Restricted Stock Units (RSU) is simpler then Restricted Stock Awards (RSA). RSU is an equity compensation where the receiver is promised free stocks in the future after meeting certain vesting conditions. See more below
In other words, an RSU holder is not considered a shareholder until the RSU vests and are settled into shares in the company. This means that the RSU holder do not have any voting rights or rights to receive any dividends
This is an alternative way to incentivise employees in companies. Also here the vesting schedule serve to incentivise the employee to stay with the company longer. If the employee decide to leave before the vesting period ends, the employees lose the right to receive free stock in the future. This serves to protect the company and prevent ending up with what is often called “dead equity” and a “broken cap table” which can cause frustration and make it hard to raise outside capital.
Once a receiver is granted a Restricted Stock Unit, he/she must decide whether to accept or decline the grant. The receiver must wait until the grant vests before the RSU can be settled into shares. The period is often called vesting period.
There are two main types of vesting; time-based vesting or performance / conditional based vesting. The most common type of vesting in early stage companies are time-based vesting. If the employee were to leave the company before the vesting period expires, the receiver lose the right to receive the free stock. It is also normal that the RSU´s vest gradually during the vesting period.
Let´s illustrate this with an example: If an employee is granted RSU with a vesting period of 4 years with gradual vesting every quarter, the employee have to work 4 years to earn the right to settle all the RSU´s. If the employee were to leave the company after one year, he/she has earned the right to keep the vested shares (1/4 of the granted shares).
Restricted Stock Awards (RSA) should not be confused with Restricted Stock Units (RSU). The difference is that with RSA´the receiver owns the stock (with restrictions) from the date of grant, while RSU is a promise to receive stock in the future (after vesting) at no cost.
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