RSU Award Agreement — Private Company

RSU Award Agreement — Private Company

For Informational Purposes Only

A stock-settled restricted stock unit agreement designed specifically for private companies, addressing the critical distinction between vesting and settlement and the Section 409A considerations that public-company RSU forms routinely omit.

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What This Document Does

A Restricted Stock Unit is a promise by the company to deliver shares of stock to a service provider once specified conditions are met. Unlike a stock option (which gives the right to purchase shares at a set price) or restricted stock (where shares are issued immediately but subject to forfeiture), an RSU is purely a contractual right — the recipient holds no shares, has no voting rights, and makes no payment until settlement occurs.

For private companies, the RSU introduces a complication that public-company forms do not address: the separation of vesting from settlement. A public-company employee whose RSUs vest can immediately receive and sell shares. A private-company employee whose RSUs vest may have no liquidity at all. This template addresses that gap directly, offering three settlement architectures — immediate settlement on vesting, fixed-date deferred settlement, and double-condition settlement (service vesting plus a liquidity event) — each designed to comply with the deferred-compensation rules of Section 409A of the Internal Revenue Code.

Why Startups and Private Companies Need This

RSUs have become a standard equity compensation tool at later-stage private companies and venture-backed startups approaching an IPO or strategic exit. They avoid the exercise-price problem of stock options (where employees must pay to exercise and may face an illiquid tax bill), and they avoid the immediate-issuance complications of restricted stock. For the company, RSUs are simpler to administer than options — there is no exercise decision, no early-exercise election, and no expiration date to manage.

The challenge is tax architecture. An RSU that vests without immediate settlement is deferred compensation under Section 409A unless it fits within a narrow exemption. A violation of Section 409A — even an inadvertent one — triggers a 20% penalty tax plus interest on the recipient, with no ability for the company to fix it retroactively. This template provides the structural framework to avoid that outcome, with settlement timing provisions, permitted-delay rules, and specified-employee treatment built into the document rather than left to informal administration.

Key Provisions

Grant Notice with Settlement Architecture Selection

The Grant Notice goes beyond the standard RSU summary. In addition to the company, grantee, grant date, number of units, share class, and vesting schedule, it requires an explicit selection of the settlement trigger — service vesting only, or double-condition (service vesting plus a qualifying liquidity event). This upfront selection drives the entire Section 409A compliance architecture of the agreement.

Vesting with Approved-Leave Tolling and Double-Trigger Acceleration

Units vest on the schedule in the Grant Notice, subject to continuous service. The template includes provisions for tolling during approved leaves (military, medical, family), an optional double-trigger acceleration clause for change-of-control scenarios, and automatic forfeiture of unvested units upon termination. Vested but unsettled RSUs survive termination and remain subject to the settlement conditions.

Section 409A Settlement Framework

The core of the private-company RSU. The agreement provides three mutually exclusive settlement architectures: the short-term deferral exemption (settlement within a brief window after vesting), a fixed-date compliant deferral, and a double-condition arrangement requiring both service vesting and a qualifying liquidity event. Permitted delays for securities compliance, specified-employee treatment, and administrative processing are defined with explicit time limits to prevent open-ended discretion that would violate Section 409A.

Tax Withholding for Illiquid Shares

Private-company RSU settlement creates a tax obligation without a liquid market to fund it. The template addresses this directly: it establishes a priority order of withholding methods (cash, payroll deduction, share withholding where permitted), acknowledges the illiquidity problem, and makes clear the company has no obligation to arrange liquidity. Settlement cannot be delayed merely because the grantee lacks funds — a rule that protects both parties from inadvertent Section 409A violations.

Change-in-Control Transaction Matrix

Schedule 1 requires a complete transaction matrix specifying whether RSUs are assumed, substituted, cash-settled, or cancelled in a change of control. The template addresses conversion ratios, buyer equity restrictions, escrow and holdback participation, earnout participation, and qualifying-termination protection periods — details that generic RSU forms leave to last-minute negotiation.

Clawback with Procedural Protections

The agreement subjects the RSUs, shares, and sale proceeds to any applicable clawback policy, but requires procedural safeguards: a designated decision maker, formal notice, a determination procedure, conflict-of-interest recusal, and correction mechanisms. This balances the company’s recovery rights against basic fairness to the grantee.

IPO Lock-Up and Securities Compliance

The grantee agrees to a lock-up of up to 180 days in connection with an IPO. Issuance of shares is conditioned on securities-law compliance, with delays limited to prevent Section 409A violations. The template includes Rule 701 compliance provisions requiring pre-grant delivery of required disclosures.

Emerging Provisions (2025–2026)

Rule 701 RSU Disclosure Gate

Current SEC staff guidance treats the grant date — not the settlement date — as the sale date for RSUs relying on the Rule 701 exemption. This means enhanced disclosure (financial statements, risk factors, and material information) must be delivered a reasonable time before grant, not at settlement. Leading practitioners now require a Rule 701 pre-grant certificate confirming the rolling aggregate calculation and timely delivery of required disclosures.

Modular Section 409A Architecture

Rather than mixing settlement provisions from different Section 409A regimes in a single document (which creates ambiguity and audit risk), current best practice separates the RSU agreement into mutually exclusive settlement modules. The company and its tax counsel select one architecture at grant — short-term deferral, fixed-date deferral, or double-condition — and incompatible provisions are deleted. This clean separation makes compliance review straightforward and reduces the risk of inadvertent violations.

Settlement Statements and Grantee Transparency

Institutional-quality RSU agreements now require the company to provide a detailed settlement statement showing vested units settled, shares issued, the valuation used for withholding calculations, the withholding method and amount, fractional-share treatment, applicable restrictions on the shares, and ledger posting confirmation. This eliminates disputes about what the grantee received and creates an auditable record.

Comprehensive Termination Matrices

Modern RSU agreements include a complete termination matrix in the vesting schedule, with separate rows for death, disability, retirement, voluntary resignation, termination without cause, termination for cause, good reason resignation, service transfer, sale of business unit, and change in control. For each event, the matrix specifies treatment of unvested RSUs, treatment of vested-but-unsettled RSUs, any acceleration, settlement timing, and whether a release of claims is required.

How to Use This Template

Begin with the Grant Notice. The most important decision is the settlement trigger — service vesting only (appropriate if the company can issue shares promptly and the grantee can fund withholding) or double-condition (appropriate if the company wants to defer actual share delivery until a liquidity event). This choice determines which Section 409A architecture applies and should be made with tax counsel before the first grant.

Complete the three Schedules: Schedule 1 (vesting schedule, termination matrix, and change-in-control treatment), Schedule 2 (clawback policy identification and procedural requirements), and Schedule 3 (stockholders’ agreement joinder and withholding election form). The agreement works in conjunction with the company’s equity incentive plan — confirm that the plan authorizes RSUs, that adequate shares are reserved, and that the plan’s definitions of Continuous Service, Change in Control, Cause, and Good Reason are consistent with the terms in this agreement.

Related Forms

This template is provided for informational and educational purposes only and does not constitute legal or tax advice. Restricted stock unit agreements involve complex tax, securities, and employment law considerations — particularly Section 409A of the Internal Revenue Code — that vary by jurisdiction and individual circumstance. Consult qualified legal and tax advisors before using this template. No attorney-client relationship is created by downloading or using this form. Montague Law provides this resource as part of its commitment to making institutional-quality legal tools accessible to entrepreneurs.