Restricted Stock Units
Restricted Stock Unit (RSU) is granted in terms of company stock but it is not issued at the time of the grant. The company distribute shares or cash equivalent of the the number of shares. Here are two reasons why company grants RSU:
- Many employees don’t understand stock options. They don’t know that they have to take action to realize any gain. It is far easier for them to understand a vesting period on restricted stock.
- Restricted stock can’t become worthless like stock options. Even if the stock price falls, restricted stock retains some intrinsic value.
For example: A stock option grant with a strike price of $10 has no value when the stock trades at $8. Restricted stock awarded when trading at $10 is still worth $8. A stock option has lost 100% of its value. The restricted stock has only lost 20%.
Both Stock option and RSU has a vesting period to be award of. The difference is at the end of the vesting period. When a stock option vests, you have the option of purchasing or not purchasing the stock at a specific price (the strike price). You do not own any company stock until you exercise the option and purchase the stock. As soon as you purchase it, you can do anything you want with it, including sell it. When a restricted stock award vests, you own the stock and you can do whatever you want with it.
Vesting periods for RSUs may be time-based or performance-based, depending on the company’s plan rules. The company may allow or require employee to defer receipt of the shares or cash equivalent until a later date.
That depends on the change in the stock price. Generally, if the stock price is going up, stock options are a little better. You can sell both at the higher market value, but with stock options you have not had to commit to the purchase until the stock price reached the point at which you wished to sell. However, if the stock price stays the same or goes down, restricted stock is better. Since you actually own the stock, it retains some value until the stock price goes to zero.
Generally, restricted stock awards are smaller than stock option grants by a factor of two or three (one half or one third the size). If a stock option grant were 100 shares, a restricted stock award would usually range from 33 to 50 shares. This is because at the end of the vesting period the 33 to 50 shares would still have some value and the 100 stock options might not.
In terms of income tax treatment, the employee is taxed at vesting but not receiving the RSUs unless the employee chooses to defer receipt of the cash or shares. The amount of income subject to tax is the difference between the fair market value of the grant at the time of vesting, minus the amount paid for the grant. Thus, if you receive the RSUs in a zero cost, it is 100% taxable!!
