How Do Restricted Stock Units (RSUs) Work?
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Restricted Stock Units (RSUs) are a form of equity compensation that has become a staple in tech compensation packages, particularly in tech hubs like San Francisco. As of 2025, companies continue to use RSUs to attract and retain talent.
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How exactly do RSUs work, and what should you understand about them to fully benefit from your compensation package? Watch the video below to gain a clear understanding of how RSUs work and how they can impact your financial journey!
Key Takeaways:
- RSUs are a form of equity compensation, where employees earn shares over time according to a vesting schedule
- When your company goes public, double-trigger RSUs become liquid, allowing you to sell them
- RSUs can be donated to charity or gifted, offering tax benefits like reducing concentration and avoiding capital gains taxes
What are RSUs?
RSUs (Restricted Stock Units) are a form of equity compensation that grants employees a predetermined number of company shares, with ownership contingent upon meeting a vesting schedule and potentially other conditions.
Companies use RSUs as a tool to attract and retain talent. These units are enticing because employees benefit financially if the company succeeds and its stock price rises. RSUs also serve as a retention strategy, encouraging employees to stay longer, as they must fulfill vesting requirements to gain full ownership of the shares.
For Example:
Grant: Let’s say your company offers you 8,000 RSUs, with a stock price of $100 at the time of the grant.
Vesting Schedule: A common vesting schedule is over four years: 25% vest after one year (referred to as a “cliff”), and the remaining 75% vest quarterly over the next three years.
This means that after the first year, you’ll receive 2,000 shares, and then 500 shares will vest each quarter for the following three years.
The RSUs aren’t yours to sell or transfer until they vest. This system ensures that employees are incentivized to stay with the company for a longer period and continue contributing to its growth.
Types of RSUs
- Single-Trigger RSUs
These RSUs vest purely based on time worked at the company. There is no secondary condition (like an IPO or acquisition) required to make the shares liquid. When the shares vest, they are taxed as income, and you own them outright.
For example, if you have 6,000 single-trigger RSUs and your company grants them with a four-year vesting schedule, you will begin to receive them gradually over four years as per the schedule.
- Double-Trigger RSUs
Double-trigger RSUs are more common, particularly in startup environments. These RSUs have two conditions for vesting:
Time-Based Vesting: You must stay with the company for a specific period, often tied to a vesting schedule.
Liquidity Event: You need a liquidity event such as an IPO (Initial Public Offering) or acquisition for the shares to become liquid.
Double-trigger RSUs are often used to keep employees around until a significant event like the company goes public. Once the liquidity event happens, employees can sell their shares, which are now liquid.
What Should You Do with Company Stock Acquired from RSUs?
Once your RSUs vest, you own shares in the company. The next decision you’ll face is what to do with these shares. Do you hold on to them in the hope that the company’s stock price will rise, or do you sell them right away?
- Sell Immediately?
Selling immediately is often recommended to avoid concentrated risk in your portfolio. For example, if you already own a significant portion of your company’s stock, holding more RSUs could expose you to unnecessary risk. By selling immediately, you can convert the shares into cash and diversify your investments.
- Hold onto Shares?
On the other hand, if you believe in the long-term prospects of your company and the stock price is likely to appreciate, you may choose to hold on to the shares. Many employees at successful tech companies hold their stock as a long-term investment, hoping it will increase in value over time.
However, holding onto shares does come with risks. The stock price could fluctuate based on company performance, market conditions, and other factors.
How To Manage Your RSU Shares?
If you decide to hold your RSUs, it’s important to manage the concentration risk. It’s easy to end up with too much of your net worth tied up in company stock, especially in the case of a high-growth company. A good strategy involves periodically reviewing your portfolio to assess whether you’re overexposed to your company’s stock. Overconcentration can lead to greater volatility in your portfolio.
One approach is to sell a portion of the RSUs as they vest and use the proceeds to diversify into other asset classes, such as bonds or index funds. This way, you can still participate in the company’s growth while reducing your risk.
What Happens To Your RSUs When Your Company Goes Public?
One of the most exciting events for RSU holders is when a company goes public. In 2025, tech companies continue to reach the IPO stage, and if you hold RSUs, this could mean a significant windfall. But what happens to your RSUs when your company goes public?
Double-Trigger RSUs and IPOs
As mentioned earlier, double-trigger RSUs require two conditions to vest: time and a liquidity event (such as an IPO or acquisition). Once your company goes public, the RSUs that have already vested become liquid, meaning you can sell them in the open market.
For example:
Year 0: You are granted 6000 RSUs at a private tech company.
Year 1: 1,500 RSUs vest, but they are illiquid because the company is still private.
Year 2: The company goes public, and all your vested RSUs become liquid, allowing you to sell them.
This is an exciting moment for employees, especially when a company goes public at a high valuation. You could potentially make a significant profit when the stock becomes available for trading.
What To Do After Your Company Goes Public?
Once your company goes public, it’s important to have a strategy for handling the newfound liquidity. You may want to consult with a financial advisor to determine the best course of action. Many employees choose to sell a portion of their shares immediately, especially if they’ve built up a large position in the company’s stock over the years.
On the other hand, some may choose to hold onto their shares, betting on the company’s continued growth and future stock price appreciation. It’s essential to weigh the potential for future gains against the risks of holding too much of one stock.
Can You Donate Restricted Stock Units To Charity?
Philanthropy can be an attractive option for those who want to use their RSUs to give back to the community. But can you donate RSUs to charity?
You can donate vested RSUs to a qualified charitable organization once they become your property. However, you cannot donate unvested RSUs, as you do not yet own them.
There are benefits to donating stock, including avoiding capital gains taxes on the appreciated value of the shares.
- Donating shares reduces the concentration of company stock in your portfolio.
- The donation can qualify as a tax-deductible charitable contribution.
To maximize the tax benefits, it’s generally advisable to donate shares that have appreciated over time. If you hold your RSUs for at least a year, you can avoid paying capital gains taxes on the appreciation when you donate the shares.
Can You Gift RSUs?
If you want to share the wealth, gifting your RSUs to someone else is an option. But can you receive a tax write-off for this gift? You can gift vested RSUs to individuals, such as family members, or charitable organizations.
However, gifting RSUs to individuals comes with tax implications. In 2025, the gift tax exclusion amount is expected to be $19,000 per recipient as per the IRS due to inflation. This means you could gift up to $19,000 of vested RSUs to someone without incurring gift tax. If you exceed this amount, you’ll need to file a gift tax return.
For charitable donations, the recipient doesn’t pay taxes when they receive the gift. However, they will owe capital gains taxes when they sell the shares. The tax bill will depend on the cost basis of the stock (its value when it is vested) and how long the recipient holds the shares before selling.
Next Steps For You
A financial advisor can help you manage your RSUs to reach your financial goals, whether it’s retirement, a major purchase, or charitable giving. Transform your equity incentives into a cornerstone of your financial strategy. Book a call today!
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