Ask HN: Former employees' RSUs at risk after startup's IPO
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!
171 comments
[ 4.6 ms ] story [ 240 ms ] threadI'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.
As an example, Stripe went out of their way to get former employees paid.
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.
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.
For example, see how easy it is to get your bi weekly paycheck copies. Most will not reply at all.
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.
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.
> 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.
Look in the company's s-1, it will be there.
This is the lock-up agreement. It’s negotiated between the company and its underwriters and is orthogonal to the RSUs.
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.
(And pedantically, a 185-day lock-up is not common.)
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.
How are the RSUs managed? Are they in a brokerage account? You may well be able to borrow from the broker.
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!)
That’s cashless cover. (Cashless exercise is the company “sells” shares to itself to cover exercise cost, which is typically strike plus withheld taxes.)
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.)
Did you mean they are a worse deal than options?
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.
Extremely common with ISOs and RSUs. There are consequences for issuers if their options are improperly exercised or RSUs improperly vested.
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.
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.
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.
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.
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.
You ask. Plenty of companies let ex employees cashlessly exercise options or sell RSUs for cover.
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 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.
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...
Is it clear whether you'd forfeit your entire grant, or just some subset of shares that would correspond to a tax/withholding percentage?
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
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?
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.
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!
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.
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.
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.)
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.
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.
Yes, we are contacting lawyers.
Thanks for your attention!
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.
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!
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.
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.