RSA vs RSU: A Comprehensive Comparison

When it comes to employee equity compensation, there are two main types of options that companies can consider: restricted stock awards (RSA) and restricted stock units (RSU). Both have benefits and drawbacks that should be considered when making a decision. 

We have compiled an informative comparison of both stock options, as well as the best cap table software to help you make the best choice for your company. 

Restricted Stock Awards (RSA) 

A restricted stock award, or RSA, is a type of equity compensation that gives employees the right to purchase shares of company stock at a set price, fair market value, or even no cost. The shares are awarded to the employee when they join the company. 

Restricted stock awards are often used by companies in their early stages when the value of their stock is low, and they may lack the ability to pay competitive salaries that larger, more established companies can. RSA can aid in employee retention due to vesting stipulations and once purchased, the employee becomes a shareholder, making them feel valued.

Advantages and Disadvantages of RSA

Advantages:

• At the time of purchase, employees become shareholders, boosting employee morale. 
• The employee can choose when to pay taxes; at the time of purchase, or when fully vested. 

Disadvantages:

• Unexpected upfront costs to the employee. 
• Only issued as stock, unlike restricted stock units, which can be issued as cash or shares at the time of vesting. 

Restricted Stock Units (RSU) 

Restricted stock units are a type of equity compensation that gives employees shares of company stock in the future. Because the shares aren’t actually given to them yet, it’s like a promise to the employee by the company. 

Often offered by larger, more established companies as a long-term employee incentive, an RSU can act as a motivator in an environment with limited opportunities for advancement. An RSU is also subject to vesting, which can help boost staff retention.

Advantages and Disadvantages of RSU

Advantages:

• No immediate tax liability to the employee, as the shares aren’t taxable until fully vested. 
• The vesting period gives the employee an incentive to stay with the company, boosting staff retention.
• No upfront costs to the employee.
• Can be issued as shares or cash.

 

Disadvantages:

• Shares aren’t issued until fully vested. Employees who aren’t fully vested when they leave (or if the company closes before vesting is reached) never receive the shares. 
• The employee isn’t a shareholder until fully vested.
• Unexpected taxes at vesting, depending on the market value.

Key Differences to Note Between RSA and RSU

Vesting

Restricted Stock Awards:

• The employee owns shares at the time of purchase; however, they are still subject to vesting for the employee to exercise their rights. 
• If the vesting requirements aren’t met when the employee leaves the company, the unvested shares are subject to being repurchased by the company.

Restricted Stock Units:

• The employee doesn’t own shares until fully vested. 
• They do not become shareholders until vesting requirements are met. 

Termination

Restricted Stock Awards:

• Unvested shares are subject to buyback from the company.

Restricted Stock Units:

• Unvested shares are forfeited back to the company.  

Taxation

Restricted Stock Awards:

• Option to pay all taxes upfront or once fully vested with an 83(b) election. The employee must choose a tax option within 30 days of the grant date.
• Subject to capital gains tax. 

Restricted Stock Units:

• Shares aren’t taxed until fully vested. 
• Subject to capital gains tax.

Whether RSA or RSU, Easily Keep Track of Any Investment Option

Ultimately, deciding between an RSA and RSU depends on what fits your company’s needs. Take the time to review the differences, as well as the advantages and disadvantages of each option. 

Whichever you choose, tracking your company’s stock options is crucial. Astrella’s professional equity management software makes it easy to track any investment. Contact us today for a demo!