Difference Between Restricted Stocks and RSUs
Equity compensation is one of the most common ways companies reward employees, but it can feel overwhelming to understand. Two of the most frequently used forms are restricted stock (RSAs) and restricted stock units (RSUs). While they sound similar, there are important differences in ownership, taxation, and employee rights.
Many clients ask us to help explain RSAs vs RSUs and what each means for their financial plan.
In this post, we provide a quick and easy overview to help you understand the difference between Restricted Stock and RSUs, the pros and cons of both, their tax treatment, and their risks and considerations.
Remember, this is educational and not specific advice. Everyone’s experience depends on their company, agreements, and financial situation.
What Is Restricted Stock?
Restricted stock (also called restricted stock awards, or RSAs) is actual company stock granted to an employee at the time of the award. The shares are issued immediately but remain subject to restrictions such as a vesting schedule.
Pros of Restricted Stock:
You own shares from the beginning, subject to vesting.
Voting rights and dividends may be available right away.
The 83(b) election lets employees pay taxes early when the company’s value is low, which is a key reason startups often prefer restricted stock.
Cons of Restricted Stock:
Unvested shares are usually forfeited if you leave the company.
Without an 83(b) election, taxes are due when the shares vest and may be higher if the value has increased.
Share prices can fluctuate, which may reduce the eventual value.
Restricted stock is often used by early-stage companies. Experiences vary, and outcomes depend on the company and the individual’s circumstances.
What Are RSUs?
Restricted Stock Units (RSUs) are not stock at the time of the grant. Instead, they are a promise that stock or cash will be delivered once vesting requirements are met.
Pros of RSUs:
No upfront ownership or tax complexity at the time of grant.
Once vested, employees receive actual shares or the cash equivalent.
Easier to understand and track compared to other equity types.
Cons of RSUs:
No ownership or voting rights until vesting.
Typically, no dividends before vesting, although some companies may provide cash equivalents.
Taxes are due at vesting, and the tax bill can be significant if the share price has appreciated.
RSUs are common in later-stage or public companies. Whether they are beneficial depends on individual circumstances and tax planning.
Restricted Stock vs RSUs: Key Differences
Although restricted stock and RSUs may sound alike, the timing of ownership, tax rules, and employer practices set them apart. Here are the main differences at a glance:
Ownership: Restricted stock makes you a shareholder at grant (subject to vesting). RSUs only become stock when they vest.
Voting rights and dividends: Restricted stock often provides these rights immediately. RSUs usually do not, although some companies offer cash equivalents.
Taxes: Restricted stock allows for an 83(b) election to pay taxes early, while RSUs are taxed only at vesting with no early election option.
Common usage: Startups and early-stage companies lean toward restricted stock. Larger or public companies tend to issue RSUs for simplicity.
How Restricted Stock and RSUs Are Taxed
Understanding taxes is one of the most important parts of comparing restricted stock vs RSUs. While both can provide value, they are treated differently by the IRS and can create very different outcomes.
Taxed as ordinary income when shares vest, based on fair market value.
An 83(b) election allows you to pay tax at the time of grant, which can be helpful if the stock value is low, but it carries risk if the shares are later forfeited.
Future gains or losses after vesting are taxed as capital gains.
(Learn More About How Restricted Stock is Taxed)
Restricted Stock Units (RSUs):
No taxes at grant.
At vesting, the fair market value of the shares is taxed as ordinary income.
When the shares are later sold, gains or losses are taxed as capital gains.
Many companies withhold taxes at vesting by selling a portion of the shares, but withholding may not cover your entire tax obligation.
Both forms of equity require careful tax planning. Results differ for each individual depending on their personal tax situation, income level, and timing of sales.
Risks and Considerations
Like all investments, restricted stock and RSUs involve risks. These should be weighed carefully when planning around equity compensation.
Concentration risk: Holding too much of your net worth in company stock may create financial vulnerability if the company underperforms.
Liquidity issues: In private companies, it may be difficult or impossible to sell vested shares until an IPO or acquisition.
Market risk: Stock prices can fluctuate significantly, and the value of your equity may not increase as expected.
Tax surprises: Many employees underestimate how much tax will be due at vesting, which can create cash flow challenges.
Being aware of these risks can help you make informed decisions and avoid unexpected outcomes.
Why Understanding Restricted Stock vs RSUs Matters
Understanding the difference between restricted stock and RSUs is important because each carries trade-offs. Restricted stock may be more common at early-stage companies, while RSUs are often used by larger or public companies. Both forms of equity have tax obligations, ownership considerations, and risks to evaluate.
At DiversiFi, we provide value by helping clients:
Identify which type of equity they hold.
Review potential tax obligations and risks.
Incorporate equity into their overall financial strategy.
Every client’s experience is unique, and outcomes vary depending on company policies and individual circumstances. If you want guidance on how to navigate restricted stock or RSUs, our team can help you review your equity compensation and fit it into your financial plan.
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