Vesting of restricted stock units: Overview, definition, and example
What is vesting of restricted stock units?
Vesting of restricted stock units (RSUs) refers to the process by which an employee earns the right to receive full ownership of stock units awarded by their employer over a set period of time or upon meeting certain conditions. RSUs are a form of compensation where employees are granted a certain number of shares, but they don't actually own or can sell those shares until they have "vested." Vesting means that the employee has met the required service time, performance goals, or other conditions specified in their agreement, at which point the RSUs become fully transferable to the employee.
For example, an employee might be awarded 1,000 RSUs, but they only gain full ownership of them after three years of continuous employment, with a certain number of units vesting each year.
Why is vesting of restricted stock units important?
Vesting of RSUs is important because it aligns the interests of employees with those of the company by encouraging employees to stay with the company for a specified period. It’s a way for businesses to reward long-term commitment and performance while providing a financial incentive. For employees, vested RSUs can be a valuable asset and can contribute significantly to their overall compensation and wealth.
For companies, vesting helps retain talented employees and motivates them to contribute to the company’s success. For employees, understanding the vesting schedule is crucial to knowing when they can access the full value of the RSUs.
Understanding vesting of restricted stock units through an example
Imagine a software company grants an employee 2,000 RSUs as part of their compensation package. The RSUs vest over four years, with 500 shares vesting each year. If the employee stays with the company for four years, they will have fully vested in the 2,000 RSUs and can sell or transfer the stock. However, if the employee leaves the company after two years, only 1,000 of the RSUs will have vested, and they will lose the remaining 1,000 unvested RSUs.
In another example, an employee at a startup might receive RSUs that vest based on both time and company performance. For example, the RSUs might vest after three years of employment, but only if the company achieves specific revenue targets during that time. If the company meets the targets and the employee stays for three years, they will vest in all their RSUs.
An example of a vesting of restricted stock units clause
Here’s how a vesting clause for RSUs might appear in an employment contract:
“The Company shall grant the Employee 2,000 restricted stock units (RSUs), which shall vest over a four-year period, with 25% of the total units vesting at the end of each anniversary of the Employee's start date, provided the Employee remains employed with the Company on each vesting date.”
Conclusion
Vesting of restricted stock units is a mechanism used to grant employees ownership in the form of stock over time, typically tied to their continued employment or achievement of certain performance milestones. It provides both an incentive for employees to stay with the company and a valuable reward for long-term commitment. For businesses, vesting ensures that employees are motivated to contribute to the company's success, while employees benefit from potential stock ownership as part of their compensation.
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.