Ask HN: Former employees' RSUs at risk after startup's IPO
Hi HN,
A group of us, former employees of a startup that recently went public on Nasdaq, are seeking advice on how to navigate an unexpected RSU settlement process. We would appreciate insights from those with experience in equity compensation, tax law, or corporate governance.
* The Situation
We worked at a startup for several years and were granted Restricted Stock Units (RSUs). These fully vested upon the company’s IPO in 2024, but the company has set the settlement date as March 15, 2025 (185 days post-IPO, However, we are not allowed to sell the shares until April, if we were to receive them). This means we will only receive the shares then, but there are some aspects of the process that we are unsure about.
* Key Questions We Have
1) Prepaying Taxes in Cash: We have been asked to wire a tax prepayment directly to the company’s bank account before receiving our shares.
Many of us were expecting a sell-to-cover approach (where some shares are withheld for taxes), which is common. We are wondering if this approach—requiring a direct tax prepayment—is standard practice.
2) Forfeiture Clause: The company has stated that if we do not prepay the taxes by March 15, 2025, the RSUs will be permanently forfeited.
We understand that companies have different ways of handling RSU settlements, but we are curious whether this type of forfeiture clause is common. Since RSUs are considered compensation, we would like to understand if there are alternative ways companies typically handle tax withholding.
3) Unclear Tax Calculation Guidance: We have been asked to calculate the withholding tax ourselves based on an estimated stock price.
However, we have not been provided official guidance on how to do this, which makes us concerned about potential errors. If we underpay, we need to send more money within one business day. If we overpay, we have to apply for a tax refund later. We’re wondering how companies typically help employees navigate tax prepayment for RSUs.
4) Difference Between Current and Former Employees:
We understand that current employees have access to a sell-to-cover option, while former employees are required to prepay in cash. We are curious if this type of distinction between current and former employees is typical for post-IPO RSU settlements.
* Seeking Advice from the Community
We are not looking to place blame—we understand that every company has its own way of structuring RSU settlements. However, since we were surprised by these requirements, we are hoping to learn from others who have experienced similar situations.
Some of the key things we would love advice on:
- Have you encountered an RSU settlement process like this before? - Are there alternative methods (e.g., net exercise, structured buyback) that could be proposed? - How do companies usually structure tax withholding for RSUs, particularly for former employees? - Are there legal or negotiation strategies that might be useful in discussing this with the company? - We are hoping to engage in a conversation with the company to explore potential solutions that work for everyone. We truly appreciate any insights from this community.
Thanks in advance!
I read down pretty far and did not see this basic advice: you need a lawyer. Hire a very good one: they are cheaper than poor lawyers by an order of magnitude.
That lawyer will review your agreements, the state laws and the communications with the company and tell you where you’re at. You could all go in together for the lawyer btw if you have the same contract.
I bet that lawyer will tell you (if this is in California) that you just need to send a letter saying “cool guys, send the shares, I’ll worry about the taxes. I don’t consent to forfeiture.” But, crucially, I am not a lawyer and I haven’t read your agreements.
anyway I would not stress over this, but I would act quickly, don’t sign anything, don’t communicate with the company unt you’ve talked to the lawyer, and know that worst case you will be able to find a loan to bridge this. It may actually be a good candidate for a venture debt firm, but either way the lawyer you hire will probably have some leads.
Congrats on the IPO!
> I bet that lawyer will tell you (if this is in California) that you just need to send a letter saying “cool guys, send the shares, I’ll worry about the taxes. I don’t consent to forfeiture.”
Not sure about this. A random thing[0] I found says:
"RSUs are considered supplemental income, and as such, the income you receive from them is subject to withholding taxes. The IRS requires a federal withholding rate of 22% for supplemental income up to $1 million, and 37% for income exceeding that amount."
(It also links to the relevant IRS publication, but I am not interested in poring over it right now.)
So I believe the employer is required to do that withholding.
It does seem pretty sketchy that current employees have access to a sell-to-cover option, but former employees do not. This feels like the company trying to screw over former employees, since they don't care if a former employee gets mad at them. Over the years I've heard of quite a few companies (and founders) who have this bizarre, messed-up belief that employees who leave the company pre-IPO shouldn't be entitled even to their vested equity.
I glanced through an old RSU plan doc from a former employer, and it does talk about withholding, including a sell-to-cover option, but the wording sounds (to me, anyway; IANAL) like they aren't required to offer that option, only that they may do so. Obviously I have no idea what OP's legal docs say (or if I'm even interpreting this doc I do have correctly); a lawyer would need to go over them.
[0] https://www.harnesswealth.com/articles/what-you-need-to-know...
I think this illustrates perfectly why they should talk to a lawyer. I read through the link you posted. They don't mention anything about sec. 83(b) elections. It's a common strategy to avoid paying taxes until the RSU's are liquidated.
I know about it because my current employer structured the RSU's this way. Every ESOP and RSU plan I've ever participated in has been slightly different. Your link focuses on a very specific set of circumstances.
>They don't mention anything about sec. 83(b) elections
Perhaps because it is inapplicable. 83(b) election can only be used for property that has been transferred but not vested. (Having a lock-up period does not mean the property is unvested).
This is inaccurate. I'm not going to litigate it with you though. Google it. It's a common strategy for a company to perform an 83(b) election on your behalf when they grant you RSU's. This way, you don't have to pay taxes as the RSU's vest.
Also, typically, your shares do not just vest all at once. There is a cliff (typically a year) followed by monthly vesting. That's why the OP's situation doesn't make a lot of sense. They are former employees, therefore a liquidity event would not have triggered any type of vesting.
They most likely have dual trigger RSUs, so the second trigger is typically a liquidity event.
You are talking about single trigger RSUs with only time based vesting.
Also a 83b means you pay taxes at the time of issuance rather than vesting. If these folks received their shares post founding, that means that there might be substantial tax burden for them when they received these shares if a 83b was filed. This is why most folks do not opt for a 83b after a substantial FMV has been established for their shares. This is also why double trigger RSUs are popular, so you can actually execute sell-to-cover.
I can only speak from my experience but I've worked for two companies where the RSU's are structured as a pseudo-option.
Essentially, their price is set at FMV at the time of issuance. Since your net is zero at the time of issuance, you pay no taxes until there is a liquidity event and you can pay to cover.
Since this happened to me at two unrelated companies, I imagine it's a very common structure because it follows common sense and it works out great for everyone.
It's not clear what you're describing, so hard to say whether it's common.
RSUs are stock. When you get them, you pay tax on their value at income rates. To deal with this you can delay actually getting the RSUs (e.g. double-trigger vesting, common), or the company itself can provide liquidity for taxes (e.g. Carta's net settlement program, not common).
Either way, 83(b) elections don't apply. They do apply to RSAs and options with early exercise, so maybe you had one of those.
My experience here is as a founder who's spent entirely too many hours with lawyers trying to engineer the most employee-friendly stock plan possible.
It's very much a grey area where you can't apply set of hard rules because each corp will do it a little differently. This is why OP needs to talk with a lawyer. I have four data points to your one over my career and I'm only counting the ones that ultimately paid out.
- Microsoft - straight straight stock award and options
- Atlassian - Pre-IPO straight stock options
- Company you never heard of 1 - RSU pseudo-options
- Company you never heard of 2 - RSU pseudo-options structured a little differently from company 1
Repeat founder, double-digit data points.
Yes, companies can do arbitrarily weird things, like OpenAI's PPUs. No, these aren't common at startups, and there's no one way that beats all the others come tax time.
If you share the stock plan, or at least concrete details, we can get to the bottom of what you're describing. But understandably you aren't likely to do that.
My comments on my own experience were only relevant to my point of the OP should speak to a lawyer because every employee stock compensation plan is different. It feels like you are trying to discredit my personal experiences and I don't understand why. Do you not believe me or is your point that you know more about the topic than I do?
Going back to the top, you wrote:
> Essentially, their price is set at FMV at the time of issuance. Since your net is zero at the time of issuance, you pay no taxes until there is a liquidity event and you can pay to cover.
I do believe the broad outcome you experienced, including having an employer file an 83(b) for you, which is rare but possible. I don't believe "RSU's [...] structured as a pseudo-option" is an accurate description of the mechanics involved. At a minimum, it's underspecified, and could lead someone else reading this to make a bad financial assumption down the road.
> is your point that you know more about the topic than I do?
I don't know, was that your point when you wrote "I have four data points to your one"? My only point is that that particular argument isn't a sound basis for dismissing the feedback you're getting, whether from me or from the others who've responded.
As I've already stated, the only point I was trying to make is that every stock compensation program is structured differently. This was in response to an article that tried to offer very specific financial advice. I've consistently advised to not follow random internet article's advice and speak to an attorney. Are you saying that is bad advice?
On the other hand, you seem hell-bent on winning a pointless argument about my own personal experiences. We both know it has nothing to do with bad financial advice since I've offered none except to speak to an attorney. Again, do you disagree with that advice?
Also, IANAL but my impression is that modern RSU's are a construct created by the legal community to get around and/or comply with the legalities of securities rules around employee compensation. There is not a singular approach on how they are structured. Your experiences may have been the result of lazy legal teams. I have no idea, but I don't doubt them.
>I'm not going to litigate it with you though. Google it. It's a common strategy for a company to perform an 83(b) election on your behalf when they grant you RSU's. This way, you don't have to pay taxes as the RSU's vest.
No need to litigate or use internet search, I can just read Section 83(b) of subtitle A of the Internal Revenue Code[0]. Also, the election must be made on your own tax return, no one else can make it "on your behalf".
You have not explained what part of my comment in inaccurate.
Many companies are as ignorant of the actual law as their employees.
[0]https://www.law.cornell.edu/uscode/text/26/83
It’s a basic legal concept that you can’t just seize pay or any asset, but especially one worked for. So, you may be right that the employer must withhold — again no idea. That said, unless you’ve specifically agreed to seizure in the past, it would be very surprising if the company did not owe you the value of those RSUs, and perhaps the ongoing value of the stock depending on if they’d failed to deliver timely on request.
Who owes the IRS? The Company, on behalf of the person.
Who owes the company for paying? The person.
Each of these are separate obligations. The company is trying to tie them together for convenience, and presumably to wash out some RSU liabilities at the same time.
> So I believe the employer is required to do that withholding.
Sure but the withholding is the responsibility of the employer. In this case, shouldn't the employer cover it and send the shares - xx%?
The group are not employees. They're ex-employees. There is no employer relationship in this case. The responsibility for withholding is somewhere else.
RSUs are wage income, and subject to supplemental wage withholding. The responsibility for wage withholding is with the payer.
I would be wary of assuming that is true for purposes of RSUs. Whether these folks and the company consider them current "employees" is not the employee-employer test for tax withholding purposes.
I'm no expert - not even a talented amateur. But, RSU's for employees are equity, and RSU's for non-employees are expense. I'm assuming, because books must balance, that there's a similar split in tax (and responsibility for tax).
Your "talk to a lawyer asap" advice was perfect. Stop there.
In the US, I've worked with the team at https://www.optimalcounsel.com/ before. They're great and founder-focused so generally get it and are reasonable on pricing.
Before you talk to an attorney, make sure you have your agreements together. That is likley your initial employment agreement, any grant docs, your separation docs, and the current agreement they want you to sign.
And yes, don't wait. If you need to take action, you may need to have time to ship docs, send wire transfers, etc.
And also time to retain an attorney. A reputable firm of any size is likely to need to check to see whether they are conflicted and to write a retainer agreement. They won’t charge for these services, but it’s not instantaneous.
How would you find good lawyers that have experience dealing with this stuff?
I had to sign stuff like this and the lawyers I was sent to seemed they didn't really have much relevant experience and I'm deeply uncomfortable with their assessments given how confused they looked.
Contact the state bar.
They provide relevant referrals to the public.
It is part of how they justify their monopoly.
You can't just use your random family lawyer. You need one who specialises in corporate law, VCs, RSUs and so on. Who that will be depends entirely on your location. I know a company that does this in London, but that's no use at all to this poster.
Your random family lawyer, if they are any good, will refer you to a specialist they know for something like this. That's a decent way to find one.
For someone based in London, are you able to share?
I've used Bird & Bird in the past. Expensive though!
How about US/California?
David at Grellas Shah would be my recommendation. They're a boutique-y startup-oriented law firm that understands these issues.
Rimon Law is fantastic.
Thank You.
call the intake people at Grellas Shah and ask for David Siegel, or for a different partner as appropriate.
And/or try contacting a bank (one of the underwriters?) to see if they’ll loan you cash for taxes using the RSUs as collateral. A lot of early Uber employees were able to get loans to exercise and cover taxes, tho these were rather large sums. That said the shares are liquid so less risk.
Thank you! We are definitely contacting lawyers.
Most countries have mandatory tax withholding by the employer, but not all (e.g. Singapore, Indonesia). In that case you would pay the taxes yourself.
What I haven’t heard yet, is not being allowed to sell on the settlement date. That puts you in a serious risk:
Worst case, the stocks fall to zero, but you paid taxes from your private money. This is net-negative.
To avoid that risk, either the employer needs to withhold the taxes or needs to allow you to sell the tax amount on the first day.
This is sad and surprising.
I’ve been through so many shenanigans during my previous life as a naive startup employee: paid huge amounts of AMT (which took years to recoup via AMT credits), was not offered 83b election, had to write huge checks to exercise ISO, had to pay taxes when exercising NSO, etc., but I had never heard of a company threatening to forfeit the RSU if tax is not wired to them, it’s simply wild, especially when the liquidity is so close.
If I was in your shoes and the amount was substantial, I’d consult a lawyer. I hired one to help me facilitate a secondary sale transaction contract and it cost me $4k, money well spent. Tons of them in the Bay Area.
I would truly love to know how this will end up for you.
I am sorry that you had to go through such shenanigans. Consulting a lawyer is also what we are working on right now. Asking just in case: do you have any lawyer to recommend? Thanks!
In case you don’t have much experience working with lawyers, start your conversation with them by saying, “The outcome I want is _________________.”
If you don’t do this, the lawyer will likely talk about many options, none of which will match your desired outcome. They also generally charge by the hour so you’ll be paying to hear about things you don’t care about.
> was not offered 83b election
The 83b election mechanism is a mess, and plenty of startups don’t explain it well to their employees, but I wasn’t aware that an employer had any particular say in it. Generally, the employee makes the election by mailing the appropriate documents to the IRS.
(I’m not a lawyer. Do your own research.)
As far as I know, a company still has to allow early exercise in order for you to be able to purchase unvested options.
Correct, and this is what I originally meant.
that AMT struggle is real, painful, and needs legislative changes when it comes to ISO exercise in private companies. especially when you have to set up a payment plan for the taxes owed, which are ever increasing due to fines and penalties, while the owed credit is ever losing value due to inflation and the lost opportunity to put that money to work. and on the state tax side you should plan on not moving and losing a job in that state as if you dont have any taxable income there you are shit out of luck on getting your money back. my only advice is that if you are offered a large chunk of options without an 83b and have faith in the company, exercise as soon as possible before the value goes up.
The only legislative changes we've gotten recently were actively designed to screw startups (thank the Republicans for Section 174 and a bunch of layoffs), so don't hold your breath.
Only $4k?
> We are curious if this type of distinction between current and former employees is typical for post-IPO RSU settlements.
I'm watching this thread, but just as a reminder that it benefits the company to be as vague and complicated as possible for ex-employees trying to exercise their equity rights. You and your equity are effectively dead weight to the company now and it's in their best interest to get you to forfeit as much as possible. The best time to cash in your equity is always when you are still an employee.
Yet another reason working for most startups is a scam
Working for a Silicon Valley startup feels like those scenes in a con movie: You're the wide eyed bettor at the pool table, convinced you have a shot...Until you realize you've been playing against world-class hustlers.
I don't think it was always that way. There were lots of overnight millionaires when tech unicorns were going IPO like gangbusters. But we haven't had a true unicorn in years, so right now, getting paid in equity is choosing to work for nothing.
This is cynical and more frequently wrong that right. In most cases, the company is trying to avoid securities regulation screw ups, tax screw ups, other regulatory or legal screw ups. Sometimes they are overly conservative and it seems annoying, but that's what they are doing.
As an example, Stripe went out of their way to get former employees paid.
This is not cynical. The situation is that a) there will be a team of very expensive lawyers and accountants working out how to best implement the plan that benefits the company (whom you can’t compete) and b) crucially, you have no control and prior on knowledge on what that plan would look like. It is not about the company trying to screw an individual over, it’s more the fact that the company will be very unconcerned if their plan is against your benefit, and you have no way to align your own benefits with the plan.
100% disagree. Just because one company goes out of the way for PR good will does not many many other companies will. Many companies do not care about you once you are a departed employee.
For example, see how easy it is to get your bi weekly paycheck copies. Most will not reply at all.
Many companies will throw existing employees and even founders under the bus if they think their is a few dollars to be won. To think they wouldn’t play games with ex employees is naive in the extreme.
Wow, check stubs used to be the basic social currency around renting and etc. Are you saying people can't get these anymore? Or maybe they know too much and don't care?
I assume GP is talking about getting paystubs from a former employer, not from a current one. I've never had any trouble getting paystubs from my current employer; they were always available through the HR website portal (ADP, Workday, etc.).
> This is cynical and more frequently wrong that right
If you are joining a startup as an employee and expecting your equity to worth something its important to be aware of the risks. And trying to sell as an ex-employee is a Risk.
Maybe I'm a cynic but having worked in employee equity I have seen more times that companies essentially turn their back on ex-employees than i have seen them actively helping them on liquidity transactions like tender offers.
I don't think it's cynical at all. Unfortunately I can't provide concrete examples, but I recall many instances over the past 15 years or so reading stuff here on HN where founders/companies expressed a belief that they should be able to claw back even vested equity from employees who have left the company pre-IPO.
It's super super gross, but it's unfortunately a thing. Hopefully that's not what's going on here with OP, but I wouldn't be surprised if it is. If the company is offering a sell-to-cover option to existing employees, they are certainly capable of doing so for former employees as well.
It was noteworthy that Stripe did that. The fact that it was unusual should speak to which behavior is more common by companies.
True that the company needs to follow regulations. But they could do "net exercise", or "sell to cover". Instead they choose "pay cash or forfeit" path.
Even that has downsides - they are effectively guaranteeing a large sale right at the end of the lock-up. It's hard to know if investors pushed back on that or from where the pressure came. This stuff is more complex than it seems, companies are rarely just being d*cks.
That's pretty normal, though, and they're offering sell-to-cover as an option to their current employees, so that sale at the end of lock-up is going to happen regardless.
I'm not convinced these events represent a significant enough number of shares to move the price, though. And regardless, many current and former employees will use this opportunity to dump more shares than just to cover withholding. I wouldn't be surprised if the number of shares sold normally at that time will dwarf the number sold to cover tax withholding.
A few things -
First, What's your end goal here? Is it to not forfeit the RSU's? Is it to not pay the taxes upfront? etc
You ask a lot of "is this normal questions", but it sort of doesn't matter if it's normal if you want something else.
Maybe the answers affect the chances of getting that something else, but it's really hard to give advice without knowing what you actually want to achieve.
It will quickly become a sort of academic discussion.
At the end you say you want to explore "potential solutions" - but can we start with what you want the outcome to be, actually?
Second, you say you want to "engage in a conversation with the company to explore potential solutions". Uh, okay.
Right now you have 30 days. Best case, assuming you don't have to do something before then, notification wise. Do you have meaningful legal representation?
If not, will you go that far, assuming the company offers you absolutely nothing? Or doesn't even bother to respond?
If you don't have lawyers, but are planning on going that far, you don't have a huge amount of time to get them and have them help.
Even if you aren't, you are veering quickly into territory where it sounds like you need more than just a bunch of questions answered by smart people on the internet.
You should strongly consider professional advice here, if for no other reason than the ability to have a live conversation about this.
This isn't idle internet curiosity, it sounds like it actually matters to y'all.
The best case is to not pay the taxes upfront. Say the company wants me to pay 50% tax in cash and then give me 100% of my vested RSU; I want 50% of my vested RSU without needing to pay taxes.
Yes, we are contacting lawyers.
Thanks for your attention!
That's not necessarily the case. You might not want to put up money to cover taxes, but that's not advantageous in all situations, so echoing everyone else's advice here: talk in depth with a professional who's time you pay for.
I'd rather pay the taxes directly than trust someone else to do it, especially when that someone is making it as difficult to get the money from your investment. Those RSU's were earned, and the whole point is you get to share in the liquidity event.
Huh? Who's trusting some other party to pay your taxes? I'm saying keep the RSUs, pay for the taxes out of pocket, so you hold onto RSUs that may appreciate faster than, say, holding onto SP500, likes say picking up FB at 30.
I think the real issue is that only one course of action is being forced on ex-employees, while the same option isn't the one exercised by current employees. Besides that, personally, I would be very worried about "paying up front" and opting into a process that is not in my control.
Most RSUs have a time and liquidity vesting. The latter triggers on IPO. If your company didn’t follow that convention, they went out of their way to screw you [1]. (RSUs are generally a worse deal than IPOs. They’re a great deal for companies, which is why Andreessen et al push them.)
> current employees have access to a sell-to-cover option, while former employees are required to prepay in cash
This is common. Cashless sales are a benefit. We strictly regulate who can and cannot be provided employee benefits in America. Your former employer would risk extending a securities-based loan to you. It can be done. Your former employer decided not to extend the privilege.
[1] Find the IPO pitch materials and see if the bankers pitch anti-dilution post IPO.
The 185 day thing is fine. It's common. The company has likely made a legal commitment to not have any employees (past or present) sell for that time period.
Look in the company's s-1, it will be there.
I commented with a correction. March 15, 2025 is 140 days from the IPO day. This is before the lockup periods ends and they require us to estimate our tax, based on the fair market value of that date, with the following formula, and pay cash, otherwise the vested RSU will be canceled:
Number of vested RSUs * the estimated fair market value of the stock at the settlement date * the appliable highest marginal federal, state, local income tax rate and employment tax rate.
Even if no one pump up the stock price, the amount of cash needed in such a short notice, is unbearable, which will make most ex-employees to give up their shares.
Borrow against the RSUs. If you have more than $500k, this should be trivial to privately arrange. (If less, idk. Also, not legal advice!)
yeah i was going to suggest the same... there are companies that do this, and honestly anyone with a little cash will lend you the money assuming the stock isn't a totally ridiculous thing.
How are the RSUs managed? Are they in a brokerage account? You may well be able to borrow from the broker.
And the important thing to note about those companies is that 100% of $0 is $0. X0% of a big number is still a big number, and still bigger than $0.
The shares are not in our brokerage account yet. According to the company, they need to confirm the tax payment to the company before the shares are transferred to the personal brokerage account.
> shares are not in our brokerage account yet
You don’t own shares. You own a right to future shares. Borrow against that. (If you want to roll your own loan, sell a deliverable forward. Again, not legal advice!)
They'll take your estimation ? Does it have to follow that formula?
If on that day, the market price is higher than my estimation, they would inform me and give me 1 day time to pay the difference. If the market price is lower, then I'll have to go through the tax return process with IRS.
anyway, mail me at username at googles service. Some chance I have an answer
Sent the email. Thank you!
> 185 day thing is fine. It's common
This is the lock-up agreement. It’s negotiated between the company and its underwriters and is orthogonal to the RSUs.
It's not orthogonal. The agreement usually covers shares owned by employees and former employees.
> It's not orthogonal. The agreement usually covers shares owned by employees and former employees
It covers them as equity holders, or people with the right to equity. I’ve negotiated lock-up agreements. Nobody is thinking about RSU holders. Hence how OP winds up in this mess.
OP’s problem stems from a draconian form of RSU. It doesn’t automatically vest on a liquidity event. It has the company collecting taxes. And it has a forfeiture clause.
Yes, it covers them. Hence it's not orthogonal. The fact that there are two agreements doesn't make them orthogonal. Many situations are covered by more than one contract (or law or regulation).
You’re being intentionally obtuse. The source of the problem isn’t the lock-up agreement, which was negotiated independently of the RSUs. And the lock-up agreement is easily (and commonly) circumvented—the problem is intractable because it’s unrelated to the lock-up.
(And pedantically, a 185-day lock-up is not common.)
Just curious, how is a lock-up commonly circumvented? Might be relevant information for me, I would appreciate any tips
Ehhh 180 days is 6 months is fairly standard.
Which is why 185 isn’t. (Lock-ups have also gone into and out of vogue. And again, this is a problem with the company’s treatment of withholding. The lock-up agreement could go away and OP would retain their problem.)
The extra 2.7% isn't material to OP's problem. As you note, OP's real problem is the withholding.
That's not a cashless sale. The company sells enough of your vested shares to cover taxes. The withholding the company sends to the IRS comes from some retail investor on the public stock exchange who buys those shares, not from the company's bank account. There's no loan involved and no risk the company has to take on.
> That's not a cashless sale. The company sells enough of your vested shares to cover taxes.
That’s cashless cover. (Cashless exercise is the company “sells” shares to itself to cover exercise cost, which is typically strike plus withheld taxes.)
These are ex-employees, so they’re not vesting anything any more. Vesting applies to your time at the company.
> These are ex-employees, so they’re not vesting anything any more
Vesting is the gradual accrual of ownership. Time-based vesting is based on time employed. Liquidity-based vesting typically instantly-vests the whole package on IPO. For an employee that means acceleration (whole package vests, irrespective of the time component) and conversion (RSU converts into equity). For an ex employee, it typically means just the latter (already time-vested RSUs turn into equity).
There are a lot of degrees of freedom with the above, which is partly why I believe RSUs are a scam next to options despite being pitched as being more downside resilient. (You aren’t being granted shares. You’re being granted a derivative that conditionally converts into shares.)
> RSUs are generally a worse deal than IPOs
Did you mean they are a worse deal than options?
I assumed it was a typo of “ISO”.
A question perhaps to help anybody else who finds themselves in this situation...
If one doesn't have the cash to prepay the taxes, where do you find a short-term lender for this?
Let's say your RSUs are worth $1M and you need to pay $220k in taxes in March, but you won't be able to sell the shares until a few months later.
In theory the $1M in public company stock seems like a fine collateral. But in practice, a recent IPO's stock can fluctuate drastically. Maybe they announce bad results in April, the stock goes down 50%, and you already paid taxes on $1M but now it's only worth $500k. An ordinary bank probably won't loan you the $220k with such a high risk collateral (I might be wrong).
If banks or rich friends are not an option, where do you get the $220k? Second mortgage on your home?
> If banks or rich friends are not an option, where do you get the $220k? Second mortgage on your home?
Paying taxes on phantom income is extremely risky. As you described, if there is a gap between the tax event and the liquidity timeframe, the value might disappear and you end up paying taxes on money you never had and never will have. A lot of people have lost everything on this.
It’s still possible if the shares’ value covers the interest payments. A shareholder will pay taxes only on the value received, while the rest is returned to the bank. So, the bank risks only the interest amount, which is manageable to assess based on the company’s performance.
P.S. I’m not a lawyer, obviously.
I am fairly confident that you have strong legal protections against forfeiture of your RSUs under these circumstances, especially if you worked in California. Unless there is an explicit clause in your employment contract where you agree to this (fairly unusual) tax prepayment scheme, your RSUs are earned income.
IANAL, but I have been around the startup scene long enough to immediately spot the red flags here. It seems like there is an explicit strategy at play here to discourage former employees from exercising RSUs, and you will likely find a strong legal argument against these terms (i.e. prepayment and forfeiture) unless you explicitly agreed to them. To echo what will probably be stated at least a hundred times on this thread - talk to an attorney.
Thank you!
@jameskuang correction: March 15, 2025 is 140 days from the IPO day. This is before the lockup periods ends and is used to determine the fair market value of the stock that taxes are calculated. If the stock drops dramatically between March 15th and the end of the lockup period, ex-employees could lose money (more cash tax is paid than the value the stock can be sold).
Wait - there’s a lot of assumptions being made in this thread. Is everyone you’re referring to a former employee? Are you sure you had RSUs, proper, as opposed to options?
If you have options, this is entirely because of the different treatment between ISOs and NSOs.
Is it possible you thought you had RSUs but instead had options?
Yes, all former employees (current employees that hold RSUs are offered sell-to-cover, no worries on upfront tax by cash). And yes, they are RSUs. As for options, ex-employees need to pay to buy options when leaving the company within 90 days.
Well, for options it's more complicated than that - you can have ISOs that convert to NSOs to allow people to defer having to exercise illiquid options when they leave the company. So that's where my options question was coming from - the scenario you describe is VERY common in a scenario where ISOs have converted to NSOs upon leaving the company.
But okay, you have RSUs - how familiar are you with your agreement? It could have been a double trigger vesting arrangement, where the shares "semi-vest" over time, but then they don't fully vest until a liquidity event, at which point poof suddenly all of those ghost shares become REAL shares. If that's the case, they likely baked in a process for employees to have those shares withheld, or auto-sold during the lockup period. It's all tied in with their HR system and other payroll processes to make that easy.
Another scenario is that at some point since you left, or right before the IPO, they re-issued everyone's shares to be a different share class, because they wanted to clean up their cap table before going public. For employees they could just fix that for them, because again - all baked into the existing systems. For previous employees (and people who were gifted stock and former board members and advisors and angel investors and whoever else), they don't have an easy way to fix this. The old stock class technically doesn't exist because its been converted, so they can't sell to cover, and when they convert, they couldn't automate that because they don't have your withholding information and other payroll details for compliance purposes.
In either scenario, it's worth either reading your agreement carefully and/or talking to an attorney. Regardless, however, if this was related to an IPO, the legal and compliance stuff on this is going to be buttoned up and carefully done, so assume that (however unfair) they either have to do this in this fashion or it's much easier for them to do it this way (or some combination of both). It is possible to do very shady things during a private transaction, even a private transaction with a publicly traded company, but not for an IPO.
There are companies that will loan you money to cover vesting costs or these types of situations - they'll do it at shitty rates, but if the options are losing out on a windfall or losing an extra 10-20% on the windfall, it's worth considering.
> It could have been a double trigger vesting arrangement, where the shares "semi-vest" over time, but then they don't fully vest until a liquidity event, at which point poof suddenly all of those ghost shares become REAL shares.
Exactly this.
> If that's the case, they likely baked in a process for employees to have those shares withheld, or auto-sold during the lockup period. It's all tied in with their HR system and other payroll processes to make that easy.
In the agreement, they said this is up to the company, and the company chose the "pay tax to me or forfeit" option.
> There are companies that will loan you money to cover vesting costs or these types of situations - they'll do it at shitty rates, but if the options are losing out on a windfall or losing an extra 10-20% on the windfall, it's worth considering.
Thanks for this advice. Agree that this seems like a viable approach. Appreciate it!
Are you in the US? Because what you're describing doesn't sound like how it would work in the US.
When the company IPOs, your vested shares would immediately vest into actual shares. At that point, you would be taxed and awarded a W-2. This is non-negotiable, and this is something that the company would be forced to handle. The idea that you have a lingering tax payment due before lockout period expires doesn't make sense to me. Your RSUs are now shares and when that conversion occurred on IPO date, you would have been taxed. You own no more tax until you sell your shares.
I'm in the US and this sounds... shady but not abnormal.
The company is required by the IRS to do withholding on supplemental income (which RSUs qualify as). There are usually three ways to do this: 1) the employee puts up the cash before vesting day, 2) the company keeps some number of the vested shares and then sends a check to the IRS from their own bank account, or 3) the company sells some number of the vested shares on vesting day and sends the proceeds to the IRS.
I've seen #1 and #3 personally as options when I've had RSU grants. I always chose #3, but I could have also chosen #1 and kept enough cash in my linked brokerage account to cover the tax withholding.
> When the company IPOs, your vested shares would immediately vest into actual shares. At that point, you would be taxed [...] Your RSUs are now shares and when that conversion occurred on IPO date, you would have been taxed. You own no more tax until you sell your shares.
No, that's not how it necessarily works. Companies can hold off on delivering the (vested) RSUs until you are actually able to sell them. That's a good thing, because no one wants to have to pay tax on their vest date if their shares aren't liquid.
Yes, we are in the U.S., but our situation seems quite different from the standard RSU process you described.
We did not receive a W-2, and the company has not reported the RSUs as taxable income yet.
Even though our RSUs fully vested at IPO, they are not yet settled as shares—the company has set the settlement date to March 15, 2025.
The company is requiring us to prepay withholding taxes in cash before they release the shares. If we don’t pay by the deadline, the RSUs will be forfeited entirely.
This is why we are trying to better understand how this aligns with U.S. tax laws and whether this is standard practice.
We agree that this doesn’t sound like how RSUs typically work in the U.S., which is why we are seeking advice. If you have any thoughts on how this situation might fit within U.S. tax regulations, we’d really appreciate your perspective!
I talked to someone who is a Chief Accounting Officer. First off, to be perfectly blunt, you were foolish to wait until 30 days before this occurred before asking questions.
The company has an obligation to withhold tax to the IRS. It sounds like the company doesn't want to spend its own cash to pay this withholding tax so they are forcing ex-employees to fork over the cash, with the threat of forfeiting their shares.
This doesn't sound legal unless it was spelled out in your employee equity grant. The fact that you would forfeit your shares seems wrong. I would read over whatever equity grants you signed.
However the benefit is that you get 100% of your shares and you don't lose any shares to taxes. You could talk to a lawyer but unless you don't have the money to pay the withholding tax (22% of the opening price of the shares on the settlement date unless you own more than $1 million, which then becomes 37%), I would just pay as little as possible and get the shares.
If it is legal, it's the company being an asshole and being really shitty to their ex-employees. Please name and shame them so that we can avoid them.
I'm not understanding the situation. When I had RSUs as an employee, those grants were voided at separation. I only got to keep the RSUs that had vested before separation (which were then just common stock and that I had paid taxes on at vesting.)
Are you saying your former employer let you keep your unvested RSUs which subsequently vested at the IPO? (I've never heard of anyone getting to keep their unvested grants after separation.) Or were you still an employee during the IPO and left the company between then and now?
It's double trigger vesting. You vest proportionally based on your length of employment but the company is private so you can't liquidate and then they fully vest (meaning you can sell what had vested by the end of your employment) again at IPO (+lock up period).
A side note.
It was 2006 when I joined Wikia (Fandom).
I was being paid $850 per month, but I also received a piece of paper promising me shares worth of $15,000.
It felt like a good chunk of money. But then I asked myself few questions:
(a) being an Elbonian citizen, how do I enforce this contract?
(b) how much would it it cost me to enforce this contract?
(c) even if I receive these shares and the company would not go IPO what am I it?
Shortly after I quit and left that piece of paper on my desk in the office.
Really think you should have at least taken the paper with you. What would they be worth now?
He's speaking rhetorically, most of the time the company setups you up with options that expire worthless.
as joe said, there was a small footprint saying I have to stay X amount of time with the company to vest these shares.
re #3, if your RSU windfall is substantially large, you might be eligible for the 100%/110% safe harbor that won't penalize you for tax underpayments (assuming you are a US taxpayer)
e.g., you make $200K in 2024 and $5 million in 2025 (which includes the RSU windfall). Assuming you pay at least 110% of what you paid in taxes in 2024 in 2025, you need not pay estimated tax or anything beyond statutory withholding amounts on the RSU windfall, and can just make up the 6 or 7 figures of tax owed at tax settlement time (e.g., by April 15/16 after the tax year in question). This is the optimal strategy, you can just park the money for tax owed in a close to as risk-free investment as possible in the meantime.
Statutory withholding rates might be higher; e.g., at my employer, if your RSU earnings are below $1 million, you can set your federal withholding as low as 22%. If your earnings are above $1 million, you are stuck with the 37% mandatory federal withholding rate (both done by sell to cover). This does not include per-state withholding minima, which can vary widely.
The issue is not that they want their withholding to be correct for the taxes they owe. The issue is the company needs to follow the withholding rules, and probably for cashflow reasons or maybe for tricky equity law reasons, would like the former employee to provide the withholding, rather than a net share settlement or sell to cover.
This should count as a supplemental wage payment. The 22% rate for supplemental wages only applies if income is under $1M and the person was paid wages by the employer this year or last; details in publication 15 https://www.irs.gov/publications/p15#en_US_2025_publink10002...
Thanks for mentioning the safe harbor rule. We are actually aware of that.
The issue here is that the company is asking the payment directly to the company's bank account, or the RSUs will be forfeited forever. This makes the situation much worse IMHO.
Right, the safe harbor rule isn't relevant here. The company is required to do withholding at the time the shares are delivered to you. They've chosen the most burdensome method for you as the only option. I'm not sure there's a way to legally force them to allow a sell-to-cover option, but I really hope so for y'all's sake. This feels really shady.
The requirement to prepay taxes in cash and the forfeiture clause are both highly uncommon.
Employees typically rely on the company to handle tax withholding, rather than manually calculating and prepaying.
Seeking professional legal and tax guidance is recommended, and a collective approach could strengthen your position.
I've never had RSUs as an ex-employee. But as a current employee I've seen net share withholding and sell to cover. With net share withholding, the company figures your witholding %, issues you the net shares after withholding and pays the withholding from cash. A new IPO company may prefer to use its cash for other things.
Given that there's one month until the date, and stock plan stuff always takes a while, it's probably too late to ask them to change their plan.
I think you should be able to finance this withholding, most likely, you'll be able to pay back the loan once the RSUs are tradable, about 30 days later. If the stock drops too far though, you'll need to sell the stock, and then marry someone with a lot of capital gains to cancel out, and have your new spouse help pay back your loan :P
On point 3 specifically: I work for a FAANG, and the employees need to nominate the percentage the company should sell-to-cover, they don't figure it out for you. If you're no longer employed by the company I don't know _how_ they'd figure it out. If RSUs are still W-2 income for a former employee (I don't know this?) it's the extra tax you'd pay on that much income - for me I estimate using the tax bracket it'll pull me into, plus any other applicable federal taxes (medicare, additional medicare, social security). They may need you to cover state taxes as well?
I'm not an accountant, you shouldn't rely on this post, and I don't know if/how you might get screwed on the other points.
Right. Instead of the IPO date, or the end of the lockup date, they chose 3/15 as the date to settle the vested RSU. And require us to estimate our tax, based on the fair market value of that future date, with this formula, and pay cash, otherwise the vested RSU will be canceled:
Number of vested RSUs * the estimated fair market value of the stock at the settlement date * the appliable highest marginal federal, state, local income tax rate and employment tax rate.
In theory if someone pump up the stock price for that date, we are screwed. Even if no one pump up the stock price, the amount of cash needed in such a short notice, is unbearable, which will make most ex-employees to give up their shares.
(Again, not an accountant, I repeat that because I might be wrong and I'd hate anyone to suffer because of that..)
There are a couple of different risks here. One is that you pre-pay the company for more than the FMV ends up being; it sucks, especially with interest rates being as high as they are, but you'll get the money back with your tax return filed next year.
A different risk is that the price is spiked high at the moment the FMV is determined, and then falls before you're able to sell the stock. This would leave you with a short-term capital loss which you'd only be able to claim back at $3,000/year - https://www.irs.gov/taxtopics/tc409#:~:text=If%20your%20capi... - unless you have other short term capital gains in the same year to offset it against.
Has the stock been volatile since the IPO? How does the daily trading volume compare to the number of shares that will exit lockup on 3/15? If I were in your shoes that would inform my evaluation of the risk.
> One is that you pre-pay the company for more than the FMV ends up being
There is another duck move in the bag, and that’s paying by cheque. Reverse if unfavourable and settle out of court. Again, massive dick move and—in my opinion—highly unethical. But the regulators and law enforcement are being defunded.
Price is mostly flat since IPO (up or down within ~10% mostly), looks the stock is thinly traded, daily volume is less than 100k shares.
I'll add that, the original post says the vest date was in 2024 but the settlement date is in 2025. I'm a little surprised (but I'm not an expert!) that your taxable event is in 2025, rather than occurring on the vest date at that date's FMV. Generally the "vest" event is the point past which you have no (per some complicated definition) threat of forfeiture... but the company is threatening to forfeit the shares pending conditions...
In your shoes I'd be seeking an accountants' advice re: (1) do you already owe tax on these shares for tax year 2024? (2) if you don't take receipt of the shares for some process reason, might you still owe taxes on them?
Sorry you're going through this, I hope it's worth it in the end.
> If you're no longer employed by the company I don't know _how_ they'd figure it out
You ask. Plenty of companies let ex employees cashlessly exercise options or sell RSUs for cover.
At Amazon you just choose sell to cover and they figure it out.
Get a lawyer. Get an accountant. Ensure they have experience in the relevant jurisdictions (yours, and your former company’s). Realize there is a risk to be borne here, by someone, and you should expect to either bear it, or pay someone else to.
Don’t take any advice here without talking to an experienced accountant
But fwiw, no sell to cover seems very suspect
Lawyer-up. Get proper legal advice.
I won't pay anything that has to go to the IRS or similar to a corporation.
I might be OK for the company, but might put you in a big trouble with the goverment. Even if they act in good faith, you will need to do some paperwork or it will trigger an audit with the IRS that will take _your_ time, not theirs.
> We are wondering if this approach—requiring a direct tax prepayment—is standard practice.
Yes. source: I went through an IPO. 2 friends at different companies had similar experiences.
> If we underpay, we need to send more money within one business day. If we overpay, we have to apply for a tax refund later. We’re wondering how companies typically help employees navigate tax prepayment for RSUs.
(double check this), but I think as long as you pay 110% of your tax obligation of last year, thats all you need to do. source: https://www.hrblock.com/tax-center/irs/tax-responsibilities/...
> We understand that current employees have access to a sell-to-cover option, while former employees are required to prepay in cash. We are curious if this type of distinction between current and former employees is typical for post-IPO RSU settlements.
Do the current employees have "withhold to cover" or "sell to cover"? My understanding is current employees would not be able to sell their stock during a blackout or lockup period, but the company can legally withhold them.
This seems like a great way to get people that don’t have cash on hand to pre-pay the taxes to forfeit their RSUs.
Can someone just name the company, cause there is enfough information here that it’s not hard to figure out.
185 days before 3/15/2025 is 9/11/2024. There were these IPOs around that time (all Nasdaq) [1]:
- 9/10: TDTH
- 9/10: XCH
- 9/12: GLXG
- 9/12: FVN
[1]: https://stockanalysis.com/ipos/2024/
Unless details were intentionally changed that narrows it down to two companies that are not US based, despite being traded on Nasdaq. The other two are a ETF and SPAC
Worth noting, because many people seem to assume these folks are based in SV
Because other Sv tech companies some us have worked for have been equally and intentionally shady
It's not those companies. There is a typo in the original post. 3/15 is before 185 days.
Why? It seems like it would be a derail and it is not hard to look up the two companies that had an IPO on October 25th 2024.
> The company has stated that if we do not prepay the taxes by March 15, 2025, the RSUs will be permanently forfeited
Is it clear whether you'd forfeit your entire grant, or just some subset of shares that would correspond to a tax/withholding percentage?
all RSU forfeited.
I hate this shit because you are inevitably in the worst possible position in terms of not only power, but information. But ultimately your shares are not worthless, so this must be a positive thing, and I keep a small portfolio of worthless company shares on the wall to remind me.
1. Unfortunately yes I have heard of this. It sucks and if they don't allow you to sell to cover you should be able to find a lender - I would start by going to a brokerage and talking to your broker. I would imagine if you purchased a short position (a PUT option to sell the same number of shares you will be owning) then you can convince them with enough documentation and maybe some kind of escrow or custodial account to effect it.
2. Then you need a lawyer and a brokerage.
3. An accountant, lawyer and brokerage. Again, this is the good scenario (shares are not worthless)
4. Since you said it was public, try your brokerage first. There are options for private companies in this space as well. There are definitely lenders who will help you out here.
If you just wanted to get the whole thing over with I would find someone willing to lend the money against the shares, again if this is a publicly listed security and you can purchase the PUTs then your brokerage should be able to loan against the shares to pay the taxes, you escrow the shares and they loan the money and then shares go into escrow and you have the PUT options so you can treat those shares as cash with your brokerage.
Went through the Twilio IPO, I can give feedback based on my experience. IANAL and all that.
1. I've never heard of that from a tech company IPO. Twilio did sell-to-cover fwiw.
2. Does your RSU contract/letter say something about that? I'd maybe check with a lawyer and see if they can even do that. I would have imagined that in this scenario, the company gives you the RSUs and leaves you to figure out paying the IRS yourself.
3. That sounds absurd, I never had to do that. Tech companies that reach IPO typically have an HR department that handles all this for you, but I mean yours clearly doesn't I guess. I don't know what, if any, obligation employers actually have legally in this regard. Again, I'd check with a lawyer.
4. Hmm, I was a current employee during my IPO experience, so don't know how former employees were handled. I'm guessing though that they were also given sell-to-cover option. I'm pretty sure the stock broker the company used (I think it was ETrade) just handled all that for the company, including showing us how much was sold to cover as things vested, and locking current employees during quiet periods.
Good luck, hope that helps a bit in terms of at least validating your sanity that this probably isn't normal.
Thank you so much!
Same shoes. Desperate for expert advice who has experienced this saga.
Same. To answer some of the comments, I am sure that I have the RSUs instead of options. The offer letter said so, the RSU agreement letter said so, and the esop platform said so too.
Got the same situation, ex-employee from a similar startup that IPO'ed in 11/2024, does it make more sense to borrow money from some loaner or file a lawsuit to these guys?
I don't know if the details are the same, but Uber pulled some last minute changes on how taxes were calculated right before IPO too.
Same question here！
Hope to see some folks with similar experience, like former employees from Uber, to share their stories.
1. Never heard of having to wire taxes as a condition of receiving stock owed to you. Your taxes are between you and the IRS. Sell-to-cover should be considered standard if the stock is liquid. Any reputable company working with any reputable broker should be able to manage it.
2. Lawyer
3. Ridiculous. Lawyer
4. So they can do sell-to-cover, they just don't want to for some reason.
If the equity amounts to a significant amount of money, you would probably benefit from consulting your own attorney. Don't take advice on an internet forum and definitely don't accept "Trust Me Bro" from the company. Good luck.
> Never heard of having to wire taxes as a condition of receiving stock owed to you
Extremely common with ISOs and RSUs. There are consequences for issuers if their options are improperly exercised or RSUs improperly vested.
Low sample count for me, so I guess I'm lucky I've never seen this. My first thought would be the same as OP's: This smells funny. Generally whenever you have to pay your employer to get paid, something foul is afoot.
The only time I’ve ever heard of it was as an option for people who wanted to keep all the shares and avoid the sell to cover.
They are cheating you.
Yeahhhhh get lawyers, most IPOs will tank in the short run leaving you footing the tax bill for money you never had (speaking from experience).
At least you get capital loss carryovers for a decade, but it's so shameful that companies dump on their own employees. What a dark world.
You need a lawyer, obviously. Probably from a big corporate law firm. One who's been around IPOs before. Those are easy to find in Silicon Valley, but scarce outside major cities.
sw. c
same question here!
same question
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Same question here
Why don't you wait it out. You can't gain much going against the org, they have all the leverage and there typically are enough terms to allow the startup to even take them from you citing x,y,z. Just wait it out - it's just a question of a few months. As for the tax piece, if you think there will be enough upside - make the demanded payment. Think logically minus the emotions.