Our world is full of these pesky little TLAs – however, some Three Letter Acronyms cause more confusion than others.
In the world of Employee Stock ownership, the ones that cause the most confusion are RSA and RSU.
So, let’s start at the beginning.
Whilst RSAs and RSUs are related, they are two very different things.
RSAs vs RSUs
A Restricted Stock Award (RSA) is a grant that permits you the right to purchase shares at the fair market value, a discount, or at no cost.
The Restricted Stock Unit (RSU), is a grant valued in terms of company stock, but you do not actually receive shares until the restrictions lapse or vest. Once those conditions are met, you then receive the shares or cash as outlined in the plan rules.
There are also legal and tax compliance differences between the two.
- As RSAs are purchased on the grant date they are therefore subject to tax from the date of grant. RSU’s are not purchased, therefore tax is deferred until shares are granted after a time limit has been raised.
- RSAs usually have time-based vesting conditions. RSU’s often have multiple vesting conditions until the employee owns the shares outright.
- Termination: Unvested RSA shares are subject to repurchase upon termination. Unvested RSU shares are forfeited back to the company immediately.
- RSAs are eligible for 83(b) elections. RSUs are not eligible for 83(b) elections and are taxed when they vest.
Finally, unlike its cousin, an RSUs release of shares may be deferred until a later date.
It means that you, the employee, must pay statutory minimum taxes as determined by the employer at vesting. Payment of all other taxes can be deferred until the time of distribution/when you actually receive the shares (you are choosing to defer receipt of the shares as well) or cash equivalent (again, depending on the company’s plan rules).
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