What are restricted stock awards (RSAs)?
Takeaway: A Restricted Stock Award (RSA) is a direct grant of stock that is restricted by vesting, making it a powerful tool for compensating very early founders and employees when the value of the stock is still effectively zero.
While the stock option is the most common form of equity compensation, there is another important tool that is often used in the earliest days of a company's life: the Restricted Stock Award (RSA). It is critical to understand the difference: a stock option is a right to buy stock in the future, whereas an RSA is a direct grant of stock today.
This stock, however, is not owned free and clear. It is "restricted" because it is subject to a vesting schedule, which gives the company the right to repurchase the unvested shares if the recipient leaves the company.
How an RSA Works
The Grant: The company's board of directors approves a grant of a specific number of shares of stock directly to an individual.
The Purchase: To avoid negative tax consequences, the recipient must purchase the stock from the company at its current Fair Market Value (FMV).
Vesting and Repurchase Rights: The purchased stock is subject to a vesting schedule identical to a stock option (e.g., a four-year vest with a one-year cliff). If the individual leaves the company before they are fully vested, the company has the right to repurchase the unvested shares, typically at the original purchase price.
The Critical 83(b) Election
Because the individual has received property (stock) that is subject to a substantial risk of forfeiture (the vesting), they must file an 83(b) election with the IRS within 30 days of receiving the stock. This is non-negotiable. The 83(b) election tells the IRS that the recipient chooses to pay taxes on the value of the stock today. If they fail to file, they will be taxed on the value of the stock as it vests in the future, which can be a tax catastrophe if the company's value has increased.
When to Use an RSA vs. a Stock Option
The choice between an RSA and a stock option is driven almost entirely by the value of the company's stock at the time of the grant.
Use RSAs at or Near Incorporation: RSAs are the ideal instrument for founders and the very first employees who join the company at its inception. At this point, the fair market value of the common stock is effectively zero (e.g., $0.00001 per share). This means the recipient can purchase a massive number of shares for a nominal cash payment and, by filing an 83(b), will have a tax liability of essentially zero.
Use Stock Options After a 409A Valuation: Once the company has raised capital or has been operating for some time, it will have a 409A valuation that gives its common stock a real, tangible value (e.g., $1.00 per share). At this point, granting an RSA becomes impractical. A grant of 100,000 shares would require the employee to immediately pay the company $100,000 to purchase the stock. A stock option is a much better tool in this scenario, as it gives the employee the right to buy the stock in the future without requiring a large, upfront cash payment.
RSAs are the simplest and most effective way to grant direct ownership to the earliest members of your team before the company's value has been formally established.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.