Ask HN: Former employees' RSUs at risk after startup's IPO

[jameskuang]

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!

[vessenes]

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!

[kelnos]

> 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...

[caseysoftware]

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.

[emilsedgh]

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.

[choppaface]

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.

[greenspam]

Thank you! We are definitely contacting lawyers.

[Jakob]

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.

[deanmoriarty]

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.

[breakds]

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!

[amluto]

> 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.)

[hansonkd]

> 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.

[Ancalagon]

Yet another reason working for most startups is a scam

[danielmarkbruce]

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.

[DannyBee]

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.

[greenspam]

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!

[sameerds]

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.

[JumpCrisscross]

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.

[danielmarkbruce]

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.

[kelnos]

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.

[Aurornis]

These are ex-employees, so they’re not vesting anything any more. Vesting applies to your time at the company.

[blackeyeblitzar]

> RSUs are generally a worse deal than IPOs

Did you mean they are a worse deal than options?

[pavlov]

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?

[jjav]

> 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.

[kdmtctl]

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.

[primitivesuave]

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.

[greenspam]

Thank you!

[greenspam]

@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).

[mattzito]

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?

[bjtunfs]

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.

[blindriver]

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.

[kelnos]

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.

[breakds]

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!

[lutorm]

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?

[pb7]

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).

[zeroq]

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.

[jhj]

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.

[toast0]

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...

[breakds]

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.

[toast0]

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

[perfmode]

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.

[andrewf]

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.

[greenspam]

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.

[JumpCrisscross]

> 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.

[scarface_74]

At Amazon you just choose sell to cover and they figure it out.

[kristjansson]

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.

[ripped_britches]

Don’t take any advice here without talking to an experienced accountant

[ripped_britches]

But fwiw, no sell to cover seems very suspect

[itake]

> 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.

[eb0la]

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.