What are restricted stock units (RSUs)? Definition, how they work and examples
A promise of shares, not the shares themselves: how RSUs vest at a private company, why most carry a second trigger, and what you hold on the day of an IPO.
The short answer
What is an RSU? A restricted stock unit is a company’s promise to deliver one share of its stock — or the cash value of one — for each unit you hold, once set conditions are met, usually staying employed for a period of years. Until then you own no shares, carry no vote and receive nothing if you leave early. At a private company the promise usually has a second condition: a liquidity event, meaning an IPO or an acquisition. A unit can be fully “vested” by time and still deliver nothing for years.
What does RSU stand for, and what is RSU stock?
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, not a share on its register. So “RSU stock” is a slightly misleading phrase. The stock exists only after the unit settles — the moment the company actually issues or transfers the shares to you.
What is an RSU for an employee? RSU compensation compared
RSU compensation is pay in shares instead of cash, deferred until conditions are met. For an employee it differs from the two other common grants in one respect that matters most: an RSU has no purchase price. A stock option gives you the right to buy shares at a fixed strike price, so it is worth something only if the share price rises above it; 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.
When do RSUs vest?
On the schedule in your award agreement. A common pattern is four years with a one-year cliff: nothing for the first twelve months, a quarter of the grant on the first anniversary, then the rest in monthly or quarterly instalments. Some grants vest on performance goals instead of, or as well as, time. None of this is set by law; every company writes its own. Time-based (service) vesting Units vest as you stay employed. Leave before a vesting date and the unvested units are forfeited. Performance vesting Units vest when a revenue, valuation or share-price goal is met.
How do RSUs work at a private company? Double-trigger vesting
Before a listing, most RSUs are double-trigger: a unit settles only when both 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 income, as each tranche vests, while the employee has no market to sell into. The tax would be real and the cash to pay it would not. The second trigger keeps the units at a substantial risk of forfeiture until the event, so nothing is delivered and nothing is taxed until then.
What happens when an RSU vests? A worked example
An employee joins a private company and is granted 4,000 double-trigger RSUs: four-year schedule, one-year cliff, monthly vesting afterwards. The company lists 30 months after the grant at $40 a share. Here is what the employee holds at each point. Two things the table shows. For two and a half years the employee had a growing number of vested units and not one share.
What is RSU income? The rules, as of October 2026
RSU income is the value of the shares, or cash, delivered at settlement. In the US it is ordinary wage income, reported on your W-2, with tax withheld through payroll; a later sale of the shares produces a separate capital gain or loss. How it is calculated, why the 22% withholding rarely covers the bill, and what the second tax event looks like are on how RSUs are taxed. General information, not tax advice Settlement can create a large income figure in a single year, with withholding set by a flat rate rather than your own bracket.
Common mistakes with RSUs at a private company
Counting time-vested units as shares Until the second trigger, they are a promise. They cannot be sold, pledged or tendered. Leaving without reading the departure terms Some plans keep time-vested units alive after you leave; some cancel them. The difference can be the whole grant. Ignoring the expiry date Double-trigger units that wait too long for a liquidity event lapse. Assuming withholding settles the tax The flat rate is a payroll convention, not your liability. Detail on the RSU taxes page.
The terms this page uses
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 — 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 — an IPO or an acquisition — before units settle.
Questions about RSUs
What happens when an RSU vests? If it is single-trigger, the company delivers the shares, or cash, shortly after the vesting date, and the value is income. If it is double-trigger, as at most private companies, meeting the time condition alone delivers nothing; the unit settles only once a liquidity event also happens. How are RSUs paid out? Usually in shares, one per unit, deposited with the company’s stock plan administrator or broker after tax is withheld — often by holding back some of the shares. Some plans settle in cash instead.
What happens when an RSU vests?
If it is single-trigger, the company delivers the shares, or cash, shortly after the vesting date, and the value is income. If it is double-trigger, as at most private companies, meeting the time condition alone delivers nothing; the unit settles only once a liquidity event also happens.
How are RSUs paid out?
Usually in shares, one per unit, deposited with the company’s stock plan administrator or broker after tax is withheld — often by holding back some of the shares. Some plans settle in cash instead. The method is written in the plan and your award agreement.
Do RSUs pay dividends?
Not directly, because an unsettled unit is not a share. Some award agreements grant dividend equivalents, paid or credited when the units settle. Private companies rarely pay dividends at all, so the question mostly arises after a listing.
Can I sell RSUs before the IPO?
Not the units: they cannot be transferred. Once units settle into shares you hold common stock, which is subject to the company’s transfer restrictions and, after a listing, a lock-up. Before settlement there is nothing to sell.
Are RSUs the same as stock options?
No. An option is a right to buy shares at a fixed price, worth something only above it, and you pay to exercise. An RSU delivers the share itself with no purchase price, so it keeps value even if the share price falls — though less of it.
Where the rules on this page come from
Rules and rates were last verified on 1 October 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.