Restricted Stock vs. Restricted Stock Units (RSUs): A Tale of Two Equity Incentives

What's the Difference?

Restricted stock and restricted stock units (RSUs) are both forms of equity compensation that give employees a stake in their company's ownership. However, there are some key differences between the two.

• Restricted stock is a grant of actual shares of stock that are subject to certain restrictions, such as a vesting period. Once the vesting period has ended, the employee can sell the shares for cash.
• RSUs are a promise to pay employees a certain number of shares of stock in the future. RSUs do not give employees any voting rights or dividends until they are settled.

Which Is Right for You?

The decision of whether to use restricted stock or RSUs depends on a number of factors, including the company's stage of development, its cash flow, and its tax situation.

Restricted stock is often used by early-stage companies that do not have a lot of cash on hand. Restricted stock can be used to attract and retain key employees without having to pay them a large amount of cash upfront.

RSUs are often used by larger, more established companies. RSUs can be used to reward employees for their performance and to align their interests with the company's long-term goals.

Benefits of Restricted Stock and RSUs

There are a number of benefits to using restricted stock and RSUs as equity compensation.

• Attracts and retains top talent. Equity compensation can help companies attract and retain top talent by giving employees a stake in the company's success.
• Aligns employee interests with company goals. Equity compensation can align employee interests with the company's long-term goals by giving employees a financial incentive to help the company succeed.
• Motivates employees to perform well. Equity compensation can motivate employees to perform well by giving them a stake in the company's success.
• Provides a tax-advantaged way to reward employees. Equity compensation can provide a tax-advantaged way to reward employees by allowing them to defer taxes on their gains until the shares are sold.

Pain Points of Restricted Stock and RSUs

There are also some pain points associated with using restricted stock and RSUs as equity compensation.

• Can be complex to administer. Restricted stock and RSUs can be complex to administer, especially for early-stage companies.
• Can be expensive. Restricted stock and RSUs can be expensive to issue, especially if the company's stock price is high.
• Can create tax liability for employees. Restricted stock and RSUs can create tax liability for employees if they are not properly structured.
• Can be difficult to sell. Restricted stock and RSUs can be difficult to sell, especially if the company's stock price is low.
• Can cause dilution. Restricted stock and RSUs can cause dilution of the company's shares, which can reduce the value of existing shareholders' investments.

Common Mistakes to Avoid

There are a number of common mistakes to avoid when using restricted stock and RSUs as equity compensation.

• Not having a clear vesting schedule. A vesting schedule is a plan that outlines when employees will be able to sell their restricted stock or RSUs. It is important to have a clear vesting schedule in place to avoid confusion and disputes.
• Not understanding the tax implications. Restricted stock and RSUs can have significant tax implications. It is important to understand the tax implications before issuing restricted stock or RSUs to employees.
• Not considering the impact on dilution. Restricted stock and RSUs can cause dilution of the company's shares. It is important to consider the impact on dilution before issuing restricted stock or RSUs.
• Not having a clear repurchase policy. A repurchase policy is a plan that outlines when and how the company will repurchase restricted stock or RSUs. It is important to have a clear repurchase policy in place to avoid confusion and disputes.

Conclusion

Restricted stock and RSUs are both valuable tools for equity compensation. However, it is important to understand the differences between the two and the benefits and pain points associated with each type. By carefully considering the factors involved, you can make the best decision for your company and your employees.

Tables

Table 1: Comparison of Restricted Stock and RSUs

Table 2: Benefits of Restricted Stock and RSUs

Table 3: Pain Points of Restricted Stock and RSUs

Table 4: Common Mistakes to Avoid