Contractual promises to deliver shares on vesting
A restricted stock unit is a contractual right to receive a share, or its cash equivalent, once specified conditions are met, typically continued employment over a period of time. The schedule for this follows standard vesting mechanics. There is no strike price and no exercise decision: once an RSU vests, the shares are simply delivered, or in some plans automatically sold with the proceeds paid to the employee.
Because there is no purchase price, an RSU always has some value as long as the underlying share price is above zero, unlike an option which becomes worthless if the share price falls below the strike price. This makes RSUs feel less risky to employees, which is one reason larger, more mature companies favour them over options, a trend covered further in RSUs for startups.
RSUs versus stock options
| Feature | RSU | Stock option |
|---|---|---|
| Purchase price | None | Strike price required |
| Value if share price falls | Reduced but still positive | Can fall to zero |
| Complexity to administer | Lower | Higher |
| Typical use case | Later stage or public companies | Early stage startups |
| Upside leverage | Lower, since there is no strike price gap | Higher, since gains are measured above the strike |
Early stage startups usually prefer options because a low strike price set when the company is worth little gives employees more percentage upside for the same number of shares, and options are cheaper for the company to grant in accounting terms. RSUs become more common once the company has a higher, more established valuation, where a low strike price on stock options would look like an unusually generous grant.
Authorising RSU grants from reserved share pools
- The plan is adopted by the board and, often, shareholders, similar to an option plan, authorising grants from a reserved pool of shares.
- Individual RSU award agreements set the number of units, the vesting schedule, and any additional vesting conditions.
- Some plans include double trigger vesting, common at private companies, requiring both time-based vesting and a liquidity event before shares are actually delivered.
- Settlement can be in actual shares or, less commonly, in cash equivalent to the share value at vesting.
At a private company, an RSU award agreement should clearly state what happens if no liquidity event ever occurs, since vested units with a double trigger can sit indefinitely without being settled.
Questions new RSU holders usually have
- Do I have to pay anything to receive RSU shares?
- No. There is no purchase price for RSUs. Shares, or their cash equivalent, are simply delivered once the vesting conditions are met.
- Can RSUs lose all their value?
- Only if the company's shares become worthless, for example in an insolvency. Unlike options, RSUs do not need the share price to rise above a strike price to have value.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.