An RSU is a promise, not a share — and that changes everything.

A promise, not a share

The whole of an RSU is one sentence in a contract: if the conditions in this agreement are satisfied, the company will deliver a share, or its cash value, at a stated time. Nothing is set aside to back that sentence. The units are unfunded and unsecured, which in an insolvency means the holder ranks as a general creditor of the company rather than as an owner of anything.

Every downstream difference falls out of that. Because no share exists yet, there is no vote to cast and no dividend to receive. Some plans add dividend equivalents — a separate contractual right to the cash value of dividends declared on the underlying share, usually accrued and paid only when the units settle — but that is a second promise bolted onto the first, not something the units carry by default.

It also means there is nothing to sell, nothing to pledge, and nothing to make a tax election on. Section 83 taxes property transferred in connection with the performance of services. An RSU at grant is not a transfer of property, so section 83 has nothing to bite on and there is no early-taxation choice to make. Hold that thought; it is the single most common error on the internet about RSUs, and it is dealt with in full below.

Grant, vest and settlement are three different dates

People use these words interchangeably and then get surprised by a tax bill. Grant is the date the award agreement takes effect and the number of units is fixed. Vest is the date the service or performance condition is satisfied. Settlement — also called delivery — is the date shares actually move into the holder’s name, and it is settlement, not vesting, that triggers income.

Most public-company plans settle at vest, so the two dates collapse into one and nobody has to think about the distinction. Private plans routinely separate them, and the gap between vesting and delivery is exactly where section 409A lives.

Section 409A governs nonqualified deferred compensation, and a legally binding right in one year to a payment in a later year is deferred compensation unless an exemption applies. The exemption most RSU plans are drafted to hit is the short-term deferral rule: an amount paid by the 15th day of the third month after the end of the year in which it vests sits outside section 409A entirely (Treas. Reg. §1.409A-1(b)(4)). Falling inside the section on a non-compliant deferral means immediate income inclusion plus an additional 20% tax and a premium-interest charge under section 409A(a)(1)(B). That is why award agreements are so specific about the settlement window, and why nobody should assume the delivery date is negotiable.

Restricted stock units are not restricted stock

The names are one word apart and the instruments are structurally different. Restricted stock is stock: it is issued at grant, the recipient is on the cap table from day one, and the company holds a right to repurchase or cancel the unvested portion if the recipient leaves. That repurchase right is a substantial risk of forfeiture, not an absence of ownership. Because the shares are property that has been transferred, section 83 applies, and with it the election in section 83(b).

Single trigger and double trigger

A single-trigger RSU has one condition: time in service. The units vest on the schedule, and they settle as they vest. A double-trigger RSU has two, and both must be satisfied before anything is delivered — the same time-based service condition, plus a liquidity condition, normally an initial public offering or a change of control.

The mechanism is worth being precise about, because the failure mode is invisible until it is not. With a double trigger, satisfying the time condition on its own does nothing observable. The units become satisfied-but-unsettled. No shares appear, no income is recognised, no tax is due, and the holder is still a general creditor of the company. They stay in that state, potentially for years, until the liquidity condition fires — at which point every satisfied unit settles at once.

Why a private-company RSU is a different instrument

At a public company an RSU behaves almost like deferred cash. It vests, shares are delivered, some are withheld or sold to cover the tax, and the rest can be sold that afternoon. The tax is inconvenient but it is fundable out of the thing being taxed.

At a private company there is no market. If a single-trigger RSU settles, the holder recognises ordinary income measured by the fair market value of illiquid shares, and owes cash tax on an asset they cannot convert into cash. Nothing about the tax rule cares that the shares are unsaleable. That is the specific failure the double-trigger design exists to prevent.

The company has the mirror-image problem. For an employee it must remit withholding in cash, on the settlement date, whether or not anyone has been paid anything. Sell-to-cover needs a buyer. Net share settlement — the company withholding shares and paying the tax itself — needs the company to fund the remittance and to absorb the shares, which is doable but is a real cash outflow and needs a repurchase or buyback mechanism to be clean. Neither works casually without a market.

Double trigger solves the individual problem and creates a collective one. Because everybody’s satisfied units settle on the same event, an IPO or an acquisition produces a large, concentrated taxable event for the whole company at once — years of accrued vesting recognised in a single tax year, at whatever the shares are worth on that day. Plans are normally drafted so that settlement completes inside the short-term deferral window, or otherwise satisfies section 409A, which constrains how long the company can wait.

The well-known squeeze is an IPO settlement that collides with a post-offering lockup. Income is recognised and withholding is due on the settlement date, while the shares delivered cannot be sold until the lockup expires. If the price falls during the lockup, the tax was measured on the higher value and the asset available to pay it is worth less. This is a mechanism, not a rarity, and it is worth reading the settlement and lockup provisions before an offering rather than after.

The other private-company trap is expiry. Private RSU awards commonly carry an outside date — often several years after grant — after which units that have not settled simply lapse. A double-trigger RSU can therefore expire worthless even though the holder served every day of the vesting schedule, because the second trigger never happened. The time condition was met in full and it bought nothing. Anyone weighing an offer heavy in private RSUs should find that date in the award agreement.

The tax event at settlement

When the units settle, the holder recognises ordinary income equal to the fair market value of the shares delivered. There is no basis to subtract, because nothing was paid for them. For an employee this is wages: it goes on the Form W-2, and it is subject to income tax withholding and to Social Security and Medicare tax.

Income tax withholding on that income normally runs through the supplemental-wage rules. Employers may apply a flat statutory rate to supplemental wages, and that rate steps up for supplemental wages above $1,000,000 in a calendar year. The rates themselves are republished every year in IRS Publication 15 (Circular E), so read them there rather than trusting a figure quoted on a blog.

FICA can also run on a different clock from income tax. Under the special timing rule for nonqualified deferred compensation in section 3121(v)(2), Social Security and Medicare tax on an amount deferred can become due when the amount is vested and reasonably ascertainable, even if the shares are delivered later. Whether that rule reaches a particular award turns on how the award is drafted and on the interaction with the exemptions the plan relies on. Treat it as fact-specific and confirm it rather than assuming income tax and payroll tax land together.

Funding the withholding

The company owes cash to the tax authorities on the settlement date. There are three ordinary ways to produce it, and they do different things to how many shares the holder ends up with.

• Sell-to-cover. Enough of the delivered shares are sold on the market immediately to raise the withholding, and the proceeds are remitted. The holder keeps the remainder. This needs a market and a broker, so it is a public-company mechanism.
• Net share settlement. The company withholds shares from the delivery rather than issuing them, and remits the cash itself. The holder receives fewer shares and pays nothing. The company has funded the tax out of its own cash and now holds back stock, so a private company needs a repurchase or buyback programme for this to be sustainable.
• Cash from the holder. The holder wires the withholding to the company and receives the full share count. This preserves the position and is the only one of the three that works at a private company with no buyback, which is precisely why it is the one that hurts.

A grant of 4,800 units vesting monthly over 48 months delivers 100 units a month at a public company, and each delivery carries its own small withholding event. The same 4,800 units on a double trigger at a private company deliver nothing for four years and then, if a liquidity event happens, settle in one block with one very large withholding event. Same award, entirely different cash-flow shape.

Basis, and what happens after settlement

The amount included in income at settlement becomes the basis in the shares. From that point the shares are ordinary property: any further movement in the price is capital gain or capital loss, and the holding period starts at settlement. Long-term treatment requires holding for more than one year under section 1222. A holder who sells on the day of settlement usually has close to zero capital gain, because the sale price and the basis are the same figure.

This is where RSUs differ most sharply from options. An option holder can exercise early and start the clock on future appreciation at capital rates, which is the whole logic behind the exercise-timing decision covered at /equity/rsu-vs-stock-options. An RSU holder cannot: the timing is set by the plan, the whole delivered value is ordinary income, and only appreciation after settlement can ever be capital.

Leaving before the units settle

Unvested units are forfeited on termination. That part is uncontroversial and matches how vesting works generally (/equity/vesting). The part worth reading the plan for is what happens to units that have satisfied their time condition but have not settled.

Under most double-trigger designs those units lapse as well. The holder served the full period, met the service condition in full, and still leaves with nothing, because the liquidity condition was never satisfied while they were employed. Some plans carve out an exception for a termination shortly before a closing, and acceleration provisions can change the answer entirely (/equity/acceleration) — but the default is asymmetric, and it is the sentence in the award agreement that decides, not the vesting table in the offer letter.