How RSUs work

What is an RSU, really? It is a promise. Your company promises to give you shares once you stick around long enough, and almost everything that confuses people about restricted stock units comes from forgetting that the promise and the shares happen at two different times.

A restricted stock unit (RSU) is a commitment to deliver one share per unit on a future date, once a condition is met. The condition is usually time: stay employed, and the units vest on a schedule. Until they vest, you own nothing you can sell. You hold a claim, not a stock. This guide is the whole mechanical story of that claim, from the day it is granted to the day you leave or sell: the four moments that matter, the schedule that controls them, the two-trigger twist at private companies, the dividend question, the stacked grants that smooth your income, what survives when you quit, and how RSUs stack up against PSUs, RSAs, and stock options. The tax that rides on all of it has its own deep dive in how RSUs are taxed. Read this one to understand what you actually hold.

The four moments that matter

Every RSU moves through the same four stages. Get these straight and the rest of the page is detail.

Grant, vest, and settlement: three dates, three jobs

People watch the wrong date. An RSU has three, and only one of them puts income on your W-2. Confuse them and you plan for the wrong day.

The grant date is when the company hands you the deal: a number of units and a schedule that says when they turn into shares. Nothing is yours yet. No shares, no vote, no tax. A grant is a calendar and a promise, and that is all.

The vesting date is when you clear the conditions, usually staying employed through a set date, sometimes plus a performance hurdle. This is the date that matters for tax. The moment a chunk vests, its full market value becomes ordinary income, the same as salary, whether you sell anything or not.

The settlement date is the day the shares actually get delivered, the IOU finally paid. For most public-company employees this rides along with vesting, same day, no gap. But the two are not the same idea, and the gap between them is the whole story for private companies.

Here is the second-order effect that trips people. A private-company RSU often needs a liquidity event before it settles, even after the time condition is met. You can be fully time-vested and still hold nothing, because settlement waits for an IPO or acquisition. That delay is doing you a favor: it keeps the income event from landing while the stock is something you cannot sell. We get to that two-trigger design in a moment.

If I'm time-vested but not settled, do I owe tax yet?

Generally no. With a delayed-settlement RSU, the income event tracks delivery of the shares, not the day you cleared the time condition. That is the entire reason private companies structure grants this way. Confirm your plan’s exact settlement terms, because the documents control the timing.

Vesting schedules and cliffs

The schedule is where the promise turns into shares you own, and it controls everything that follows: when you own the shares, when you owe tax, and what you walk away with if you leave. Read the calendar wrong and you can quit a month too early and leave real money behind.

Most grants, especially in tech, follow one common pattern: vesting over four years with a one-year cliff at the start. The cliff means nothing vests for the first year. Hit your one-year mark and a block vests all at once, often a quarter of the grant. After the cliff, the rest vests in smaller, regular pieces, monthly or quarterly, across the remaining years.

Two words map the whole thing. A cliff is all-or-nothing at a single date: before it, zero; on it, a block. Graded vesting is the steady drip after the cliff, where shares vest in regular installments over time. Most grants use both, a cliff to start and graded vesting to finish.

Pull up your grant documents and find three dates: your cliff, your vesting frequency after it, and your next vesting date. Those three control when you own your shares, when you owe tax, and what is at stake if you ever decide to leave. The schedule is the contract. Read it before it costs you a block.

Single-trigger vs double-trigger: the private-company twist

At a private company, time-based vesting is often only half the story. Many private RSUs need a second condition, a liquidity event, before the shares truly settle. That changes the tax timing completely, and it is the single most important structural fact a pre-IPO employee can know.

A trigger is just a condition that has to be met before your units turn into shares you own and owe tax on.

One condition: time. You hit your vesting dates, the shares settle, and the full value is ordinary income that day. Standard at public companies, where you can sell shares the moment they land.

Two conditions: time and a liquidity event, usually an IPO or acquisition, sometimes a qualifying tender offer. You can clear every vesting date and still own nothing taxable until the second trigger fires. Standard at private companies.

The reason the design splits along the public/private line is the whole point. Picture a single-trigger RSU at a private company. Your units vest on the calendar, so the full value becomes ordinary income that day, the same as salary. Now notice what you are holding: shares in a company with no public market. You owe real cash tax on a paper number, and you cannot sell a single share to raise that cash.

That is the worst spot in equity comp, a tax bill on something illiquid. The second trigger exists to keep you out of it. No liquidity event, no income event. The tax waits until there is finally a market to sell into.

The day both triggers fire

Here is the part people miss until it hits them. With a double-trigger grant, every unit that already cleared the time trigger has been quietly stacking up. When the liquidity event finally closes, all of it settles at once. Years of vesting that piled up unseen all become income in the same quarter.

For 2026 that flat federal supplemental rate is 22% on the first $1,000,000 of supplemental wages in the year, and 37% on anything above $1,000,000 2026. Both sit well below a high earner’s real top rate, which is what decides how big your shortfall is.

The second-order effect is the one that bites. A normal vesting year is income spread thin. A double-trigger settlement is four or five years of income stacked into one, which can shove you into a higher bracket and trip surtaxes you never saw at your salary. The shares finally became real, and so did a tax bill sized for all of them at once. If a liquidity event is on your horizon, plan for that year as the single biggest income event of your career, and read the withholding gap before the shares settle, not after.

Which liquidity events count as the second trigger?

Read your grant, because a tender offer and an acquisition are not always treated the same. Some plans count only an IPO, some add qualifying acquisitions, some include company-approved secondary sales. Find which events fire your second trigger in writing, well before the closing week, because the answer decides when years of stacked income suddenly becomes taxable.

Do RSUs pay dividends?

Usually not directly, and the reason is simple: you do not own the shares yet. An RSU is a promise of stock, not stock, so there is nothing to pay a dividend on. Some grants bridge that gap with dividend equivalent rights, often shortened to DERs. A dividend equivalent is a contractual side payment that mirrors what a real dividend would have paid on your unvested units. The company is choosing to pay it, because nothing requires a dividend on shares you do not yet own.

The common structure does not pay you cash as it accrues. Instead, the dividend equivalents accrue alongside your units and pay out only when the underlying units vest. Vest, and the accrued equivalents come with them. Forfeit the units by leaving early, and the accrued equivalents usually vanish too.

Here is the tax catch most people miss. A dividend equivalent paid on unvested RSUs is generally taxed as ordinary compensation, wages, not as a qualified dividend. So it does not get the lower dividend tax rate. It runs through payroll and shows up on your W-2 as pay. Once your shares actually vest and you own them, dividends paid on the owned shares can qualify for dividend treatment going forward. The wage treatment is specifically the pre-vesting equivalent.

Refresh grants: why you keep getting new ones

What happens to your equity after your first grant finishes vesting? At a healthy company, a new grant lands before you get there, and it stacks on top of what you already have. That is a refresh grant, sometimes called a follow-on or top-up, and it is how companies keep your total equity from quietly running out.

So you do not vest one grant and then start another. You run several at once, each on its own four-year clock, overlapping. In year three you might have shares vesting from your original grant, your year-one refresh, and your year-two refresh, all in the same quarter. The point is retention: refreshes layer new unvested equity on top so you always have a meaningful amount still ahead of you. The company is buying your next few years, over and over.

Here is the hidden price in the stack. Because each refresh starts its own cliff, your “guaranteed” equity is less continuous than it looks. If a refresh you were counting on does not arrive, or arrives smaller, your vesting income can step down a year or two later, and you will not feel it until the gap opens. The overlap that smooths your income also hides where the next cliff sits. There is a tax angle too: several overlapping grants mean more total value vesting in a given year, a bigger ordinary-income spike than any single grant creates, and a wider withholding gap in April.

How do I track several grants at once?

Build one calendar with every grant on it: grant date, cliff date, and the vesting amounts for each layer. Then sum them by year. That single view tells you what is actually vesting and when, instead of you guessing from one grant you happen to remember. It also shows you where your real cliffs are, which matters the day you think about leaving or negotiating a refresh.

What happens to your RSUs when you quit or get laid off

Two things happen the day you leave, and they could not be more different. Your vested shares are yours to keep, full stop. Your unvested shares almost always disappear, and there is no partial credit for the time you put in toward the next date.

Once an RSU has vested, the shares are real, settled, and in your name. Quitting changes nothing about them. You already paid ordinary income tax on their value when they vested, so the company has no claim and you walk out with the stock. Whether you keep holding it or sell is a separate decision, covered in sell at vesting or hold.

Unvested RSUs are the expensive part. They are still just a promise, and that promise usually ends the day your employment does. Leave eleven months into the year and the block that would have vested at month twelve is typically gone. No proration, no goodwill credit for eleven months of work. The reason cuts both ways: vesting is a retention tool, so the unvested shares are designed to evaporate the moment you stop staying.

For unvested RSUs, quitting and getting laid off usually end the same way: you lose them. The difference shows up in the fine print. Some layoffs come with severance terms that accelerate part of your unvested equity, and some grants have acceleration clauses tied to a job loss after an acquisition. Those are written into your specific documents, not guaranteed by law. The acquisition case is its own subject in RSU acceleration on acquisition.

What if my company gets acquired and then lets me go?

That is the one scenario where unvested shares sometimes survive. Certain grants include acceleration that vests part or all of your unvested units if you are terminated as a result of an acquisition. The language in your grant decides it, so read that clause before you assume anything.

PSUs: RSUs with a performance catch

A performance stock unit (PSU) is an RSU with a number attached. An RSU pays you for showing up. A PSU pays you for hitting a target. That one swap, time for performance, changes how many shares you get and when you can count on them.

The plumbing is identical. A PSU settles in shares and gets taxed exactly like a regular RSU: ordinary income on the full value the day it vests, then capital gains on anything it earns after. What changes is the condition that turns the unit into shares. A standard RSU vests on time. A PSU vests on time and on the company clearing a performance bar.

Vests on a schedule. Stay employed through each date and the shares are yours. The count is fixed the day you are granted. Predictable.

Vests on a schedule plus a performance hurdle. Hit the target and you might earn more shares than the grant says. Miss it and you can earn fewer, sometimes zero. The count floats until the results are certified.

PSUs come with a payout curve. Land at target and you get 100% of the units. Beat it and many plans pay 150%, 200%, sometimes more. Fall short and the multiplier drops below 100%, and below some floor you get nothing for that tranche. The targets are usually one of three kinds: financial metrics like revenue or operating margin hitting a set level, a stock-price level the shares have to reach or hold, or total shareholder return (TSR), often measured against a peer group rather than an absolute number.

The tax does not strike at grant, and it does not strike when the performance period quietly ends on the calendar. It strikes when the results get certified, the committee signs off on the multiplier, and the shares settle. Your income is the share count times the price on that certification date, and both pieces float until then. A PSU that pays at 200% in a strong stock year is two grants’ worth of ordinary income stacked into one vesting year, with a withholding gap to match. The full tax treatment lives in how PSUs are taxed.

RSUs vs RSAs vs stock options

The grant you hold is not the only kind a company can give. Knowing where RSUs sit next to the alternatives tells you what you actually have and what you gave up to get it.

RSAs. A restricted stock award (RSA) is actual stock you own the day it is granted, subject to forfeiture until it vests. An RSU is a promise of stock delivered later. That gap is the whole difference: because an RSA is real stock you already own, you can make an 83(b) election, a choice to be taxed on the value today instead of at vesting. For RSUs there is no such choice, because you do not own anything yet to elect on. RSAs show up for founders and very early employees when the stock is nearly worthless. The full comparison, and the 83(b) math, is in RSAs vs RSUs.

Stock options. An option is the right to buy shares at a fixed strike price, set the day it is granted. You only make money if the stock climbs above that strike, and you have to spend cash to exercise.

Worth something at any positive stock price. No cost to acquire. The full value is ordinary income at vesting, taxed like salary, whether you sell or not. Lower ceiling, almost no floor. The grant that protects you when the stock is flat or down.

Worth nothing unless the stock rises above your strike. Cost cash to exercise. Bigger upside if the company takes off, total loss if it does not clear the strike. The grant that rewards you when the stock runs, and stings when it stalls.

The grant you are offered says a lot about where the company thinks it is. Big public companies mostly grant RSUs, because the share price is already high and an option struck at today’s price is a coin flip on further gains. Early startups mostly grant options, because the strike can be set very low and the entire bet is that the price multiplies from there.

The two are taxed on different clocks. RSUs are taxed at vesting on their full value, no choice in the matter. Options give you more control: you decide when to exercise, and the tax depends on whether they are incentive stock options or non-qualified options, which behave very differently.

So which grant should I want?

Do not ask which is better in the abstract. Ask what kind of company you are joining and how much loss you can stomach. RSUs give you something with a floor and a capped ceiling. Options give you a swing that can be huge or zero. For most employees at an established company, the RSU’s floor is worth more than the option’s distant upside. For a founder or an early hire betting on a multiple, the cheap option can be the better instrument. Neither is wrong. They are bets with different shapes.

What this means for you

The single idea to hold onto: vesting is a taxable event. You can do everything right and still get surprised in April, because the tax shows up when shares vest, long before you decide to sell anything. So read your grant for the things that actually decide your outcome. Find your schedule and your next cliff. Find out whether you hold single-trigger or double-trigger units, because that tells you when the tax clock even starts. Build one calendar that sums every grant by year so the refresh stack stops hiding its cliffs. Then, once you see RSUs as income that happens to arrive as stock, the rest of the decisions get a lot clearer.

If you are sitting on a large grant and a liquidity event or a job change is in view, that is exactly the kind of decision worth pressure-testing before it lands. A fit check is what that conversation is for.