RSU vs. RSA: do you understand the difference?  

We’re here to clear up some common confusion around these two equity compensation vehicles. 

As a founder or early employee of a private company, navigating the complex world of equity comp is essential for attracting and retaining top talent. Despite their near-identical names, restricted stock awards (RSAs) and restricted stock units (RSUs) are distinctly different.  

Both offer paths to ownership of company shares, but they differ in terms of when they’re offered in the company journey, how they vest, and how they’re taxed. They’re considered “restricted” because they can’t be freely transferred or traded, due to the private status of the awarding company. 

As a certified equity professional at Fidelity Private Shares, I’m responsible for helping to advise companies and individuals in the occasionally intricate world of equity compensation. Based on these conversations, I’ve identified some key concepts that founders might need to double-click into. 

Let’s delve to the details of RSU vs. RSA to help you make informed decisions about your company's equity compensation strategy.

What are restricted stock awards (RSAs)? 

Restricted stock awards (RSAs) are a form of equity compensation that grants an employee ownership of common stock, subject to certain vesting requirements. RSAs are typically granted to founders and early employees of private companies. While the shares are granted immediately, employees can only sell or transfer the shares after they reach a predetermined number of years of service to the company. 

Because they’re administered at the early stages, RSAs present a significant upside opportunity for employees. Employees are usually granted the shares at a time when the value of the shares is relatively low. Utilizing an 83(b) election, employees ensure they pay taxes on the shares when they’re granted, rather than later on when they’ve vested and their value has (hopefully) increased. 

What is an 83(b) election? 

If an employee is granted RSAs that vest over time, it will likely be advantageous to pay tax on the grant when the value is as low as possible.  Assuming that a company’s value increases over time, the individual tax liability of an RSA will also increase over time.  Fortunately, a special tax filing called an 83(b) election can give the grantee the option to pay the tax liability of the total grant within 30 days of the grant date. This provision in the Internal Revenue Code (IRC) allows employees to achieve favorable income tax treatment on RSAs. 

Here’s an example: let’s say your company’s stock is worth $1/share, and you’re granted 100,000 RSAs. This brings your equity value to $100,000. Within 30 days, you complete an 83(b) election. 

We’ll say those shares fully vest after four years. At that time, the value of company stock has increased to $5/share, meaning you own $500,000 worth of equity. (If your vesting schedule includes more milestones, you’d have to pay taxes based on the value of the shares that vested at each milestone.) 

The 83(b) election allowed you to pay taxes on the RSAs when they were awarded (i.e. when the value was $100,000), instead of when they vested (i.e. when the value was $500,000). As long as you made the 83(b) election within 30 days of the initial grant, you set yourself up for massive tax savings.  

Remembering the 83(b) election is crucial. I’ve witnessed a handful of the fixes engineered to compensate for a missed 83(b) -- and they all end with confusion and a large legal bill. 

What are restricted stock units (RSUs)? 

Restricted stock units (RSUs) are a form of equity compensation used by later-stage private and public companies that allow employees to earn shares once certain criteria are met. RSUs typically vest with a double trigger; in addition to a time-based service component, RSUs don’t turn into shares until a qualifying liquidity event, oftentimes an initial public offering (IPO) or acquisition.  

RSUs aren’t privy to the favorable tax treatment that RSAs provide; employees pay taxes on RSUs when they become shares based on the vesting criteria. When the triggers occur and the shares vest, it is often a large, taxable event. 

Generally, in this case, the company will either choose to withhold shares to cover tax liabilities (known as a “withhold-to-cover") or allow the employee to pay cash to cover taxes. 

RSUs are typically only awarded when a company has a clearer picture of the prospects for a liquidity event (i.e. going public or being acquired). Many RSUs expire within 7 years. If the company doesn’t end up having a liquidity event and RSUs are approaching expiration, we again fall into a situation where your law firm will need to advise on the best path forward.  These types of modifications cause a lot of confusion and are costly. 

If you depart a company before a liquidity event, you typically hold onto the RSUs you’ve earned over time. When the company reaches its liquidity event, your shares will vest based on time-served milestones. 

What are the differences between RSU and RSA? 

A few key differences between RSUs and RSAs include: 

• The stage in which they’re offered 

• Vesting criteria 

• When they’re taxed 

Company Stage 

RSAs are typically granted to founders and employees of early–stage companies. RSUs are granted much later, often as a private company approaches an IPO. 

Vesting 

RSAs tend to vest with single triggers, such as time-based milestones. RSUs, on the other hand, often vest with a double trigger: time-based milestones and the company going public.  

I should specify that this is in the private market. RSUs in the public market look more like RSAs, just without the ability to file an 83(b). 

Taxation 

RSA recipients can complete an 83(b) election within 30 days of award for favorable tax treatment. RSUs are only taxable after a double trigger. Sell-to-cover and withhold-to-cover only apply to RSUs. 

Navigating the RSU vs. RSA conversation — and the entire equity compensation journey — is much easier when you have helpful resources. Fidelity Private Shares is the all-in-one equity management solution that helps founders work smarter. Our software includes an employee portal with workflows for 83(b) elections and allows you to store all of your crucial company documents within an automated data room.  

Discover how Fidelity Private Shares can streamline your equity management and simplify the equity comp process. 

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