An offer letter with equity attached feels like a bonus you haven't cashed yet. It isn't, not exactly. A restricted stock unit — an RSU — is a promise: your employer agrees to hand you actual shares later, on a schedule, as long as you're still around when each piece comes due. Nothing changes hands on the day you're granted one. Everything changes on the day it vests.
That distinction is where most of the confusion lives. People treat the grant like the moment that matters, then get blindsided months or years later when vesting quietly triggers a tax bill, a chunk of missing shares, and a brokerage account that looks nothing like what they expected. None of it is a trick. It's just mechanics nobody walks you through, so here's the walkthrough.
A grant is a promise, not a purchase
When an employer grants you RSUs, they're not selling you stock and they're not gifting it to you outright. They're committing to give you a set number of shares in the future, contingent on you staying employed through a vesting schedule. Until a unit vests, you don't own anything you can sell, transfer, or borrow against — it's a number on a compensation statement, not a position in your portfolio.
This is also why RSUs are simpler to understand than stock options, even though the two get lumped together in casual conversation. An option gives you the right to buy shares later at a fixed price, which means its value depends on the stock going up from where it was granted. An RSU is just shares, full stop — if the stock is worth anything at all when it vests, your units are worth something too. That simplicity is exactly why RSUs have become the default equity grant at most companies that offer one.
The vesting schedule: how the clock actually runs
A vesting schedule spells out when each portion of your grant converts from a promise into real shares. The two most common shapes:
- Graded vesting. Your grant is split into equal chunks that vest at set intervals — often a portion every quarter or every year — over a total period of three to five years. A four-year grant vesting quarterly, for example, releases a small slice of shares sixteen separate times.
- A cliff, then graded vesting. Many employers require a first-year "cliff" — nothing vests at all until you've been there a full year, at which point a lump sum vests at once, with the remainder following on a regular schedule after that. Leave before the cliff and the entire grant is forfeited.
Whichever shape it takes, the schedule is the whole point of an RSU grant: it's a retention tool as much as a compensation tool. Each vesting date only pays out if you're still employed on that specific date, which is exactly why job-offer conversations about equity should always ask about the schedule, not just the headline number of units.
Vesting is the taxable event — not the sale
Here's the part that catches people off guard. The moment shares vest, their full market value on that date counts as ordinary income to you — taxed the same as your salary, not at the lower long-term capital gains rate people associate with investing. You owe tax on that value whether you sell the shares immediately or hold onto every single one.
This is different from how most people expect stock to work. There's no "I haven't sold, so I haven't triggered anything" grace period with RSUs. The government treats the vesting date as the moment you effectively received compensation, because in every meaningful sense, you did — the shares are now yours to do with as you please.
Why your share count shrinks on vesting day — withholding
Because vesting creates an immediate tax bill, your employer has to withhold for it, the same way they withhold from a paycheck. Most plans handle this one of three ways:
- Sell-to-cover. A portion of the newly vested shares is automatically sold to cover the withholding, and the rest lands in your account. This is the most common default and requires nothing from you.
- Net settlement. Your employer withholds shares directly instead of selling them on the open market, then delivers you the net amount. Functionally similar to sell-to-cover from your perspective.
- Pay cash. Some plans let you cover the withholding out of pocket and keep every vested share. Rare, and only worth considering if you have cash on hand and specifically want to hold the full position.
Whichever method your plan uses, treat the withholding as an estimate, not a guarantee. Standard payroll withholding on equity compensation is a flat rate that frequently runs lower than what you'll actually owe once your full income for the year is added up, especially in a year with a large vesting event. Check where you stand well before filing season, not after, so a shortfall doesn't arrive as a surprise.
The second tax event: what happens when you sell
Once shares vest, they behave like any other stock you own. Their value on the vesting date becomes your cost basis — the number your future gain or loss gets measured against. Sell above that basis and you owe capital gains tax on the difference; sell below it and you can claim a loss.
The rate you pay on that difference depends entirely on how long you hold the shares after they vest, not how long the overall grant existed. Sell within a year of the vesting date and any gain is short-term, taxed at the same ordinary rates as your income. Hold more than a year past vesting and a gain qualifies for the lower long-term capital gains rates instead. That one-year clock resets with every single vesting batch, which is easy to lose track of when a grant is vesting quarterly.
The decision nobody tells you to make: hold or sell
Once withholding is handled and the shares are genuinely yours, you face a choice that has nothing to do with taxes: keep holding stock in the company you already work for, or sell and put the money somewhere else. This is where a real, if quiet, risk shows up — your paycheck and a chunk of your investments are now tied to the same employer. If that company has a bad year, you can lose income and portfolio value at the same time, for the same reason.
There's no universally correct answer, but there is a universally honest question: would you buy this much of this single stock today, with fresh cash, if it weren't already sitting in your account? If the answer is no, that's a real signal, not disloyalty. Selling vested shares to diversify into a broader mix of investments is an extremely common and entirely reasonable move — it isn't a bet against your employer, it's just not betting your whole financial life on one company alongside your job.
