RSAs Vs RSUs: The Ultimate Face-off of Restricted Stock Options

  • Written Written by Sanya Gupta 17 May 2024 | 4 min read
  • Editor's Note :

    Vega Equity delves into the critical distinctions between Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs), two prevalent forms of equity compensation. Whether you're an employee considering your compensation package or an employer structuring benefits, understanding these differences can significantly impact your financial decisions and tax obligations.

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Ever wondered about these similar-sounding stock options - RSAs and RSUs? Well, they're more than just alphabet soup—they're the ticket to a piece of the company pie but how they are different?

RSAs and RSUs are stock options as a gesture from employer to employee, recognizing their hard work with a share of the company. But there are certain criteria before an employee can claim a piece of the company pie. For employers, they're tools to keep top talent engaged. It's all about showing appreciation and keeping the team motivated!

What is the Restricted Stock Awards?

Restricted stock awards (RSA) represent a type of stock compensation granted to employees, offering company shares with specific restrictions. These restrictions can be vesting period, performance conditions, or predetermined criteria. Unlike stock options, RSAs do not necessitate employees to purchase stock at a fixed price. And do you know, one significant aspect of RSAs is that they confer immediate ownership of the stock to the employee upon grant which entitlements the shareholders to dividends and participation in company voting.

However, until the restrictions are lifted, employees cannot sell or transfer the shares.

Why do companies give RSAs?

RSAs resonate with long-term incentives to align employee interests with company performance and are also considered for retaining valuable employees by incentivizing their contributions to company success.

Now that we've grasped the fundamentals of RSAs, let's delve into the other Stock Option – RSU

What is a Restricted Stock Unit?

Restricted Stock Units (RSUs) represent an alternative form of stock compensation extended to employees. RSUs give a commitment of company shares to the employee at a later date, restricted to meeting specified conditions. Unlike RSAs, RSUs provide a commitment to receive the shares in the future and do not provide immediate ownership of the stock to the employee.

Typically, RSUs are governed by a vesting schedule, necessitating the employee's tenure with the company for a designated timeframe to obtain the shares. Upon vesting, the employee gains the ability to sell or transfer the shares. However, until the fulfillment of vesting requirements, the employee lacks ownership and voting rights.

Why do companies give RSUs?

RSUs have gained popularity in recent times due to their adaptability. They are commonly utilized by companies aiming to afford employees a stake in the company's prosperity without mandating upfront stock purchases.

Feeling like an RSU & RSA pro? Great! Now, let's see how RSAs and RSUs are different. Buckle up!

RSAs VS RSUs?

Let's break down RSAs vs RSUs! These are both types of stock options companies give out, but they're not the same. One big difference is how much they cost the employee, then there's the vesting period before they actually own them, and of course, there are tax implications to think about. Also, what happens if the employee leaves the company? These are all important factors to weigh when comparing RSAs and RSUs.

Features
Restricted Stock Awards (RSAs)  
Restricted Stock Units (RSUs)
Stage of company
Typically awarded in very early stages with low Fair Market Value (FMV) 
Granted in later stages, often in mature companies with high FMV 
Ownership
Shares issued at grant, subject to purchase price requirements   
Shares issued upon settlement often correlated with vesting 
Vesting 
Usually time-based or milestone conditions
Can have standard time-based or milestone vesting, or event-based (e.g. the company going public or getting acquired (“double-trigger”)
Termination
Unvested shares repurchased by the company 
Unvested RSUs were forfeited back to the company immediately  
Tax status
Help maximize capital gains; Taxed as ordinary income if not purchased in cash at FMV
Taxed mostly as ordinary income upon settlement  
Dividends and Voting Rights 
Have rights to dividends and company voting from grant     
Do not provide these rights until shares are delivered to the employee 
Transferability
Generally non-transferable until restrictions are lifted
Once vested, RSUs can be sold or transferred by the employee 

1. Vesting of RSUs Vs RSAs

RSAs: Since the employee gets RSA shares upon grant, vesting only influences whether the company can buy back shares if they depart or are let go, and doesn't impact their tax responsibilities. To prevent individuals from joining a company, obtaining their RSA award, and promptly departing with full ownership, most companies implement time-based vesting schedules. This ensures that individuals earn their equity grant over time and gain alignment between personal and company goals across the organization.

While time-based vesting is common for RSAs, milestone-based vesting,, although less common, can also be utilized.

RSUs: RSUs operate differently from RSAs. With RSUs, the recipient doesn't receive the shares until they vest and the company settles them. What's intriguing is that RSUs can have multiple conditions for vesting.

For instance, if someone has a single-trigger vesting schedule or liquid RSUs, typically, they only need to fulfill a time-based requirement to see their shares vest.

Now, onto double-trigger vesting. This adds another layer of complexity. It's essentially a two-step process where shares vest only if two conditions are met:

This arrangement can delay tax obligations until the company's situation stabilizes enough for the recipient to sell some shares to cover taxes. It's akin to providing a buffer period before facing tax liabilities.

Expert Insights on Single-Trigger Vs Double-Trigger RSUs

Thinking about adding RSUs to your company's mix or gearing up to grab some as part of your equity compensation plan? clearing any confusion on the Single-Trigger vs. Double-Trigger RSUs

2. Impact of Termination

RSAs: Upon exiting the company, all vested RSA shares remain with the individual, while any unvested shares are subject to potential repurchase by the company. Essentially, the company reserves the right, although not the obligation, to buy back these shares, usually at the lesser of the purchase price or the current fair market value. It's like a safety net – ensuring fairness for both parties involved.

RSUs: Similarly, upon departure, an individual will retain vested RSU shares; however, there's a catch: Given that RSUs often entail additional vesting conditions, such as a liquidation event, there's a possibility that any time-vested shares may expire before all conditions are fulfilled. If, for instance, the shares expire before the company undergoes acquisition, goes public, or engages in a secondary transaction, the individual won't retain them. Regardless of liquidation conditions, any RSUs not subject to time-based vesting are forfeited upon termination.

The individual's grant agreement for RSUs should delineate the outcome for RSUs in the event of departure, including the expiration of double-trigger RSUs, if applicable.

3. Tax Implication

Equity compensation entails two tax categories: ordinary income tax and capital gains tax. Presently, the long-term capital gains tax rate is lower compared to the ordinary income tax rate. If an employee holds onto a stock for over a year from acquisition to sale, any appreciation in value is subject to taxation as long-term capital gains.

RSA Taxation Working

Let's break down how RSAs are taxed under different scenarios:

Under normal federal income tax rules:

When the employee receives RSAs, there's no immediate tax implication. Taxes only come into play when RSAs vest. At that point, the recipient is taxed on the difference between the fair market value (FMV) at vesting and the price you paid when you received the RSAs.

For example:

Employee Cost at Grant: $3/share
FMV at Vesting: $10/share

Taxable Gain: $7($10-$3) - subject to ordinary income tax.

When they eventually sell these shares, any profit is subject to capital gains tax. So, if they sell them for $20 a share, tax is on the difference between the selling price and the FMV at vesting.

FMV at sale: $20/share
Taxable profits = $20 – $10 = $10 (Subject to capital gains tax)

However, there's a catch: What if they can't sell shares right when they vest, or if the share price drops afterward? Unfortunately, once they’ve paid taxes on RSAs, there's no refund, even if the shares lose value.

FMV at Sale: $20/share
Taxable profits = $20 – $3 = $17 (Subject to capital gains tax)

Given that the CGT rate is typically lower than the ordinary income tax rate, opting for the 83(b) election results in a substantially reduced tax liability.

RSU Taxation Working

Keep in mind, that restricted stock awards provide shares to the recipient upfront, while RSUs represent a commitment from the company to grant shares to the employee. This distinction leads to significantly different tax implications between RSUs vs RSAs - RSU holders typically face a larger income tax obligation at vesting.

When an RSU is granted, there's no immediate tax obligation, but upon vesting, the employee is liable for income tax on the entire fair market value (FMV) at that point.

FMV at vesting: $8/share
Amount of RSUs vested: 25 (out of 100)
Taxable gains = 25 x $8 = $200 (Subject to ordinary income tax)

The company may choose to withhold a portion of your shares or require direct cash payment to cover this tax liability.

Once the vesting period is over, they're free to sell these vested RSUs at any time. If they've held the shares for one year or less before selling, and the selling price exceeds the FMV of your stocks (resulting in short-term capital gains), the employee will be taxed at federal ordinary income tax rate. Otherwise, it's considered long-term, typically subject to lower federal ordinary income tax rates.

FMV at sale: $20/share
Taxable profits = $20 – $8 = $12 (Subject to long term capital gains tax)

Here's the silver lining: Individual can sell vested RSUs immediately after they vest to avoid capital gains tax. Many choose this route to sidestep any potential tax implications resulting from fluctuations in the stock's value.

However, some individuals opt to retain their RSUs after vesting, banking on the belief that the company's share value will substantially increase over time, making it a strategic investment decision.

RSA or RSU: Deciding Your Equity Journey

Okay, so you're at this crossroads, trying to figure out which stock plan is the right fit for you: RSAs or RSUs. Let's break it down. RSAs are like those humble beginnings, perfect for start-ups when the company's stock isn't worth a whole lot yet. It's like being in on the ground floor of something big, you know? RSUs, on the other hand, are more for those companies that have already made it big. Their stock is soaring, and RSUs just make more sense because, well, the stock is worth more.

But hey, it's easy to feel lost in this stock jungle. No worries, though! That's where we come in. Vega Equity will help you figure out which path to take, whether it's RSAs vs RSUs. So, why not reach out today? Let's embark on this stock adventure together!

About Vega Equity

Vega Equity offers companies an effective, intuitive, and paperless platform for managing equity. It provides accurate cap table management, customized user experiences, and precise information. Additionally, it assists in measuring KPIs, analyzing data, and tracking performance towards goals.

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