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Restricted Stock Units vs. Restricted Equity Grants

Restricted Stock Units vs. Restricted Equity Grants

These two vehicles for granting equity are often confused, and they have vastly different outcomes.


  1. An RSU is a contractual right to receive stock at a future date based on vesting criteria, typically time based vesting but it can also be performance vesting. A recipient receives a grant agreement for RSU’s today, which provides that each year the recipient will receive X shares of stock, based on time vesting. The recipient does not pay for the stock and does not recognize income upon the execution of the RSU grant agreement.
  2. The upside of an RSU is that it is a full value grant (because there is no strike price). The downside is that upon receipt of the stock in the future, the recipient will recognize income equal to the fair market value of the stock. Thus, if a share of stock is worth $10, and the recipient received 5,000 shares, they will have $50k of income. Since the stock is illiquid, the recipient will go out of pocket for the taxes. Moreover, as time goes on, assuming the stock becomes more valuable, then each year that more RSU’s vest and the stock is issued, the recipient will have an increasingly large tax bill.
  3. The recipient cannot file a Section 83(b) upon receipt of the grant and, thus, there is no mechanism to mitigate the recognition of income as the stock is issued.

Thus, for this reason, we typically only use RSU’s in public companies, because the executive is then able to sell off a portion of the stock to pay the taxes. He can’t do that with this stock. If the recipient is prepared to pay taxes on phantom income each year, then this works fine and the recipient receives a full value grant.

An alternative that we typically use with non-public companies that “splits the difference” is a restricted stock grant. It works like this:

  1. A restricted stock grant is a grant of stock today, which is then subject to a “risk of forfeiture”, which means that if the recipient does not satisfy the “vesting” criteria, the shares which have not vested are forfeited.
  2. We require the recipient to file with the IRS a Section 83(b) election, which is an election by the taxpayer to include in current income property that is subject to a risk of forfeiture. Because it is subject to a risk of forfeiture, the stock is discounted, with the amount of the discount dependent on the severity of the restrictions. For instance, a one year vesting period would have very little discount, and a 10 year would have a significant discount, the difference being that the stock is much more likely to vest in one year, than it is in 10, because there are a variety of circumstances that could lead to termination of employment. For example, if today the recipient receives stock at $10/share, and is granted 5,000 shares, then the FMV is $50k, but if it is subject to 4 year vesting, it might be subject to 50-70% discount, in which case the recipient would file the 83(b) and report income at $15k-$25k and pay taxes on a much lower level of income.
  3. As the stock vests (the forfeiture restrictions lapse), there is no taxable event to the recipient.
  4. Finally, the other advantage over RSU’s is that the holding period for capital gains starts when the 83(b) election is filed, while the holding period for RSU’s begins when the stock is granted per the RSU grant agreement.

The restricted grant will not avoid taxes upon grant, but it will result in much lower taxes being due, and save a tremendous amount of taxes going forward as the forfeiture restrictions lapse vs. RSU’s.

For more information, please contact Kurt D. Olender at 908-964-2485 or