409A Valuation and RSUs / Restricted Stock: What Founders Need to Know

How this page fits with our other guides: This article covers RSUs and restricted stock only. Stock options have their own guides: 409A valuations and employee stock options and how the 409A sets the strike price for ISOs and NSOs. The 83(b) election for early-exercised options is covered in 409A, early exercise and the AMT trap, and for LLC units in our 83(b) election guide for profits interests. We link to those pages rather than repeat them.

RSUs vs Restricted Stock: Two Different Instruments

The names are similar, and both usually vest over time, but legally they are opposites.

• Restricted stock (a restricted stock award, or RSA) is actual stock issued on the grant date. The holder owns the shares, usually can vote them, and appears on the cap table immediately. The "restriction" is that unvested shares are forfeited, or repurchased by the company at the original price, if the holder leaves before vesting. Founder stock and early-exercised options are both restricted stock.
• A restricted stock unit (RSU) is a promise. The company agrees to deliver one share of common stock (or, in some plans, its cash value) for each unit once vesting conditions are met. Until then, the holder owns nothing: no shares, no votes, and only an unfunded, unsecured claim against the company.

That difference decides which tax rules apply. Restricted stock is property transferred in connection with services, so it is governed by Internal Revenue Code Section 83. An RSU is a right to receive property in the future, which is the kind of arrangement Section 409A was written to regulate. Neither one has an exercise price, which is why the 409A valuation plays a different role for both than it does for options.

Do RSUs need a 409A valuation?

Not to set a price, because RSUs have no strike price. But a private company still needs a reliable fair market value of its common stock for RSUs: it measures the employee's taxable income and the company's withholding when shares are delivered, and it supports the grant-date fair value used for ASC 718 stock compensation expense.

The 409A valuation is the natural source for that number. At settlement, the value of the delivered shares is wages for an employee, reported on the W-2 and subject to income tax withholding and Social Security and Medicare taxes. Before an IPO, there is no market price, so the company uses its most recent board-adopted valuation of common stock. If that valuation is stale or unsupported, the company risks under-withholding, and the employee's reported income may not hold up if the IRS reviews it.

The accounting side uses the same input. Under ASC 718, an equity-classified RSU is measured at the fair value of the underlying share on the grant date, with no option-pricing model needed. For a private company, that is generally the fair value of common stock from the latest valuation, which is why auditors ask for the 409A report that covers each RSU grant date. Our common vs preferred stock valuation guide explains why that common value sits well below the preferred price of the last round.

RSUs, Restricted Stock and Options Compared

The table below sets the three common equity awards side by side. The last row shows what the 409A valuation is used for in each case.

The pattern to notice: for options, a low 409A value is the source of the employee's upside. For RSUs and restricted stock, the 409A value is mostly the measure of the tax bill, and the timing of that measurement is what matters.

Are RSUs subject to Section 409A?

They can be. An RSU is a right to compensation paid in a later year, so Section 409A applies unless an exception does. Most RSUs avoid it under the short-term deferral exception, by delivering shares no later than March 15 of the year after the year they vest. RSUs settled later must follow Section 409A's payment rules.

The short-term deferral rule is in Treasury Regulations Section 1.409A-1(b)(4). It treats a payment as outside Section 409A if it is made by the later of the 15th day of the third month after the end of the employee's tax year, or of the company's tax year, in which the right stops being subject to a substantial risk of forfeiture. For a calendar-year employee and company, that is March 15 of the following year. A standard RSU that delivers shares on, or within a few weeks of, each vesting date meets it easily.

The problems come from design features that push delivery later or make it uncertain:

• Deferred settlement. An RSU that vests in 2027 but delivers shares in 2030 is deferred compensation. It is allowed, but the payment date or event must be fixed in writing up front and limited to permitted events: a fixed date or schedule, separation from service, a change in control, death, disability, or an unforeseeable emergency.
• Retirement vesting. If an employee who reaches retirement eligibility keeps vesting after leaving, the risk of forfeiture lapses at eligibility, not at the scheduled vesting dates. Delivering shares on the original schedule can then miss the short-term deferral deadline.
• Discretion over timing. Letting the employee or the board choose when shares are delivered, after the award is granted, is generally inconsistent with Section 409A.

When an RSU fails Section 409A, the consequences are the ones described in our guide to 409A valuation penalties: income inclusion of the vested amount, a 20% additional federal tax, and premium interest, all on the employee. Note what is missing from this list. Unlike an option, an RSU cannot fail Section 409A because the 409A valuation was too low. The 409A valuation RSU risk is about settlement timing, not pricing, which is why RSUs are generally less 409A-sensitive than options.

Double-Trigger RSUs: Why Private Companies Use Them

A plain time-vested RSU at a private company has a serious flaw. Shares are delivered at vesting, the employee owes tax on their 409A value, and there is no market in which to sell them. If the 409A value is $4.00 and 10,000 units vest, the employee has $40,000 of wages and no cash to pay the tax. The company must also withhold, which means either collecting cash from the employee or holding back shares and paying the tax itself.

Double-trigger RSUs solve this. The award vests only when two conditions are met:

• Service condition: a time-based schedule, such as four years with a one-year cliff.
• Liquidity condition: an IPO or a change in control, usually within a stated term, often seven years from grant.

Because the liquidity event is a real condition that can fail, the award stays subject to a substantial risk of forfeiture until it happens. Shares are then delivered shortly after the IPO or the closing, which keeps the award within the short-term deferral exception. The income is measured at the value when shares are delivered: the public trading price after an IPO, or the deal consideration in an acquisition, not an earlier 409A value. For employees who have been accumulating units for years, that can be a large tax event, and companies often settle a portion of the shares to cover withholding.

On the accounting side, a liquidity condition is a performance condition under ASC 718. An IPO or acquisition is generally not considered probable until it occurs, so a company typically recognizes no expense for double-trigger RSUs until the event, then records a catch-up for all service already performed. The amount is still based on the grant-date fair value, which is where each grant's 409A value comes back in. Our guide to the pre-IPO 409A valuation covers how those values are set as an offering approaches.

Payroll taxes can follow a different clock than income tax for RSUs, under the special timing rule for deferred compensation in Section 3121(v)(2). How that rule applies to a given award depends on its terms, so confirm the timing with payroll counsel before the first settlement.

Restricted Stock and the 409A Value: Section 83, Not Section 409A

Restricted stock sits outside Section 409A entirely. The 409A regulations state that a transfer of property subject to Section 83 is not a deferral of compensation (Treasury Regulations Section 1.409A-1(b)(6)). The holder already owns the shares; nothing is being promised for later.

That does not make the valuation irrelevant. Under Section 83(a), when restricted stock vests, the holder has ordinary income equal to the fair market value of the vesting shares, minus anything paid for them. At a private company, that fair market value is normally the 409A value on each vesting date. A restricted stock 409A valuation therefore does two jobs: it sets the purchase price when the shares are issued, and, if no 83(b) election is filed, it measures the income at every vesting date that follows.

One point of precision: the safe harbor presumptions described in our 409A safe harbor guide are written for Section 409A. Section 83 has its own fair market value standard, and the value is determined without regard to the vesting restriction itself. In practice, the same independent appraisal is the standard support for both, but it is evidence of value for Section 83 purposes, not a statutory presumption.

Can you file an 83(b) election on RSUs?

No. An 83(b) election applies only to property actually transferred, and an RSU transfers nothing until shares are delivered, at which point they are already vested. The election is available for restricted stock, including founder stock and shares from early-exercised options, and must be filed with the IRS within 30 days of the transfer.

For restricted stock, the 83(b) election moves the income from each vesting date to the grant date. If the holder pays the full 409A value for the shares, the income at grant is zero, and all later appreciation is capital gain, with the holding period starting at grant. The cost is risk: if the shares are later forfeited, the holder cannot deduct income that was reported, though a holder who paid for the shares generally has a capital loss limited to the amount paid.

A simple example shows why the 409A value at grant matters so much. A founder buys 1,000,000 shares of restricted common stock at a 409A value of $0.01, paying $10,000, with 25% vesting each year:

• With an 83(b) election: income at grant is $1,000,000 × ($0.01 − $0.01) = $0. Nothing is taxed again until the shares are sold.
• Without an 83(b) election: if the 409A value is $1.00 when the first 250,000 shares vest, the founder has 250,000 × ($1.00 − $0.01) = $247,500 of ordinary income that year, and more each year as later tranches vest at the then-current 409A value.

The 30-day deadline cannot be extended, and missing it is one of the costliest mistakes in startup equity. For the AMT interaction when the restricted stock comes from early-exercised ISOs, see our early exercise and AMT guide.

When Startups Switch From Options to RSUs

The choice of award tends to follow the 409A value of common stock over the company's life.

• Formation and pre-seed: founders take restricted stock at a nominal 409A value and file 83(b) elections. Purchase prices are low enough that early employees sometimes receive restricted stock too.
• Seed through Series B: stock options become the default. Paying full value for restricted stock gets expensive as the 409A value rises, and options let employees defer the cost until they choose to exercise.
• Late stage and pre-IPO: once the 409A value is high, new options have less upside, and employees value an award that does not go underwater. Companies often move to double-trigger RSUs for new hires and refresh grants.

Dilution works differently too. An RSU delivers a whole share for every unit, while an option delivers only the gain above the strike price, so a company typically grants fewer RSUs than options for the same intended value. Both usually draw from the same plan reserve, which is worth modeling when sizing the option pool.

A Practical Checklist for RSU and Restricted Stock Grants

• Keep the 409A current on every grant and vesting date. RSU grants need it for ASC 718; restricted stock needs it for the purchase price and for income at each vesting date if no 83(b) was filed. Refresh it at least every 12 months and after material events.
• Fix the RSU settlement date in the award agreement. Deliver shares at vesting or within the short-term deferral window, or write a compliant deferral schedule.
• Check retirement and acceleration terms. Any provision that vests the award early can move the short-term deferral deadline.
• Plan the withholding. Decide in advance whether settlement will net shares, sell shares, or collect cash, especially for a liquidity event that settles many awards at once.
• Track 83(b) elections. Keep a copy of each filed election and proof of the filing date for every restricted stock grant.

The Bottom Line on the 409A Valuation for RSUs and Restricted Stock

The 409A valuation RSU picture is simpler than the option picture in one way: there is no strike price that can be set too low. The Section 409A question for RSUs is when shares are delivered, and most private companies answer it with double-trigger awards that settle promptly after a liquidity event. Restricted stock is outside Section 409A entirely, but the 409A value still sets its purchase price and measures its income.

For both awards, the valuation is the number the tax and accounting rules are applied to. A current, independent 409A valuation, adopted by the board before each grant and kept up to date through vesting and settlement, is what keeps those numbers defensible.

The examples in this article are illustrative and based on simplified assumptions. This article is general information about Sections 83 and 409A and the taxation of RSUs and restricted stock, not legal, tax or accounting advice. Section 409A compliance, 83(b) elections, payroll tax timing and the tax result of any award depend on the specific plan, award agreement and individual facts; consult your own legal and tax advisors before granting, settling or electing on equity awards.