RSUs vs. RSAs: Pros and Cons, Taxes, Examples

Equity compensation is often used by companies to retain and reward employees, with two common types being restricted stock units (RSUs) and restricted stock awards (RSAs). While both give employees a stake in the company, they differ in how they are structured, taxed and valued. A financial advisor can help you evaluate which option fits better with your overall financial goals.

Restricted Stock Units (RSUs)

RSUs are a form of equity compensation where a company promises to grant shares to an employee at a future date, usually after meeting certain conditions. These conditions often include continued employment over a set period or achieving specific performance goals. RSUs are commonly used by public companies and larger private firms because they allow equity to be awarded without immediately issuing stock.

Employees don’t receive the actual shares until the RSUs vest. Once vested, the company delivers the shares or their cash equivalent, and the employee owes ordinary income tax based on the fair market value at vesting. Until that point, RSUs have no real value to the employee and can’t be sold or transferred. This structure makes them useful for encouraging long-term commitment.

One of the reasons RSUs are widely used is that they involve no upfront cost to the employee and follow a clear vesting schedule. Although they don’t provide early ownership or dividends before vesting, their simplicity and deferred taxation make them a practical equity tool for both employers and employees.

Grant Type

RSUs represent a contractual promise to deliver company stock in the future. Unlike RSAs, the shares themselves are not issued at the time of the grant. Instead, they are recorded as a bookkeeping entry and delivered once the vesting conditions are satisfied.

Ownership

RSUs do not grant actual ownership rights until vesting occurs. This means employees do not have voting rights or receive dividends (unless otherwise stated) before the units vest and convert into actual shares.

Vesting

Vesting schedules for RSUs can be based on time, performance or a combination of both. A common arrangement is time-based vesting over four years with a one-year cliff. This means the employee would receive a portion of their shares vested after a year, with 100% vested after four years. Only after the RSUs vest do employees receive the shares and associated rights.

Forfeiture

If an employee leaves the company before their RSUs vest, they forfeit the unvested RSUs. This forfeiture clause makes RSUs a powerful tool for encouraging employee retention.

Taxation

RSUs are taxed as ordinary income at the time of vesting. The value of the shares on the vesting date is added to the employee’s W-2 earnings and is subject to income and payroll taxes. When the employee eventually sells the shares, any further gains or losses are treated as capital gains.

Example

Suppose you receive 1,000 RSUs that vest over four years. On your first vesting date, 250 RSUs vest, and the stock is valued at $40 per share. You’ll report $10,000 in taxable income that year. If you hold the shares for another year and sell them at $50, you’ll recognize a capital gain of $10 per share on the sale.

Restricted Stock Awards

RSAs differ from RSUs in a key way: The employee receives the actual shares at the time of the grant, although the shares are subject to forfeiture and transfer restrictions. This means the employee becomes a shareholder immediately, often with voting rights and dividend eligibility.

RSAs are commonly used by early-stage startups or with new employees who receive equity as part of their compensation package. Because shares are issued at the grant date, the employee assumes more risk upfront. However, they also have more flexibility in managing their equity.

RSAs may also offer tax planning opportunities, particularly when paired with an 83(b) election. This tax provision allows employees to pay taxes on the value of the stock at the time of the grant, potentially reducing their tax burden if the stock appreciates significantly before vesting.

Grant Type

RSAs involve the immediate issuance of company stock to the employee. However, the shares are subject to restrictions on transfer and may be forfeited if vesting conditions aren’t met. Unlike with RSUs, employees own the stock from the outset.

Ownership

Employees receiving RSAs typically have full ownership rights immediately. This includes voting rights and eligibility for dividends, even though the shares are subject to forfeiture if they do not meet vesting conditions.

Vesting

Like RSUs, RSAs vest over time or based on performance milestones. However, since shares are granted upfront, the employee holds them even while waiting for them to fully vest.

Forfeiture

If an employee leaves before the vesting period is complete, they typically forfeit any unvested shares. This applies even though the employee technically owns the shares from the grant date.

Taxation

Unless an 83(b) election is filed, RSA taxation is similar to that of RSUs. The fair market value of the shares is taxed as ordinary income when the shares vest. However, if the employee files an 83(b) election within 30 days of the grant, the value is taxed immediately based on the grant date price. This can result in a lower tax bill if the share price appreciates over time.

Example

Say you receive 1,000 RSAs when the stock is worth $2 per share. If you file an 83(b) election, you’ll report $2,000 as taxable income right away. If the stock rises to $10 by the time it vests, you won’t owe any further income tax on the increase—just capital gains tax when you sell.

Restricted Stock Units vs. Restricted Stock Awards

While both RSUs and RSAs are forms of equity compensation, their mechanics, tax treatment and risk profiles differ. Whether you’re managing risk, minimizing taxes or optimizing the value of your equity package, it’s important to know the distinction between RSUs vs. RSAs.

Feature	RSUs	RSAs
Grant Type	Promise to deliver shares	Shares issued at grant
Ownership	No ownership until vesting	Immediate ownership
Voting Rights	Not granted until vesting	Granted immediately
Dividends	May be deferred	Typically eligible immediately
Vesting	Commonly time-based or hybrid	Time-based or performance-based
Forfeiture	Unvested shares are forfeited	Unvested shares are forfeited
Taxation	Ordinary income at vesting	Ordinary income at vesting or 83(b)
Best For	Later-stage companies	Startups or early hires

Bottom Line

RSUs and RSAs can both add value to a compensation package, but they differ in ownership terms, tax treatment, and planning considerations. RSUs are generally simpler and come with less upfront risk, while RSAs may provide earlier ownership and possible tax advantages through an 83(b) election. When comparing the two, it’s important to consider factors like job tenure, income timing and risk tolerance.

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