What Is a RSU? (Definition, Pros and Cons)

Stock units enable individuals to invest in a company and share in the overall success of their investments. Companies issue restricted stock units to employees and offer the opportunity to buy shares at a discount. Understanding restricted stock unit helps an employee make an excellent investment and get the maximum benefit. In this article, we define a restricted stock units (RSUs), discuss its pros and cons.

RSU is a type of equity incentive program that companies offer to allow their employees to take part in share ownership while holding onto their shares until free trading. Some employers offer the stock unit as a compensation package to employees. For example, some companies offer them incentives for work, such as hitting sales targets or performing better than others in the same position.

 

These stock units offer employees a chance to benefit from the equity upside without holding onto any risk and paying capital gains taxes until they sell their units. Companies offer restricted shares at the beginning of employment or once an employee holds a job for a specific time. After receiving restricted stock units from a company, employees can save them until they can sell their stock without any restrictions or transfer them within six months with minor restrictions. 

The following are the pros of restricted stock units:

A notable benefit of restricted stock incentives is the flexibility it offers. Employees in this program may not immediately exchange the stocks for cash or receive dividends because they have the option of holding onto their shares for a certain period. During this period, employees receive dividends monthly, depending on the company's payment schedule. Employees can later sell or keep their shares as a longer-term investment portfolio.

The restricted stock unit encourages employees to save money since they earn dividends regularly. Employees also don't pay tax on restricted stock units which helps them save money. It's easier to save your stocks until the vesting period ends. After that, you can decide whether you want to sell the stock or continue holding it without restrictions. Employees who save their stock may have a financial option on whether to make additional investments to convert their restricted stock unit into shares of stock that aren't part of a company plan.

The period employees hold on to their shares makes restricted stock incentives better for long-term investments. Long-term investment options help employees earn more money and lower investment risk. It also allows their stocks to gain value if they hold on to them longer. 

For instance, if an employee gets five percent shares in the company upon joining, they can save that and invest it for many years to gain profits. At the end of the program, employees may have cash savings. This stock unit may also reward employees who take a longer time to decide what investment to do with their shares. Some prefer to wait for the perfect price for their shares.

Another benefit of a restricted stock unit is that it helps employers retain employees. Employees with opportunities to earn more choose to stay at the company. The employee may choose to stay at the company since the company may offer them better retirement plans and allow an employee to have more family time. 

These stock options also help employees see their long-term value in the company. Restricted stock units encourage long-term investments by offering a better long-term reward. Employees who receive restricted stock unit may be willing to stay with their company for longer if they receive dividends regularly. They may also see this as a secondary compensation form while waiting to receive full salary payments and benefits.

Restricted stock incentives also encourage employees to increase their productivity. Some companies offer performance financial rewards. These rewards encourage employees to work harder and contribute more resources, increasing productivity. A sense of ownership may also increase productivity since employees have more incentive to work more efficiently. Employees who receive stock units also feel that the employer values their contributions, boosting their motivation.

Restricted stock units are easily transferable once they vest. You can trade on any exchange, providing employees with liquidity, potentially at a profit. The employee bears the income tax liability and is liable to pay capital gains taxes if they decide to sell the shares. It's easier to make a profit when you trade shares on an exchange, and it's possible to get out of the company plan altogether.

The following are the cons of restricted stock units:

Employees with a shorter period to hold on to their shares have higher risk since their investment may lose value if they don't sell or exchange the stock before the period ends. There's also a chance that employees may make a mistake in deciding when to sell their stock. The mistake can happen if the company doesn't specify an appropriate time to sell the stock or if they receive conflicting information about this period. Employees can do their research and also rely on third-party resources before deciding.

The potential forfeiture depends on whether an employee leaves voluntarily or involuntarily. Employees may lose their restricted stock units if they leave their company before the end of the vesting period. They also may lose the stock if there's a change in control before the vesting period ends or if they leave their job. It can be a problem for employees who want to wait until free-trading status comes along to make more money on their stocks without restrictions.

Tax liability depends on whether employees sell their stock during the vesting period. Employees pay taxes on the shares they hold. They may pay income tax on their stock and capital gains tax if they decide to sell the stock. Employees may not be aware of how much money they may pay in taxes.

Employees who exchange their restricted stock after the vesting period pay taxes or capital gains if they sell the stocks on a stock exchange. The risk can be lower when an employee stays with the company until the vesting period ends. However, quitting a company before that time may come with certain tax penalties.

It's difficult for employees to liquidate their stocks after the period ends if they decide not to sell their shares. The company may not want them to do so, and since the company holds the stock, the employee has little incentive to convert it back into cash. Sometimes it may force the employee to go through a brokerage process with potentially high fees to sell shares.

It's difficult for employees who have restricted stock to sell their stocks because of restrictions on selling them. They may also sell depending on performance or age limits set by company policy or individual goals. For example, companies sometimes restrict their employees receiving restricted units of their stock for more than a certain period after receiving it.