What Is an RSU? Restricted Stock Units Explained

A restricted stock unit (RSU) is a promise from your employer to give you shares of company stock in the future — typically after you've remained at the company for a specified vesting period. RSUs have become the dominant form of equity compensation in the technology industry and are increasingly common across other sectors. For millions of employees, RSUs represent a significant (sometimes dominant) portion of their total compensation and net worth.

How RSUs Work

Your employer grants you a specified number of RSUs — for example, 1,000 RSUs vesting over 4 years. A common vesting schedule is 25% per year: 250 RSUs vest after your first year, then 250 each subsequent year. When RSUs vest, you receive actual shares of company stock (or the cash equivalent). Until they vest, RSUs are a promise — you don't own the shares and can't sell them.

Unlike stock options (which only have value if the stock price exceeds the exercise price), RSUs always have value as long as the stock price is above zero. This makes RSUs less risky than options from the employee's perspective — you receive something valuable regardless of whether the stock has appreciated since the grant date.

How RSUs Are Taxed

RSUs are taxed as ordinary income when they vest — not when they're granted. If 250 RSUs vest and the stock price is $200, you have $50,000 in ordinary income added to your W-2 for that year. Your employer typically withholds taxes by selling a portion of the vesting shares (often called "sell to cover"), delivering the remaining shares to your account.

After vesting, any subsequent gain or loss is a capital gain or loss. If you hold the shares after vesting and sell at $250, the $50 per share gain ($250 minus the $200 vesting price) is a capital gain — short-term if held under a year after vesting, long-term if held over a year. The initial $200 per share was already taxed as income at vesting.

The Concentration Risk Problem

For many technology employees, RSUs create dangerous concentration. A software engineer earning $200,000 in base salary plus $200,000 in annual RSU vesting may accumulate millions in company stock within a few years. If the company's stock declines 50% (as many technology stocks did in 2022), a huge portion of their net worth evaporates simultaneously with the career risk they already face as an employee of the same company.

The rule of thumb: no single stock should represent more than 10-15% of your total investable assets, regardless of how much you love the company. This means systematically selling vested RSUs and diversifying into other investments — index funds, quality stocks in different sectors, bonds. The emotional attachment to your employer's stock is understandable; the financial concentration it creates is genuinely dangerous.

RSU Strategies

Sell-at-vesting is the simplest approach: sell every RSU as it vests and invest the proceeds in a diversified portfolio. This eliminates concentration risk and treats RSUs as a cash bonus that happens to arrive in stock form. It's the strategy most financial advisors recommend for employees who already have significant human capital risk tied to their employer.

Hold-and-evaluate is appropriate if you've done the quality analysis and believe your company's stock is genuinely undervalued relative to its competitive advantages. But this should be a conscious investment decision — not a default. Ask yourself: if you received a cash bonus of the same amount, would you use it to buy your company's stock? If not, you should sell the RSUs and invest elsewhere.

Tax-optimized selling considers the timing of sales: selling in years when your ordinary income is lower (reducing the marginal rate on vesting income), holding shares after vesting for 12+ months to qualify for long-term capital gains rates on subsequent appreciation, and coordinating with tax-loss harvesting in other portfolio positions.