An RSU agreement is the contract between you and your employer that spells out when your restricted stock units vest, what happens to them if you leave, how taxes are collected when shares are delivered, and what restrictions apply once they hit your brokerage account. Every agreement sits underneath a broader company equity plan, and the two documents together determine what you actually own and when. Reading yours carefully before your first vest is worth far more than reading it after something goes wrong.
The Plan Behind the Agreement
Your individual RSU agreement does not stand alone. It operates under your company’s equity incentive plan, sometimes called a stock plan or omnibus plan, which sets the overall rules: who is eligible, the maximum shares the company can issue, and the board or compensation committee’s authority to interpret the plan and resolve disputes. Your agreement fills in the specifics for your grant, such as the number of units, the vesting schedule, and settlement terms.
This hierarchy matters because the plan’s terms generally override the individual agreement when the two conflict. A typical agreement states that the plan is “incorporated by reference” and that the plan’s definitions control unless the agreement says otherwise.1U.S. Securities and Exchange Commission. Facebook Inc 2012 Equity Incentive Plan – RSU Award Agreement Most agreements also note that the plan is discretionary and can be amended, suspended, or terminated by the board. That does not mean the company can pull back vested shares, but it does mean it retains flexibility over future grants and plan administration. If your agreement points to the plan for a definition or rule you cannot find, ask HR or the stock plan administrator for a copy of the plan document.
Grant Notice: The Numbers That Identify Your Award
The first page is usually a Grant Notice with the core data points. The grant date starts the contract and the vesting clock. The number of units is the maximum shares you could receive if every vesting condition is met, though at this stage they are a promise, not shares.
The Grant Notice also records the fair market value on the grant date, typically defined for public companies as the closing price on the exchange where the stock trades. That figure matters for the company’s accounting. Your tax bill at vesting, however, will be based on the stock price on the vesting date, not the grant date.
Dividend Equivalent Rights
RSU holders don’t own actual shares until settlement, so they have no right to dividends paid to regular shareholders. Some agreements make up for this with dividend equivalent rights, which credit your account with additional RSUs equal in value to dividends declared on the underlying stock. Those additional units typically vest on the same schedule as the original grant, and when they pay out they are taxed as ordinary income rather than at the qualified dividend rate. Not every agreement includes them, so check.
Vesting Schedules
Vesting is the most important section for most employees because it determines when you actually earn the shares. Until units vest, they remain a conditional promise the company can revoke.
Time-Based Vesting
The common structure requires you to stay employed for a set period. A four-year schedule with annual vesting is standard at many public companies, with 25% vesting on each anniversary of the grant date. Some agreements vest monthly or quarterly after year one, which smooths income. The agreement will specify whether vesting is ratable (equal installments) or graded (different percentages at different intervals).
Many agreements include a cliff, typically a one-year waiting period before any units vest. Leave before the cliff date and you forfeit everything. On the cliff date, the first block (often 25% of the total) vests at once, and the remainder vests on the specified interval afterward. The cliff exists so the company gets a full year of service before transferring any equity.
Performance-Based Vesting
Some agreements tie vesting to corporate milestones: revenue, earnings per share, stock price thresholds, or other financial metrics. Performance conditions are often set out in an appendix. If the company misses the target, some or all units may never vest regardless of how long you stay. Hybrid schedules that combine time and performance conditions are increasingly common, especially for senior roles.
Settlement: When Units Become Shares
Settlement is the moment your vested units convert into actual shares of common stock. Before settlement, RSUs carry no voting rights and no direct ownership. After settlement, you hold real shares with the same rights as any other shareholder.
At most public companies, settlement happens within a few days of vesting, and shares are deposited electronically into a designated brokerage account. Once shares are in your account you can hold, sell, transfer, or donate them, though trading restrictions, blackout periods, and holding requirements may still apply.
Tax Withholding When Units Vest
When RSUs vest, the fair market value of the shares on the vesting date counts as ordinary compensation income under Internal Revenue Code Section 83.2Office of the Law Revision Counsel. 26 US Code 83 – Property Transferred in Connection With Performance of Services That income is subject to federal income tax, applicable state income tax, Social Security, and Medicare. Your agreement gives the company authority to collect these taxes before releasing shares and specifies the collection method.
Federal income tax withholding on RSU income uses the flat supplemental wage rate: 22% for total supplemental wages up to $1 million in a calendar year, and 37% on anything above $1 million.3Internal Revenue Service. 2026 Publication 15 – Employers Tax Guide Two collection methods appear in most agreements:
- Sell to cover. The plan administrator sells enough of your vesting shares on the open market to cover the tax withholding. Proceeds go to the tax authorities, and the remaining shares land in your account.
- Net share withholding. The company retains a portion of the vesting shares rather than issuing them to you, and uses its own cash to pay the tax bill. You receive fewer shares, but no market sale takes place.
Both methods reach the same result: you do not have to write a check to cover the immediate liability. Your agreement may lock in one method or let you choose. Some agreements also permit cash payment, though that is less common.
Why 22% Withholding Often Falls Short
The 22% supplemental rate is a rough approximation, not a personalized calculation. If your total income puts you in the 32%, 35%, or 37% federal bracket, the withholding will not cover your actual liability. The shortfall grows when you add a spouse’s income, other bonuses, investment gains, or multiple vests in the same year. Large vests late in the year are especially risky because there is less time to adjust estimated tax payments before the filing deadline.
The agreement itself will not warn you about this. Project your total annual income, compare expected taxes to what has been withheld, and if the numbers don’t line up, make quarterly estimated payments to the IRS to head off underpayment penalties.
What Happens After Vesting: Capital Gains and Cost Basis
The tax story does not end at vesting. Once shares are in your account, further price movement creates a separate capital gain or loss. Your cost basis is the fair market value on the vesting date, the same figure that was taxed as ordinary income. The capital gains holding period begins the day after vesting. Sell more than one year after the vesting date and any gain qualifies for long-term capital gains rates. Sell earlier and the gain is short-term, taxed at your ordinary rate.
This is where people trip up at tax time. The vesting-date income appears on your W-2. If you later sell at a profit, that gain appears on a 1099-B from your broker. If the cost basis on the 1099-B is not adjusted properly, you can pay tax twice on the same income. Confirm the 1099-B reflects fair market value at vesting, not zero.
Forfeiture: What Happens If You Leave
Forfeiture provisions protect the company’s equity pool by tying share delivery to service. The standard rule is direct: if you leave before units vest, whether by resignation or layoff, unvested RSUs are forfeited on your last day.4U.S. Securities and Exchange Commission. Amalgamated Financial Corp 2021 Equity Incentive Plan – Restricted Stock Unit Award Agreement
Termination for cause is harsher. Many agreements forfeit all unvested units on a for-cause termination, and some reserve the right to claw back or repurchase shares that already vested if the company determines cause existed at separation.4U.S. Securities and Exchange Commission. Amalgamated Financial Corp 2021 Equity Incentive Plan – Restricted Stock Unit Award Agreement “Cause” is defined in the agreement and often covers criminal conduct, fraud, willful failure to perform duties, or violations of company policy.
Agreements often define “continuous service” to specify when vesting pauses. An approved leave of absence might toll the clock without triggering forfeiture, while an unapproved absence could be treated as a resignation. Read the continuous service definition carefully before taking a leave, transferring to a subsidiary, or moving to part-time status.
Death and Disability
Most agreements carve exceptions to standard forfeiture for death and permanent disability, often accelerating all or a pro-rated portion of unvested units. The specifics vary widely. Check your agreement for the exact treatment, and if the agreement is silent, the parent plan controls.
Change in Control: Single vs. Double Trigger
If your company is acquired or merges, unvested RSUs do not simply disappear. What happens depends on the change-in-control language and the deal terms. Common outcomes:
- Accelerated vesting. All unvested units vest at or before closing, and you receive shares or cash in the acquiring company.
- Rollover or conversion. Unvested RSUs transfer to the acquirer, typically converted into equivalent units of the new company’s stock on an adjusted vesting schedule.
- Cash-out. The acquirer cancels unvested units and pays their value in cash, taxed as ordinary income.
- Cancellation. In the worst case, unvested units are canceled outright as part of the deal.
The most important distinction is single trigger vs. double trigger. Single-trigger acceleration vests all unvested RSUs automatically when the deal closes, regardless of whether you keep your job. Double-trigger acceleration requires two events: the acquisition, plus your involuntary termination without cause or your resignation for “good reason” such as a significant pay cut, demotion, or forced relocation. Double-trigger is the market standard because acquirers want unvested equity as a retention tool after closing.
If your agreement is double-trigger and you resign voluntarily after an acquisition without qualifying good reason, your unvested units continue on their existing schedule under the new employer. Know which trigger applies before making any employment decisions around a deal.
Selling Restrictions After Vesting
Holding vested shares does not always mean you can sell whenever you want. Most companies impose trading windows that permit transactions only during set periods, typically opening a day or two after quarterly earnings and staying open for one to two months. Outside those windows, employees generally cannot trade company stock. Unscheduled blackouts can also appear around mergers, acquisitions, or other significant events.
When a vesting date falls in a blackout, you owe taxes on the shares but cannot sell them to lock in value. If the stock drops before the window reopens, later sale proceeds may be less than the income you were taxed on. Net share withholding is sometimes permitted during blackouts because it is a private transaction between you and the company rather than an open-market sale.
10b5-1 Plans and Rule 144
Insiders and officers may be required to use a Rule 10b5-1 trading plan for share sales. These are written instructions filed with a broker in advance that automate trades at set prices, quantities, or dates. Because the trading decisions are made before you possess any material nonpublic information, the plan provides a legal defense against insider trading claims.
Company officers, directors, and holders of more than 10% of outstanding shares are “affiliates” under securities law. Affiliates who sell face additional restrictions under SEC Rule 144, including volume caps (generally the greater of 1% of outstanding shares or the average weekly trading volume over the prior four weeks) and a Form 144 filing requirement. For reporting companies, restricted securities also carry a minimum six-month holding period from acquisition.5eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution Most rank-and-file employees are not affiliates, but a large RSU grant combined with other holdings can push you into that category.
Private Company RSUs
Private-company RSU agreements differ from public-company versions in one basic way: there is no public market for the shares after settlement. To handle this, most private-company agreements use a double-trigger structure requiring both a time-based vesting condition and a liquidity event. Even after your units have time-vested, they will not settle into actual shares until the company goes public, is acquired, or holds a tender offer. If neither event happens, your RSUs remain paper value indefinitely.
That creates genuine financial uncertainty. You cannot sell shares that have not been issued, and you cannot control when a liquidity event occurs. Some employees watch their statements grow in paper value for years with no way to access the money.
Section 83(i) Deferral
When a private company does settle RSUs into shares, employees face a tax bill on income they cannot easily liquidate. Section 83(i) of the Internal Revenue Code lets eligible employees at qualifying private companies elect to defer income tax on settled RSU shares for up to five years from the vesting date. The income becomes taxable at the earliest of several events, including the date the stock becomes publicly tradable, the date you sell or transfer the shares, or the end of the five-year period.
Eligibility is limited. You cannot elect 83(i) if you are or have been a 1% owner, the CEO, the CFO, or one of the four highest-compensated officers during the current year or the preceding ten calendar years. The company must be a qualifying private corporation with no stock traded on an established market, and if you are eligible, the company must notify you of the election opportunity at least 30 days before the earliest date the shares would otherwise be taxable.
Clawbacks
Since 2023, SEC-listed companies have been required to adopt clawback policies under SEC Rule 10D-1, and many RSU agreements now incorporate those requirements. If the company restates financial results due to a material error, the policy requires recovery of any incentive-based compensation received by executive officers during the three fiscal years preceding the restatement that exceeds what would have been paid under the corrected financials.6eCFR. 17 CFR 240.10D-1 – Listing Standards Relating to Recovery of Erroneously Awarded Compensation
Clawback applies on a no-fault basis. It does not matter whether you had anything to do with the accounting error. If RSU vesting was tied to a financial metric that gets restated down, the excess must be recovered. Incentive-based compensation under the rule covers any compensation granted, earned, or vested based on financial reporting measures, which includes performance-based RSUs and can reach time-based RSUs when stock price was a factor. Recovery can happen through direct repayment, offset against future compensation, or cancellation of outstanding awards. Some companies also include broader clawback provisions in their agreements that go beyond the SEC minimum.
Section 409A Timing
Section 409A of the Internal Revenue Code governs deferred compensation, and RSUs that do not settle promptly after vesting can fall under its rules. A 409A violation is expensive: all deferred compensation under the plan becomes immediately taxable, plus a 20% penalty tax on top of regular income tax, plus interest calculated from the year the compensation was first deferred.7Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans
Most standard RSU agreements avoid 409A by qualifying for the short-term deferral exception: if shares are delivered no later than March 15 of the year after the vesting year (or by the 15th day of the third month after the vesting date, if later), the arrangement is exempt from 409A. That is why your agreement likely specifies settlement within days of vesting. If the agreement lets the company defer settlement significantly beyond vesting, or lets you choose the timing, the arrangement may need to comply with 409A’s full distribution rules. Any provision letting you elect to defer settlement deserves a careful read.
Private-company RSUs with a liquidity-event trigger are especially exposed to 409A issues because the gap between time-based vesting and actual settlement can stretch for years. Well-drafted agreements structure these arrangements to comply with 409A or to qualify for the Section 83(i) deferral election.