RSU: Meaning, taxation, and how to better manage your startup’s cash flow
Learn the meaning of RSUs, how they vest, tax implications, and how founders should consider them for compensation, dilution, and company cash flow.
Rho Editorial Team
Restricted stock units are a common form of equity compensation that convert into actual shares of stock after a vesting period.
Vested RSUs are taxed as ordinary income at fair market value, and later sales create capital gains tax obligations depending on when shares are sold.
Planning around vesting dates, tax liability, and concentration in company stock helps employees avoid surprises and gives founders a clearer view of dilution.
RSUs influence ownership, cash flow, and liquidity planning, making them an important part of a founder’s financial strategy
Restricted stock units are an increasingly common item in a startup compensation package. They help teams reward people with equity that follows performance without asking for a purchase price up front.
For founders, RSUs come with careful considerations beyond employee compensation. They influence ownership over time, payroll withholding, and how prepared you are when a liquidity event arrives. This guide covers how RSUs work, the tax implications, how they compare to stock options and restricted stock awards, and what to plan for as your company scales.
What are restricted stock units (RSUs)?
Restricted stock units are promises to deliver shares of stock at a future date once vesting conditions are met. Employees don’t hold actual shares until the units vest. Before that point, their units are considered “unvested” and carry no voting rights or dividends.
RSUs sit alongside other forms of equity compensation. Restricted stock awards give actual shares at grant that can be forfeited if conditions are not met, and some recipients make an 83(b) election. Stock options give the right to buy shares later at a set purchase price and only create value if the stock price rises above that level. RSUs have become popular because the value is clear when shares vest and because administration is simpler for growth companies.
The RSU process
An RSU grant lays out the number of units, how they vest, and when they turn into actual shares. Follow this sequence.
First, the company awards the RSU grant on the grant date as part of the compensation package.
Next, the grant defines a vesting schedule that explains how and when units become earned, for example, monthly or annually over a four-year vesting period.
Then, on each vesting date, a portion of the grant becomes vested RSUs that you own.
After vesting, on the settlement date, the company delivers the vested units as actual shares of stock to your brokerage account.
Finally, the fair market value on the vesting date sets the amount of ordinary income for tax purposes and becomes your cost basis for any future capital gains tax when you sell.
Vesting can be based on time, performance milestones, or a liquidity event such as an IPO, and unvested units are forfeited if the employee leaves before they vest.
How RSUs work in practice
RSUs follow a clear pattern once they are granted, vested, and eventually sold. Let’s take a look at how an employee experiences vesting and compare that with stock options to get a better idea of why companies use both forms of equity compensation.
RSU grant example
An employee accepts a job offer with a grant of 1,000 RSUs that vest over four years. After the first year, 250 units vest when the company’s stock price is $50. On the vesting date, those 250 units settle into the employee’s brokerage account as 250 shares of stock. The fair market value of $12,500 is treated as ordinary income, and taxes are withheld. If the employee sells immediately at $50, no capital gain is created. If they hold for one year and sell at $70, the $20 increase per share qualifies as a long-term capital gain.
Stock options comparison
Now imagine the same employee is granted 1,000 stock options with a $40 purchase price. If the stock trades below $40, the options have no value to exercise. Unlike RSUs, which always create shares when they vest, options can expire worthless. This difference explains why RSUs feel more predictable, while options carry more risk but also greater upside if the stock price rises well above the strike.
RSUs vs stock options and RSAs
RSUs, stock options, and restricted stock awards are all equity tools, and each has a different tradeoff profile.
Feature | RSUs | Stock options | RSAs |
Cost to employee | Employees receive actual shares when units vest. | Employees buy shares at a set purchase price when they exercise. | Employees receive shares at the grant that can be forfeited. |
Where value comes from | Value depends on the value of the stock at vesting. | Value depends on the stock price relative to the strike at exercise. | Value exists at grant and is tied to restrictions. |
Tax timing | Income tax at vesting, capital gains tax on sale. | Taxes at exercise or sale, depending on type and timing. | Taxes at grant with an 83(b) election or when restrictions lapse. |
Risk profile | Units that vest produce shares and therefore value. | Options can expire with no value if the stock price never exceeds the strike. | Shares exist at grant and can lose value before restrictions lapse. |
Ownership impact | Shares add to the count when shares vest. | Shares add to the count when options are exercised. | Shares add to the count at grant. |
Many later-stage companies favor RSUs because employees see clear value when shares vest, and finance teams get more predictable accounting.
Tax implications of RSUs
RSU tax lands in two steps, and both require proper planning.
When RSUs vest
When RSUs vest, the fair market value of the shares is treated as ordinary income for income tax. If 1,000 units vest at a value of $50 per share, that creates $50,000 of taxable income. Employers usually withhold federal, state, and Medicare taxes, often by retaining a portion of the shares. Default federal withholding is often 22%, which may be lower than an employee’s actual tax rates. That mismatch can leave additional tax liability at filing.
When employees sell
When the employee sells, any movement in the value of the stock since vesting is a capital gain or loss. A sale within one year of vesting is generally short-term and taxed at ordinary income tax rates. A sale after one year is generally long-term and taxed at long-term capital gains tax rates. Employees report sales on Schedule D.
The IRS updates guidance on related topics such as Section 83 and the 83(b) election. While RSUs are not eligible for an 83(b) election, understanding Section 83 helps teams compare RSUs, RSAs, and options as part of an overall equity plan. Always confirm the specifics with a tax professional.
Planning around RSUs: Timing taxes and portfolio risk
RSU planning comes down to three areas: timing, taxes, and concentration. A clear plan prevents surprises and keeps restricted stock units aligned with long-term goals.
Plan around the vesting schedule and tax liability
You should track each vesting date, the number of units vesting, and any trading windows that apply. When shares vest, the fair market value is treated as ordinary income. For example, if 500 units vest at $30 per share, that creates $15,000 of taxable income.
In 2025, the federal withholding rate for supplemental wages is 22%. If your marginal tax rate is higher, you may owe more when you file, which makes it important to run tax estimates ahead of each vest and decide whether to sell, hold, or use a sell-to-cover strategy.
Choose a sell or hold framework in advance
Selling vested RSUs immediately simplifies RSU tax and ensures you have cash to cover income tax. A sell-to-cover approach sells only enough shares to cover tax liability, leaving the rest invested. Holding beyond the vesting date can qualify you for long-term capital gains tax rates if shares are sold after more than one year, but it also exposes you to the risk that the value of the stock falls. Clear rules reduce guesswork. Decide in advance what price or timeline will trigger a sale.
Monitor concentration and use thresholds
RSUs increase exposure to company stock as they vest. If a single position grows too large, it can distort your financial plan. Many investors consider 20% of investable assets in one stock as a point to rebalance.
Rebalancing may mean selling on a schedule, setting aside cash for taxes, or donating appreciated shares to nonprofits. Since vested RSUs settle into a brokerage account, keeping account details updated and tracking cost basis are essential to manage sales and reporting.
Coordinate support when needed
Large vesting events, IPOs, or acquisitions can create multiple tranches of vested RSUs at once, along with significant tax liability. A financial advisor can help model tax implications, coordinate timing, and manage cash flow. Creating an annual rhythm keeps RSUs from overwhelming your broader financial plan.
The goal is clarity. You know when shares vest, you know the likely tax implications, and you decide in advance how you will act. That is how you turn equity compensation into outcomes you can rely on.
Company-level considerations with RSUs
RSUs extend beyond payroll—they shape ownership, operations, and readiness for major company milestones.
Impact on ownership and administration
Growth-stage companies often shift from stock options to RSU grants because the value at vesting is easier for employees to understand and simpler to administer. Unlike options, there is no purchase price or exercise decision. For finance teams, RSUs still require modeling. Shares are issued when they vest, so dilution enters the cap table gradually. Accurate modeling of vested RSUs alongside stock options and other equity ensures founders and investors understand the ownership impact.
Acceleration, liquidity events, and tax implications
Some plans include acceleration if there is an acquisition or IPO. In a single-trigger or double-trigger acceleration, multiple tranches of unvested RSUs can vest at once, which significantly increases both dilution and employee tax liability. Planning for these events in advance helps founders prepare employees for the tax implications of vested RSUs and ensures the company can manage investor expectations around ownership.
Cash flow and reporting
RSUs also affect operations. Payroll teams must handle withholding for federal, state, and Medicare taxes when shares vest, often by retaining shares or processing cash payments. These transactions hit cash flow and affect how finance teams close the books. Clear processes and timing make sure reporting is accurate and predictable.
If you are evaluating equity structure more broadly, you may also find our advisory shares guide useful as a companion reference.
Making the most of your RSUs with Rho
RSUs are valuable, but they work best inside a plan. Set clear rules for when you sell or hold, run tax estimates ahead of large vesting events, and monitor how much company stock you hold over time. If you are a founder, treat RSUs as part of your operating plan since they affect hiring, ownership, and readiness for a liquidity event.
At Rho, we help founders connect these decisions to daily operations. Our platform brings cash, spend, and treasury into one place so you have clear visibility as shares vest and as your plans evolve. Whether you’re preparing to raise, actively raising, or have just closed a round, we can help you manage capital with control and speed.
Sign up today, and let’s get started.
FAQs founders have about RSUs
Can RSUs pay dividends before they vest?
RSUs do not pay dividends before vesting, but some companies provide dividend equivalents that are credited once shares vest.
Do RSUs give voting rights?
RSUs do not carry voting rights until they vest into actual shares of stock. After vesting, the shares hold the same rights as other common stock.
What happens to RSUs if a company remains private?
If a company stays private, vested RSUs may be illiquid until an IPO or acquisition provides a market for the shares.
Do RSUs expire?
Unvested RSUs are forfeited if the employee leaves the company, but vested RSUs do not expire once they are delivered as shares.
Can RSUs be transferred to another person?
RSUs are generally non-transferable while unvested, meaning they cannot be sold, gifted, or pledged. Once they vest into actual shares, normal transfer rules apply.