What Are Restricted Stock Units (RSUs)? How They Work and Examples

RSU stands for restricted stock unit. The RSU definition the IRS works from is short. An RSU is an “unsecured, unfunded promise to pay cash or stock in the future,” and one unit typically represents one share (IRS Publication 5992). The “unit” is a bookkeeping entry in the company’s equity plan. It does not appear on the register of shareholders.

So “RSU stock” is a slightly misleading phrase. The stock exists only after the unit settles, which is the moment the company actually issues or transfers the shares to you. Before that, the company simply owes you a future delivery, with nothing set aside to back it. You have no shareholder vote. You get no dividends unless your agreement grants “dividend equivalents,” payments that match the dividends a share would receive. And you have nothing you can sell, pledge or give away.

This legal status is why RSUs are not taxed when they are granted. US tax rules exclude “an unfunded and unsecured promise to pay money or property in the future” from the definition of property (26 CFR §1.83-3(e)). A unit is that kind of promise, so there is nothing to tax at grant. There is also nothing to make an 83(b) election on, which is a choice to be taxed at grant. That is the difference from restricted stock, where real shares are issued on day one.

The Paperwork Behind a Grant

Two documents define every RSU. The company’s equity incentive plan, or RSU plan, sets the rules for everyone: who can receive units, what happens in an acquisition and how shares are delivered. Your award agreement, or RSU agreement, sets your own terms. It lists the number of units, the vesting schedule, any second trigger, the settlement date and the date unsettled units expire. If a recruiter told you something different, the documents win.

RSU compensation is pay in shares instead of cash, delayed until set conditions are met. For an employee, the main difference from the two other common grants is that an RSU has no purchase price. A stock option gives you the right to buy shares at a fixed strike price. It is worth something only if the share price rises above that strike. An RSU delivers the whole share, so it is worth something at any price above zero. The trade-offs between option types are on ISO vs NSO.

Companies tend to move from options to RSUs as their share price climbs. An option with a high strike price is worth little to a new hire. A unit that delivers the share keeps its value.

How does an RSU work over time? It vests, meaning it is earned, on the schedule in your award agreement. A common pattern is four years with a one-year cliff. Nothing vests for the first twelve months. A quarter of the grant vests on the first anniversary, and the rest in monthly or quarterly installments. Some grants vest when performance goals are met, either instead of time or in addition to it. None of this is set by law. Every company writes its own schedule.

• Time-based (service) vestingUnits vest as you stay employed. If you leave before a vesting date, the unvested units are forfeited.
• Performance vestingUnits vest when a revenue, valuation or share-price goal is met. This is rarer below senior levels.
• Liquidity-event vestingThe second trigger at private companies: an IPO or an acquisition. The next section covers it.

When do RSUs expire? Unvested units lapse when you leave. Units that have met the time condition but are waiting for a liquidity event have an expiry date of their own. They lapse if no IPO or sale happens by then. Some plans also cancel time-vested units when you leave. Read both terms before you resign.

Before a listing, most RSUs are double-trigger. A unit settles only when two conditions have been met: the time condition and a liquidity event. The reason is tax. A single-trigger unit at a private company would deliver shares, and taxable income, as each tranche vests. Yet the employee would have no market to sell the shares in. The tax would be real, and the cash to pay it would be missing.

The second trigger keeps the units at a substantial risk of forfeiture, meaning they can still be lost, until the event. So nothing is delivered and nothing is taxed until then. It also keeps the plan inside the short-term deferral rule of Section 409A. Under that rule, a payment made on time does not count as deferred. The deadline is the 15th day of the third month after the end of the year in which the risk lapses (26 CFR §1.409A-1(b)(4)). The mechanics of the 409A rules are on 409A valuation.

How Do RSUs Work Pre-IPO, Event by Event?

An IPO

Every unit whose time condition is met settles in one block, on the date or within the window the plan sets. The shares then usually sit under a lock-up before they can be sold. Units still vesting by time settle as each tranche vests.

An acquisition

The plan decides whether the buyer takes over the units, converts them into its own units or pays them out in cash. What happens to the shares themselves is in what happens to stock when a company is acquired.

A tender offer

A tender offer buys shares. A unit that has not settled is not a share. So RSU holders usually cannot take part unless the company settles some units for the purpose.

A secondary sale

Units that have not settled cannot be sold or transferred. A secondary transaction, including a purchase by an SPV, needs shares that exist.

An employee joins a private company and is granted 4,000 double-trigger RSUs. The schedule is four years, with a one-year cliff and monthly vesting afterward. The company lists 30 months after the grant at $40 a share. Here is what the employee holds at each point.

The table shows two things. First, for two and a half years the employee had a growing number of vested units and not one share. Second, on the IPO date, 30 months of pay became income at once, valued at the listing price. The shares themselves were usually locked up at that point. So their price on the first day the employee can sell may be higher or lower than the $40 that was taxed.

Now change one fact: the employee leaves at month 24. On a typical double-trigger grant, the 2,000 unvested units are forfeited. The 2,000 time-vested units stay outstanding until the company lists, is sold or the units reach their expiry date. Then they settle or lapse, with the employee no longer there.

RSU income is the value of the shares, or cash, delivered at settlement. In the US it counts as ordinary wage income. It is reported on your W-2, and tax is withheld through payroll. A later sale of the shares produces a separate capital gain or loss. How the income is calculated, why the 22% withholding rarely covers the bill and what the second tax event looks like are on how RSUs are taxed.

• Counting time-vested units as sharesUntil the second trigger, they are a promise. They cannot be sold, pledged or tendered.
• Leaving without reading the departure termsSome plans keep time-vested units alive after you leave. Some cancel them. The difference can be the whole grant.
• Ignoring the expiry dateDouble-trigger units that wait too long for a liquidity event lapse.
• Assuming withholding settles the taxThe flat rate is a payroll convention. Your actual tax bill can be higher. The RSU taxes page has the detail.
• Valuing units at the last round priceThe round priced a different class of shares from the one your units deliver.
• Planning a sale for the IPO daySettled shares usually sit under a lock-up before they can be sold.

A funding round prices preferred stock. Your units deliver common stock. Once they have settled, the ways to sell are in selling pre-IPO shares.

Restricted stock unit (RSU)

A company’s unfunded promise to deliver one share, or its cash value, per unit once vesting conditions are met.

Vesting

Meeting the conditions, such as time, performance or an event, that turn a unit into a right to be paid.

Settlement

The delivery of shares or cash for vested units. For an RSU, this is the tax event.

Cliff

An initial period, often a year, during which nothing vests. The first tranche vests at its end.

Double-trigger

Vesting that needs both a time condition and a liquidity event, such as an IPO or an acquisition, before units settle.

Substantial risk of forfeiture

A condition, such as staying employed, under which the right can still be lost. When it lapses, the tax timing is set.

83(b) election

A choice to be taxed on restricted property when it is granted. It is not available on RSUs.

Dividend equivalents

Payments some award agreements make to match the dividends a share would have received, usually paid when units settle.

Lock-up

A period after an IPO, set by contract, during which existing holders, employees included, cannot sell.

Rules and rates were last checked on October 1, 2026. Tax rules are US federal, and the withholding rates apply to 2026. Other jurisdictions treat equity pay differently. The worked example is illustrative. The terms of any real grant are in its plan and award agreement.