Restricted Stock Units (RSUs)

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A Restricted Stock Unit (RSU) is a promise to deliver a share of stock at vesting, typically issued by late-stage startups or public companies.

What are Restricted Stock Units (RSUs)?

A Restricted Stock Unit (RSU) is a promise to deliver a share of stock at vesting. RSUs are typically issued by late-stage startups or public companies. As opposed to stock options, RSUs have no strike price and thus are never underwater. RSUs are treated as income upon vesting.

RSUs typically vest based on a set vesting schedule. Most likely the entire RSU grant will vest over 4 years with the first 25% vesting after a 1 year cliff. Since RSUs are treated as income upon vesting, which triggers income tax, most private companies opt for what is called a "double-trigger" vesting schedule. The second trigger is a liquidity event such as an IPO or an M&A. While an employee will earn/vest RSUs based on the amount of time of their employment (the first trigger), they will not be issued shares or trigger taxes until there is a liquidity event. At public companies, since the shares are freely tradable, "double-trigger" vesting is not necessary.

The catch is RSUs must come with an expiration date of at most 10 years from the date they are granted. Companies are not required and will not always reissue RSUs if they reach expiration. RSUs also cannot be sold or transferred while the company is still private, so employees will need the company to exit prior to their expiration date to avoid them becoming worthless.

How are RSUs taxed?

An RSU will always be taxed at the high ordinary income tax rates upon vesting. An exception is filing an IRS 83(i) election to get a 5 year deferral. Ordinary income tax will still be due on the RSU value but additional increases in value are eligible for capital gains treatment.

An IPO triggers taxes for the standard private company "double-trigger" RSUs even if you aren’t ready to sell the shares. This post IPO vesting may cause your tax bracket to explode to higher levels regardless of whether you sell the RSUs. This means that even your regular W2 wages will get taxed at a higher rate.

Most employees will opt to turn in shares to pay their post-IPO taxes, this the more cash efficient route, but does still raise your tax bracket.

For companies where employees are turning in shares to cover taxes, the company still has to send real money to the IRS as opposed to shares.

If you have RSU's in a private venture-backed company, but want cash now, ESO Fund can offer you a liquidity advance against your RSUs on a non-recourse basis.

This innovative service promotes and enables a healthier relationship between companies and employees. I my opinion it's valuable to employees and great for the overall tech environment and economy. It is good for nobody when employees feel trapped because they can't afford to leave. In less extreme cases exercising can be expensive and somewhat risky and this is simply a good smart hedge and a good square deal. Brilliant!

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