For those who have built a career in employee equity, the terms and expressions used are rolled off at machine-gun speed, but what happens if you’re taking your first steps into the world of employee stock ownership?
Three letter acronyms (TLAs) can be confusing, and when it comes to employee equity, you'll frequently hear the terms RSAs and RSUs bandied around. Restricted Stock Awards and Restricted Stock Units are very popular types of equity plans used by companies to help them retain key staff for longer. Stock is called 'restricted' because although you own the shares, you still have to earn them, based on a set of conditions.
So how do they differ from each other?
A Restricted Stock Award (RSA) is a grant that permits you the right to purchase shares at the fair market value (FMV), a discount or at no cost, on the day they are granted. They need to be paid for at the time they are granted.
A Restricted Stock Unit (RSU) is a grant of company stock but you do not actually own or receive the shares until the restrictions lapse, or 'vest', at a later date. You therefore do not have to pay for them at the time they are granted. Once the restrictions have been met, you then receive the shares or cash, as outlined in the plan rules.
There are several legal and tax compliance differences between RSAs and RSUs:
As RSAs are purchased on the grant date they are therefore subject to tax from the date of grant. In the US this makes them eligible for 83(b) elections.
RSUs are not purchased, therefore tax is deferred until shares are granted after a time limit has arisen. In the US they are not eligible for 83(b) elections.
RSAs usually have time-based vesting conditions.
RSUs often have multiple vesting conditions before the employee owns the shares outright.
- Termination terms
Unvested RSA shares are usually subject to repurchase upon termination, however this can differ depending on the plan rules.
Unvested RSU shares are subject to criteria based on the reason for termination.
- Release of shares
With RSAs and RSUs the share release dates are fixed, however with RSUs the release of shares may be deferred until a later date. This means you, the employee, must pay statutory minimum taxes as determined by the employer at vesting, but payment of all other taxes can be deferred until the time of distribution, when you actually receive the shares. You can choose to defer receipt of the shares or cash equivalent, depending on the company’s plan rules.
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