Award of restricted stock units: Overview, definition, and example
What is an award of restricted stock units?
An award of restricted stock units (RSUs) is a type of employee compensation where an employer grants units that represent company stock to an employee, but the stock is subject to certain conditions, such as a vesting period or performance goals. Unlike stock options, RSUs do not require the employee to purchase the stock; instead, the employee receives the units as a form of compensation, and the units are converted into actual shares of stock once the vesting requirements are met. These requirements may include staying with the company for a certain number of years or achieving specific company performance metrics.
For example, a company may grant an employee 1,000 RSUs, but the employee will only actually receive the shares after they have worked with the company for three years, or after meeting certain performance targets.
Why is an award of restricted stock units important?
An award of restricted stock units is important because it provides employees with an ownership interest in the company, which can align their interests with those of the shareholders. RSUs serve as an incentive for employees to stay with the company and contribute to its success over the long term, as they must meet vesting conditions to receive the actual shares.
For businesses, RSUs can be a powerful tool for attracting and retaining talented employees without requiring an immediate outlay of cash. RSUs also allow companies to reward employees with stock, without requiring them to purchase it or bear the upfront cost. For employees, RSUs offer the potential to benefit from company stock value growth, which can be especially valuable if the company performs well over time.
Understanding award of restricted stock units through an example
A technology startup offers a software engineer an award of restricted stock units. The company grants the employee 1,000 RSUs, but the shares will only vest over a four-year period: 25% of the units vest at the end of each year, provided the employee remains employed with the company. At the end of the first year, 250 RSUs vest, and the employee is given the actual shares of stock in the company. If the employee leaves before the full vesting period, they forfeit the unvested RSUs.
In another example, a corporation grants 5,000 RSUs to a senior executive, contingent on achieving specific company performance goals. If the executive helps the company reach those goals within three years, they will receive the stock units as actual shares. If the performance targets are not met, the executive does not receive the shares, and the RSUs are forfeited.
An example of an award of restricted stock units clause
Here’s how this type of clause might appear in an employment agreement or stock plan:
“The Company hereby grants to the Employee 1,000 Restricted Stock Units (RSUs), subject to the following vesting conditions: (i) 25% of the RSUs will vest on the first anniversary of the Grant Date, and the remaining RSUs will vest in equal annual installments over the following three years; and (ii) Vesting is contingent upon the Employee’s continued employment with the Company through each vesting date. Upon vesting, the RSUs will be converted into common shares of the Company and delivered to the Employee.”
Conclusion
An award of restricted stock units (RSUs) is a popular form of equity compensation that provides employees with the opportunity to receive company stock once specific vesting conditions are met. RSUs are a valuable tool for aligning employee interests with company performance, encouraging retention, and offering employees a stake in the company’s success. For companies, RSUs are an attractive alternative to immediate cash compensation and can be used as a long-term incentive for high-performing employees.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.