When Do Your Restricted Stock Units (RSUs) Vest?

Restricted Stock Units (RSUs) have become a common component of employee compensation. While RSUs are granted as part of a compensation package, they do not represent immediate ownership of company stock. Instead, they are a promise of future equity that becomes fully owned by the employee once specific conditions are met. Understanding the timing of this process, known as vesting, is important for individuals to manage their financial planning effectively. This guide outlines the key aspects of when RSUs vest.

Key Vesting Concepts

Understanding the distinct terms associated with RSUs is fundamental to grasping their vesting process. The “grant date” marks the initial award of RSUs to an employee. On this date, the company formally promises a certain number of shares in the future, but the employee does not yet own them.

The “vesting date” is the specific point in time when the RSU restrictions are removed, and the employee gains full ownership rights to the shares. Following the vesting date, the “release date” or “settlement date” is when the vested shares are actually delivered to the employee, typically into a brokerage account. While often simultaneous, the vesting and settlement dates can sometimes differ due to administrative or tax withholding procedures. Until RSUs vest, they hold no voting rights or dividend payments.

Typical Vesting Timelines

The “when” of RSU vesting is primarily defined by the company’s established vesting schedule. These schedules are designed to retain employees and typically span several years. Two common structures are “cliff vesting” and “graded vesting.”

Cliff vesting involves a waiting period, often one year, before any RSUs vest. Once this initial period concludes, a significant portion, or sometimes all, of the RSUs vest at once. For example, an employee might receive 100% of their RSU grant after completing one year of service. After the cliff, any remaining unvested RSUs may then follow a graded schedule.

Graded vesting, on the other hand, allows RSUs to vest in installments over a specified period. A common graded schedule involves 25% of the RSUs vesting each year over a four-year period. Some companies may even implement more frequent vesting, such as quarterly or monthly installments, after an initial cliff period. This incremental approach provides employees with portions of their equity over time, aligning their long-term commitment with company performance.

Conditions Impacting Vesting

While continued employment is a common requirement for time-based RSU vesting, various conditions can influence the standard timeline. Performance-based vesting ties the release of RSUs to the achievement of specific metrics. These metrics can be individual performance goals, company-wide financial targets, or stock price objectives. Such RSUs, sometimes called Performance Stock Units (PSUs), incentivize employees to contribute directly to company success.

Accelerated vesting allows RSUs to vest sooner than the original schedule under certain circumstances. This can occur during a “change of control” event, such as a company merger or acquisition, where unvested RSUs may immediately vest to ensure employee loyalty. Accelerated vesting provisions might also be triggered by specific clauses related to an employee’s retirement or disability, acknowledging long-term contributions.

Conversely, termination of employment typically impacts unvested RSUs. If an employee resigns or is involuntarily terminated, any RSUs that have not yet vested are usually forfeited back to the company. This forfeiture clause serves as a retention mechanism, encouraging employees to remain with the company through their full vesting period. However, vested RSUs remain the property of the employee, regardless of the reason for separation.

The Vesting Event

The moment RSUs vest signifies a change in ownership and triggers specific financial implications. Upon vesting, the restricted nature of the shares is removed, and they become fully owned by the employee. The employee now possesses the actual company shares, which can be held or sold.

Vesting is considered a taxable event. The fair market value of the vested shares on the vesting date is treated as ordinary income for the employee. This income is subject to federal, state, and payroll taxes, similar to a cash bonus or regular salary. Employers withhold a portion of the vested shares to cover these tax obligations. The value of the vested RSUs is reported on the employee’s W-2 form for the year in which they vest, potentially increasing their taxable income. The shares are then delivered to the employee’s designated brokerage account, completing the transfer of ownership.