at a certain point of employment. If any employee does not remain with the organization until this time, they receive none of the stock.
- Performance based vesting. This vesting schedule is based on the completion of a project or launching of a product instead of a time requirement. This option is attractive to employers because it guarantees performance and not just employee tenure.
- Liquidity event vesting. Events like an IPO, acquisition, or merger can trigger the vesting of RSUs.
RSUs are promised from the employer directly to the employee and cannot be transferred. Shares will not be transferable until they are vested, but once they are publicly traded, they can be traded at any time. RSUs are unable to be sold while a company is privately held, so their appreciation is tied to a company successfully making an initial public offering.
How Can an Employer Begin Offering Restricted Stock Units (RSUs)?
RSUs are considered a form of compensation issued by an employer in the form of company shares. RSUs can be offered by both public and private organizations, but private organizations should only offer RSUs after a stable valuation, which could happen after a series of venture-backed capital funding. RSUs are a more stable option for organizations to offer because they have no value until they vest, and then they function as traditional stock options.
According to Carta, on average, companies switch to RSUs 5.5 years after incorporation, at a post-money valuation of 1.05B.
Restricted Stock Unit Example
One of the best ways to understand RSUs is to look at a hypothetical scenario of how they work in the real world. Read on to review an example of RSUs provided by Investopedia.
“Suppose Madeline receives a job offer. Because the company thinks Madeline’s skill set is valuable and hopes she remains a long-term employee, it offers her 1,000 RSUs in addition to a salary and other benefits.
The company’s stock is worth $10 per share, making the RSUs potentially worth an additional $10,000. To give Madeline an incentive to stay with the company and receive the 1,000 shares, it puts the RSUs on a five-year vesting schedule.
Madeline receives 200 shares after one year with the company, another 200 shares after the second year, and so on until she acquires all 1,000 shares at the end of the vesting period.
Depending on the company’s stock performance, Madeline may receive more or less than $10,000.”
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Tyler empowers Talent Acquisition professionals, HR business leaders, and key stake holders to develop and execute talent management strategies. He is igniting the talent acquisition process through: team building, accurate time to fill forecasting, driving creative talent sourcing, and fine-tuning recruiting team effectiveness.