What Is the Difference Between a Restricted Stock Unit and a Restricted Stock Award?
Which stock bonus structure is right for you? Find out with this breakdown.
Over the past 10 years, the structure of common stock option bonuses has shifted. This has been a result of changing accounting rules and regulations, and it has major implications for employees and companies of all shapes and sizes.
Two of the most popular stock bonus structures today are the restricted stock unit (RSU) and the restricted stock award. Let's compare and contrast to help you understand which is better for you.
What is a restricted stock unit?
Restricted stock units are a promise made to an employee by an employer to grant a given number of shares of the company's stock to the employer. Generally, RSUs are granted based on a vesting schedule, meaning the employer must continue to work at the company for a specified period of time before the full value of the RSUs can be awarded.
In some cases, particularly for higher ranking executives, RSUs can also be tied to performance goals either individually or at the corporate level, and they can also contain covenants that can terminate the RSUs if the employee is terminated for cause.
Generally, an RSU represents stock, but in some cases an employee can elect to receive the cash value of the RSU in lieu of a stock award.
Once RSUs are exercised and become actual shares of the company's stock, those shares come with standard voting rights for the class of stock issued. However, before the RSUs are exercised they carry no voting rights. This makes sense because the RSUs are themselves not actually stock, and therefore don't carry the same rights inherent to the stock itself.
RSUs are taxed as ordinary income as of the date they become fully vested, using the fair market value of the shares on the date of vesting.
What is a restricted stock award?
Restricted stock awards are similar to RSUs in many ways, but have their own unique differences as well. Like RSUs, restricted stock awards are a way for the company to reward employees with stock in addition to their cash compensation. Restricted stock typically vest over time and can be subject to termination if the employer is fired, quits, or fails to meet any performance objectives as stipulated in the stock award program.
However, the similarities largely stop there. Restricted stock awards come with voting rights immediately because the employee actually owns the stock the moment the award is granted. This is in contrast to RSUs, which represent the right to stock, as opposed to owning the stock but with restrictions. Also, restricted stock awards cannot be redeemed for cash, as some RSUs can be.
The tax treatment of restricted stock awards comes down to a choice by the employee. The employee can pay taxes similarly to an RSU award, with the fair market value of the restricted stock counted as ordinary income on the day of vesting. However, thanks to a rule called Section 83(b), restricted stock award holders can also elect to pay the ordinary income tax based on the fair market value of the stock on the day it is granted. This feature is beneficial to many highly compensated executives because it provides them with greater choice in their tax planning.
Sometimes, restricted stock awards require that the employee pay a certain amount in order to accept the restricted stock. In essence, the employee is paying for the shares, typically at a discount. This structure can reduce the tax burden for the employee because the taxes paid on the restricted stock award will be based on the difference between the value and the amount the employee paid, instead of the total value of the stock.
For employees without high salaries, this requirement can be a major issue with restricted stock awards. This is part of the reason why RSUs have gained popularity in recent years.
Every company and employee is different. Weigh your options as such.
While similar in most regards, the differences between RSUs and restricted stock awards can have a major impact on how valuable a stock bonus can be. It's critical to consult with an accountant who has experience with various stock award structures to ensure you maximize the value of your RSUs or restricted stock based on your own personal situation.
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Difference rsu and stock options

Bryan Springmeyer is a California corporate attorney who represents startup companies.
The information on this page should not be construed as legal advice.
What's the Difference?
Restricted stock and restricted stock units (RSUs) are different things. "Units," which are used in a variety of different executive compensation instruments, generally represent a measurement of contractual rights to a company's stock. Often, the measurement is 1:1, meaning that each unit is exchanged for one share of stock upon the "settlement" of the units. In the case of RSUs, the amount of units that are earned by the employee vests similar to the common provisions of restricted stock. Employees earn units under the vesting conditions of the agreement, and are contractually entitled to exchange the units for stock or cash or some combination of the two depending upon the terms of the agreement.
Restricted stock, on the other hand, is a grant of stock that has certain vesting conditions, usually related to the passage of time and continued employment. The holder has legal title to the stock, which is subject to the company's contractual right to repurchase if the vesting conditions are not met (i. e., the employee/founder is terminated or leaves the company).
Using One or the Other.
When a startup has implemented an employee incentive plan that allows for grants of restricted stock or restricted stock units, the plan administrator may consider a couple of different factors in deciding which instrument to use.
Federal Income Tax - property, including stock in a company, triggers certain tax laws if it is given in exchange for service to a company. This results in income tax on the fair market value of the stock. This is particularly troubling for private company employees, since their ability to liquidate the stock to meet their tax burden is limited.
Restricted stock is optimal when the company has little to no value and the recipient makes an 83(b) election. Otherwise, this instrument may result in huge tax burdens on the employee recipient.
As with other forms of equity-based nonqualified deferred compensation, such as stock options, RSUs allow the recipient to defer recognition of income until the point when they exercise their contractual right to stock, assuming compliance with 409A. In a privately held company, the employee may be in a better position to liquidate their stock to pay their tax burden. Plans may also provide for cash payments, up to and exceeding the tax burden of the recipient, which could alleviate that concern.
Shareholder Treatment - Another consideration for management and the plan administrator is whether they want the recipients to become shareholders in the company. Restricted stock recipients typically have full rights as a shareholder for each of the shares they hold - whether they are vested or not. Since RSUs are not actual stock in the company, but rather a contractual right to such stock, the grant recipient only acquires shareholder status when, and to the extent, that the company settles the right with stock. Shareholder status is significant since shareholders vote on important corporate matters, have legal rights as minority shareholders, and the number of shareholders can impact a company's ability to remain private.

How Restricted Stock and RSUs Are Taxed.
Employee compensation is a major expenditure for most corporations; therefore, many firms find it easier to pay at least a portion of their employees' compensation in the form of stock. This type of compensation has two advantages: it reduces the amount of cash compensation that employers must pay out, and also serves as an incentive for employee productivity. There are many types of stock compensation, and each has its own set of rules and regulations. Executives that receive stock options face a special set of rules that restrict the circumstances under which they may exercise and sell them. This article will examine the nature of restricted stock and restricted stock units (RSUs) and how they are taxed.
What Is Restricted Stock?
Restricted stock is, by definition, stock that has been granted to an executive that is nontransferable and subject to forfeiture under certain conditions, such as termination of employment or failure to meet either corporate or personal performance benchmarks. Restricted stock also generally becomes available to the recipient under a graded vesting schedule that lasts for several years.
Although there are some exceptions, most restricted stock is granted to executives that are considered to have "insider" knowledge of a corporation, thus making it subject to the insider trading regulations under SEC Rule 144. Failure to adhere to these regulations can also result in forfeiture. Restricted stockholders have voting rights, the same as any other type of shareholder. Restricted stock grants have become more popular since the mid-2000s, when companies were required to expense stock option grants.
What Are Restricted Stock Units?
RSUs resemble restricted stock options conceptually, but differ in some key respects. RSUs represent an unsecured promise by the employer to grant a set number of shares of stock to the employee upon the completion of the vesting schedule. Some types of plans allow for a cash payment to be made in lieu of the stock, but this type of plan is in the minority. Most plans mandate that actual shares of the stock are not to be issued until the underlying covenants are met.
Therefore, the shares of stock cannot be delivered until vesting and forfeiture requirements have been satisfied and release is granted. Some RSU plans allow the employee to decide within certain limits exactly when he or she would like to receive the shares, which can assist in tax planning. However, unlike standard restricted stockholders, RSU participants have no voting rights on the stock during the vesting period, because no stock has actually been issued. The rules of each plan will determine whether RSU holders receive dividend equivalents.
How Are Restricted Stock Taxed?
Restricted stock and RSUs are taxed differently than other kinds of stock options, such as statutory or non-statutory employee stock purchase plans (ESPPs). Those plans generally have tax consequences at the date of exercise or sale, whereas restricted stock usually becomes taxable upon the completion of the vesting schedule. For restricted stock plans, the entire amount of the vested stock must be counted as ordinary income in the year of vesting.
The amount that must be declared is determined by subtracting the original purchase or exercise price of the stock (which may be zero) from the fair market value of the stock as of the date that the stock becomes fully vested. The difference must be reported by the shareholder as ordinary income. However, if the shareholder does not sell the stock at vesting and sells it at a later time, any difference between the sale price and the fair market value on the date of vesting is reported as a capital gain or loss.
Section 83(b) Election.
Shareholders of restricted stock are allowed to report the fair market value of their shares as ordinary income on the date that they are granted, instead of when they become vested, if they so desire. This election can greatly reduce the amount of taxes that are paid upon the plan, because the stock price at the time of grant is often much lower than at the time of vesting. Therefore, capital gains treatment begins at the time of grant and not at vesting. This type of election can be especially useful when longer periods of time exist between when shares are granted and when they vest (five years or more).
John and Frank are both key executives in a large corporation. They each receive restricted stock grants of 10,000 shares for zero dollars. The company stock is trading at $20 per share on the grant date. John decides to declare the stock at vesting while Frank elects for Section 83(b) treatment. Therefore, John declares nothing in the year of grant while Frank must report $200,000 as ordinary income. Five years later, on the date the stock becomes fully vested, the stock is trading at $90 per share. John will have to report a whopping $900,000 of his stock balance as ordinary income in the year of vesting, while Frank reports nothing unless he sells his shares, which would be eligible for capital gains treatment. Therefore, Frank pays a lower rate on the majority of his stock proceeds, while John must pay the highest rate possible on the entire amount of gain realized during the vesting period.
Unfortunately, there is a substantial risk of forfeiture associated with the Section 83(b) election that goes above and beyond the standard forfeiture risks inherent in all restricted stock plans. If Frank should leave the company before the plan becomes vested, he will relinquish all rights to the entire stock balance, even though he has declared the $200,000 of stock granted to him as income. He will not be able to recover the taxes he paid as a result of his election. Some plans also require the employee to pay for at least a portion of the stock at the grant date, and this amount can be reported as a capital loss under these circumstances.
Taxation of RSUs.
The taxation of RSUs is a bit simpler than for standard restricted stock plans. Because there is no actual stock issued at grant, no Section 83(b) election is permitted. This means that there is only one date in the life of the plan on which the value of the stock can be declared. The amount reported will equal the fair market value of the stock on the date of vesting, which is also the date of delivery in this case. Therefore, the value of the stock is reported as ordinary income in the year the stock becomes vested.
The Bottom Line.
There are many different kinds of restricted stock, and the tax and forfeiture rules associated with them can be very complex. This article only covers the highlights of this subject and should not be construed as tax advice. For more information, consult your financial advisor.

Difference rsu and stock options

Over the past month I have been asked this question more times than I can count and so I thought it was a great topic to write about. Although they are similar in many ways, they have huge differences that can affect ones decision about which to use, if given the choice. Many companies have shyed away from Stock Options and towards Restricted Stock Units (RSU) because of a change in tax reporting that requires them to expense employee stock options. Some companies, like Johnson & Johnson, actually offer both to employees and make them choose which they want.
Stock Options are the right to buy a specific number of shares in the future at a pre-set price (grant price). In general, options vest three years from the date of the grant, and option holders have an additional seven years from the vesting date to exercise them (exercise period).
Restricted Stock Units (RSU) are a grant of units, with each unit, once vested, equal to a share of stock. Company stock is not issued at the time of the grant. However, when RSUs vest, you will receive one share of company stock for each RSU that vests.
Here is table that compares both:
Value Over Time.
Options have value if the stock price rises above the grant price, but could have no value if the stock price is at, or below, the grant price.
RSUs will always have value, whether the stock price goes up or down. The value of your award will increase if the price goes up and decrease if it goes down.
100% vested after 3 years.
100% vested after 3 years.
Options expire 10 years after the grant date.
RSUs become actual shares on vesting. Then they are yours to hold or sell.
In most cases options are taxed as income at the time of exercise, regardless of whether shares are sold or held. Taxes on gains also may need to be paid upon subsequent sale of shares.
RSUs are generally taxed when they vest.
**This is general information and may not be the same for every plan. Speak with a tax accountant to determine what your taxes will be.**
It all depends on the company the employee works for and the employee’s financial information. Here are the questions I usually want to find out about the employee and the company before making a recommendation:
About the employee:
How high of a risk tolerance do you have? What tax bracket are you in?
About the stock:
How stable has the stock performed over the last 3, 5, and 10 years? Compared to the stock market? How are the fundamentals of the stock right now? How does the sector that the stock is part of look for the future? Are there any pending issues that will help/hurt the company in the future?
If the employee answers that they have a very low risk tolerance then I would never recommend them choosing options, if given the choice. This is because with an RSU, they are given the right to actual shares not the right to buy shares at a given price.
Look at Merck (MRK) for example. Employees were given options as a bonus on March 2, 2001 with a grant price of $75.76. These options never were worth anything. By the time the first portion of the options vested, on March 2, 2002, the stock was trading below $65 and would never come back above the grant price. If the company had given RSUs instead, although they would be worth less than they were when granted, it would have given some return.
If the employee answers that they have at least a moderate risk tolerance, the above questions would make a difference to which to choose. Options and RSUs are taxed at different times, so it is important to figure out what your tax bracket is and which would help/hurt you more.
If after those questions, there isn’t a clear choice, then look at the stock. If the answers about the stock are that it: has been very stable; has grown steadily over the last 3, 5, and 10 years; isn’t fundamentally very expensive; has strong growth potential in that sector; and doesn’t have any negative issues pending, then it is worth looking into the options plan.
I personally prefer RSUs because of the limited risk in them. Yes, there is more upside potential in an option because of the number of options issued compared to the number of RSUs for the same plan. For example, Johnson & Johnson gives its employees the choice of which they want and will give four options for every one RSU.
I hope this helps explain the complicated bonus plans and which may be best for you. Please contact me with any questions or comments,
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