Restricted Stock Units After Termination: Rights and Responsibilities

Restricted Stock Units, commonly known as RSUs, represent shares of your company stock, awarded as part of an employee’s compensation package, vesting over a set period. For you, RSUs serve as a strategic incentive, tying talent to your startup’s growth while preserving cash. Employees value them as a stake in the success they help build, making RSUs a key element of modern startup compensation.

When an employee leaves your company, the question of what happens to their RSUs arises quickly. This issue carries weight for both you and your departing team member. For the employee, it determines whether they retain any financial reward from their vested shares or lose unvested ones entirely. For you, it impacts your equity pool and how you plan future grants. The outcome depends on your company’s RSU policies, which can vary widely, adding a layer of nuance to every termination scenario.

This blog explores different facets of a common question that most founders have ‘what happens to restricted stock units after termination’. Keep reading to learn more.

The basics of RSUs

Restricted Stock Units (RSUs) represent a promise to grant employees actual shares of company stock at a future date, subject to certain conditions. The most common condition is vesting, which ties the actual receipt of shares to a specific timeline or performance milestones.

Typically, RSUs follow a vesting schedule, often spanning four years with a one-year cliff. This means an employee must remain with your company for at least one year before any RSUs vest, after which they may vest gradually, often quarterly or monthly. Some RSUs vest based on performance milestones instead. Once vested, the given number of shares belong to the employee; until then, they remain unearned. You must design these schedules to reward commitment and align interests with your company’s growth. 

If you overlook the importance of clearly defining RSU terms, especially in employment contracts, it could lead to confusion and potential legal disputes during termination. As a founder, being well-versed in these basics ensures you manage RSUs effectively, avoid unnecessary disputes, and clearly communicate expectations to your team.

Vested vs. Unvested RSUs: What’s the difference?

The distinction between vested and unvested RSUs is fundamental to understanding their fate when an employee leaves your company:

• Ownership rights: Vested RSUs represent company shares that the employee has earned the right to receive. These shares are considered owned by the employee and cannot be taken away. Unvested RSUs, on the other hand, are still conditional and do not confer any ownership rights to the employee.
• Tax implications: Vested RSUs typically trigger a taxable event at the time of vesting, with the Fair Market Value (FMV) of the vested shares considered as ordinary income. Unvested RSUs do not have immediate tax consequences, as they have not yet been earned.
• Treatment upon termination: When an employee leaves your company, they generally retain their vested RSUs or the resulting shares. Unvested RSUs are usually forfeited upon termination, reverting to the company’s ownership.
• Flexibility in company policies: While vested RSUs are generally protected, you have more flexibility in determining the fate of unvested RSUs. Some companies may allow accelerated vesting under certain circumstances, while others may offer a grace period for vesting after termination.

What typically happens to RSUs upon termination?

When employees leave your startup, the handling of restricted stock units after termination largely depends on why their employment ended. Whether the departure is voluntary or involuntary, RSUs are governed by conditions outlined in the equity plan and the employee’s contract. 

• In most cases, vested RSUs stay with the employee, while unvested ones lapse back to your company.  
• Retirement or disability could trigger special provisions like accelerated vesting, enabling immediate ownership of some or all unvested RSUs. 
• Many companies allow the RSUs to vest immediately in cases of death or disability, transferring ownership to designated beneficiaries.

Voluntary resignation

When an employee chooses to leave your company, the treatment of their RSUs becomes a significant consideration. Here are the key points to consider in such scenarios:

• Vested RSUs: These shares typically remain fully owned by the employee. Your company may facilitate their immediate settlement, allowing employees to liquidate or retain the actual shares of stock according to their personal financial strategy.
• Unvested RSUs: Employees usually forfeit unvested RSUs immediately upon resignation. It’s crucial to specify this clearly in employment agreements and equity documents to prevent disputes upon departure.
• Post-termination vesting: Some startups offer accelerated vesting provisions to employees upon resignation, especially for executives or key employees. Ensure such clauses are explicitly outlined in your RSU agreement.
• Exercise window: Clearly communicate the timeframe within which employees must exercise or liquidate their vested RSUs, if applicable, after resignation. Commonly, this window ranges from 30 to 90 days.
• Review your equity plan regularly: Regularly updating and clearly defining your equity plans helps you avoid ambiguity or unexpected financial obligations during employee exits. This proactive approach reduces potential misunderstandings and legal disputes.

Involuntary termination

Involuntary termination presents a more complex scenario for RSU treatment. Here are the key factors you must consider in case of involuntary termination:

• Reason for termination: The treatment of RSUs can vary significantly based on whether the termination is due to layoffs, restructuring, or for cause. Terminations for cause often result in immediate forfeiture of all unvested shares and potentially even vested ones.
• Layoffs or restructuring: If the termination is due to layoffs or a reduction in workforce, startups may choose to accelerate vesting partially or fully as a gesture of goodwill. The decision depends on your company’s policy or negotiation during severance discussions.
• Vesting date and clawback considerations: If an employee is close to a significant vesting date, consider adjusting the termination date to allow for that vesting, especially for long-term, valuable employees. Be aware of any clawback provisions in your RSU agreements that might apply in cases of termination for cause.
• Severance negotiations and legal compliance: RSUs can be part of severance package negotiations. You might offer accelerated vesting or extended exercise periods as part of a separation agreement. Ensure that your RSU treatment in involuntary terminations complies with all applicable labor laws and regulations, particularly in mass layoff situations.
• Communication and documentation: Provide clear, written communication to terminated employees about the status of their RSUs, including any applicable deadlines or special provisions. Keep thorough records of all decisions and communications regarding RSU treatment to protect your company in case of future disputes.

Legal considerations: Employment agreements and RSU contracts

The treatment of RSUs after an employee leaves your company is typically governed by two key documents, i.e., the employment agreement and the RSU grant agreement. These documents outline the specific terms and conditions that apply when an employee’s tenure ends.

When drafting or reviewing these agreements, pay close attention to:

• Vesting schedules: Clearly define how RSUs vest over time and what happens to unvested units upon termination.
• Termination clauses: Specify how different types of termination (voluntary, involuntary, for cause) affect RSU treatment.
• Post-termination exercise periods: If applicable, state how long employees have to exercise vested RSUs after leaving.
• Clawback provisions: Include conditions under which your company can reclaim vested RSUs or their value.
• Accelerated vesting: Define any circumstances that might trigger accelerated vesting, such as a change in company control.

The changing landscape of RSU rights

Recent legal developments have significantly impacted how RSUs are treated upon employment termination. 

A landmark decision by the Delaware Supreme Court in December 2024 has broadened the application of the ‘employee choice’ doctrine to RSU agreements. This ruling allows for the enforcement of forfeiture-for-competition provisions in RSU agreements without subjecting them to a reasonableness review. For you as a founder, this means greater flexibility in designing RSU agreements that protect your company’s interests when employees leave to join competitors.

However, it’s important to note that this ruling primarily applies to cases of voluntary resignation. The court did not address situations involving involuntary termination, leaving room for potential future litigation in those scenarios.

In contrast, some jurisdictions are taking a more employee-friendly approach. For instance, the Quebec Court of Appeal has ruled that employees are entitled to compensation for unvested RSUs that would have vested during their notice period. This decision highlights the importance of considering local labor laws when structuring your RSU agreements, especially if you have employees in different jurisdictions.

Tax implications of RSUs after termination

The tax consequences of RSUs after termination can be complex and depend on several factors, including the timing of termination relative to vesting and settlement dates.

When an employee leaves your company, the tax treatment of their RSUs hinges on whether they have vested and been settled. Vested RSUs that have been settled (i.e., converted to actual shares) are typically taxed as ordinary income in the year of settlement. If termination occurs after vesting but before settlement, the concept of constructive receipt may come into play.

Constructive receipt means that even if an employee has not physically received the shares, they may still be taxed on the value if they had the right to receive them. This can result in a tax liability for the employee even if they have not actually received any cash from the sale of shares.

For unvested RSUs, termination usually results in forfeiture, and there are no immediate tax consequences. However, if your company offers accelerated vesting upon termination, this could trigger a taxable event for the employee and your company must handle appropriate tax withholdings.

International considerations: RSUs in a global workforce

Managing RSUs becomes even more complex when you have a global workforce. Different countries have varying tax treatments for RSUs, and these differences can significantly impact both your company and your employees when termination occurs.

For example, some countries may tax RSUs at grant, while others tax at vesting or settlement. When an employee moves between countries or works as an expatriate, you need to consider both home and host country regulations. This can lead to potential double taxation issues, where both countries claim the right to tax the same income.

To mitigate these risks, consider implementing strategies such as:

• Tailoring RSU agreements to comply with local laws in each country where you have employees.
• Providing clear communication to employees about the tax implications of their RSUs, especially if they’re relocating.
• Offering tax equalization policies for expatriate employees to ensure they’re not disadvantaged by international assignments.

Negotiating RSU terms: Before and after employment

The negotiation process for RSUs does not end at the offer letter stage; it can extend to termination discussions as well. By being aware of the latest trends and best practices in RSU negotiations, you can create better compensation packages and handle terminations effectively.

• Extended post-termination exercise periods: Startups are increasingly offering more generous post-termination exercise windows for equity compensation. Consider implementing longer exercise periods, such as 5 or even 10 years, instead of the traditional 90-day window. This approach can make your equity packages more attractive and reduce the risk of employees feeling burned by short exercise windows.
• Accelerated vesting clauses: Negotiate accelerated vesting provisions that take effect under specific circumstances, such as a change in company control or involuntary termination without cause. Be clear about the conditions that trigger accelerated vesting to avoid potential disputes later.
• Good leaver provisions: Implement good leaver clauses in your RSU agreements. These provisions allow for more favorable treatment of equity comp when an employee leaves under certain circumstances, such as involuntary termination without cause or resignation for good reason. 
• Tailored vesting schedules: Consider offering more flexible vesting schedules that align with your company’s growth stages and employee retention goals. For instance, you might implement a shorter vesting period (e.g., one year) with more frequent vesting intervals to increase compensation competitiveness, similar to practices adopted by some tech giants.

The role of company policies and discretion

Your company’s policies significantly influence how restricted stock units after termination are treated. Standardized policies create clarity for employees regarding their equity rights upon leaving. However, your company retains discretion to make exceptions under special circumstances. For instance, high-performing employees, executives, or key personnel may receive preferential RSU treatment during separation negotiations.

One important concept to understand is double-trigger acceleration. This provision accelerates the vesting of RSUs upon the occurrence of two events, typically a change in company control (such as a merger or acquisition) followed by involuntary termination of the employee. Including double-trigger acceleration in your RSU agreements can provide additional security for employees while still protecting the company’s interests in retention during critical periods.

Streamline your equity compensation strategy with Qapita

Understanding the intricacies of Restricted Stock Units (RSUs) after employment termination is crucial for you as a startup founder. The complexities surrounding vesting schedules, legal considerations, and tax implications highlight the importance of having a clear grasp on your specific situation. This includes thoroughly reviewing employment agreements, RSU documents, and company policies to ensure fair treatment of this form of equity compensation during various termination scenarios.

At Qapita, we recognize the challenges you face in managing equity matters, especially when it comes to RSUs after termination. Our comprehensive equity management solutions are designed to help startups like yours navigate these complexities effectively. As the leading equity management platform trusted by over 2,400 companies and 350,000 employee-owners, we offer all the tools and expertise you need to structure and manage your company's equity compensation plan from inception to IPO. Our equity management platform, rated as #1 by G2, provides robust features for CapTable management, equity awards administration, and employee engagement. 

Book a free 1:1 demo with our experts today, and let’s work together to harness the full power of ownership in your company.