what are restricted stock units?
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They are a “promise” of future stock.
A lot depends on the policies of the company but here’s an example of it how it works.
1) You get the RSUs on day 1 but they don’t turn into real stock for 3 years. In the mean time any dividends the company gives out for real stock gets automatically reinvested as more RSUs.
2) The value of the RSUs is always the value of the actual stock, so it can change over time.
3) The RSUs converting to real stocks that you now own is the same as being given stocks or cash as a bonus at the moment by your company, meaning it’s a “taxable event”. Most companies will automatically, or at least give you a choice, of selling off enough of your RSUs to pay off this tax bill so you don’t owe anything at tax time.
For Example –
Company gives me 10 RSUs for Christmas Bonus worth $10 year, they say it’s a $100 bonus.
Year 1: Company issues a $1 per share dividend, those get reinvested into RSUs @ $10 per, so I now have 11 RSUs.
Year 2: Stock price is now $15 a share, my 11 RSUs are worth $165 now, sweet! Dividend this year is $1.50 so you now have 12 RSUs
Year 3: Stock price is now $20 a share. 12 x $20 = $240 worth of stock gets awarded to you and moves to your investment account. However, that’s like getting a $240 bonus which means taxes. So the company sells 2 shares, $40 worth, to pay the tax bill in advance. You know receive 10 shares in your account, currently valued at $200. Any dividends given away this year will like come to you as a check in lieu of being re-invested.
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