Vesting of RSUs: Overview, definition, and example
What is vesting of RSUs?
Vesting of RSUs (restricted stock units) refers to the process by which an employee earns ownership of stock or shares in a company over time. RSUs are a form of compensation given by an employer that gives employees the right to receive shares in the company after a certain period or upon meeting specific conditions, such as continued employment or performance goals. "Vesting" refers to the point at which the employee fully owns the shares granted by the employer. Before vesting, the employee does not have full ownership rights, and the shares may be subject to forfeiture if the employee leaves the company prematurely.
For example, an employee may be granted 100 RSUs, but they won’t actually receive or be able to sell those shares until they have been with the company for three years, at which point the RSUs vest.
Why is vesting of RSUs important?
Vesting of RSUs is important because it incentivizes employees to stay with the company for a certain period and meet performance goals. It aligns the interests of the employee with the company's long-term success by tying the employee's compensation to the value of the company’s stock. The vesting schedule is often used as a retention tool to encourage employees to remain loyal to the company.
For employees, vesting of RSUs represents a way to benefit from the company's growth and increase in stock value, while also providing a form of deferred compensation. For employers, vesting of RSUs helps attract, retain, and motivate talented employees by offering them an opportunity to participate in the company’s financial success.
Understanding vesting of RSUs through an example
Imagine an employee, Sarah, is granted 200 RSUs from her employer, with a 4-year vesting schedule. The RSUs vest annually, meaning 50 shares vest each year for four years, contingent on Sarah remaining employed with the company. If Sarah stays with the company for the full 4 years, she will receive all 200 shares. If she leaves the company before the 4 years are up, she may forfeit any unvested RSUs.
For example, after one year, Sarah has vested 50 RSUs and is able to sell or transfer those shares. After two years, another 50 RSUs vest, and so on. If Sarah leaves the company after two years, she would keep the 100 shares that have vested, but she would lose the remaining 100 unvested shares.
An example of vesting of RSUs clause
Here’s how a vesting of RSUs clause might appear in an employment agreement:
“The Company grants the Employee 1,000 RSUs under the Company’s equity incentive plan. The RSUs will vest in equal annual installments over a period of four years, with 25% of the RSUs vesting on the first anniversary of the grant date, and the remaining RSUs vesting in three subsequent annual installments, subject to the Employee’s continued employment with the Company.”
Conclusion
Vesting of RSUs is a crucial concept in employee compensation plans, providing employees with a stake in the company’s future success while encouraging retention and performance. The vesting schedule outlines how and when employees can claim ownership of their RSUs, typically based on their tenure with the company or other performance metrics.
For businesses, RSUs with vesting schedules help align employee incentives with company goals, while for employees, it offers a potential financial reward tied to their contributions and the company’s growth. Understanding how vesting works is essential for both employees and employers to make the most of this form of 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.