Settlement of RSUs: Overview, definition, and example
What is the settlement of RSUs?
The settlement of RSUs (Restricted Stock Units) refers to the process by which the units of stock granted to an employee or recipient are converted into actual shares of company stock. RSUs are a form of compensation where an employee is promised a certain number of shares in the company at a future date, typically subject to vesting conditions such as continued employment or meeting performance goals. Once the RSUs vest, the company issues actual shares of stock to the employee, and the employee becomes the rightful owner of those shares, which can then be sold or held according to the company's rules.
The settlement process includes determining when the RSUs are vested, transferring the shares to the employee, and handling any necessary tax withholdings or reporting obligations.
Why is the settlement of RSUs important?
The settlement of RSUs is important because it represents the final step in the employee’s compensation process, where promised shares are actually delivered. For employees, the settlement provides a tangible benefit in the form of company stock, which may have financial value. For employers, it allows the company to reward and retain key employees, tying their compensation to company performance and stock value.
The settlement process is also significant for tax purposes, as RSUs are taxable when they vest, and employees must pay taxes on the value of the shares they receive. Understanding the settlement process ensures that employees are aware of the timing of their benefits and can plan accordingly for tax liabilities.
Understanding settlement of RSUs through an example
Let’s say a company, XYZ Corp., grants 1,000 RSUs to an employee, Alice, with a 4-year vesting period (250 RSUs vest each year). Alice works for the company for four years, and as each portion of her RSUs vests, she becomes entitled to receive 250 shares each year. After four years, when all her RSUs have fully vested, Alice will receive 1,000 shares of XYZ Corp. stock.
The settlement occurs when XYZ Corp. transfers the shares to Alice’s brokerage account. The value of the stock on the vesting date will determine how much Alice needs to report for tax purposes. If the stock is worth $20 per share when the RSUs vest, Alice will owe taxes based on the value of the 1,000 shares ($20,000), and she will own the actual shares in her brokerage account.
An example of a "settlement of RSUs" clause
Here’s how a settlement of RSUs clause might appear in an employment or equity compensation agreement:
“Upon the vesting of the Restricted Stock Units (RSUs), the Company shall settle such RSUs by transferring the equivalent number of shares of common stock to the Employee’s brokerage account. The settlement of the RSUs shall occur on the Vesting Date, subject to the Employee’s continued employment and any applicable withholding requirements. The value of the RSUs shall be determined by the Company’s stock price on the Vesting Date.”
Conclusion
The settlement of RSUs marks the final step in the process of granting restricted stock units to employees. It converts the units into actual company stock, which employees can then own or sell. This process is essential for ensuring employees receive the compensation they were promised, while also creating tax implications that must be addressed. For businesses, the settlement of RSUs is a critical part of employee compensation strategies, offering a way to reward, retain, and incentivize key talent by tying their compensation to the performance of the company’s stock.
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.