Ask HN: Former employees' RSUs at risk after startup's IPO
110 comments
·February 12, 2025vessenes
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...
greenspam
Thank you! We are definitely contacting lawyers.
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.
rwmj
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.
0xFF0123
For someone based in London, are you able to share?
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.
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!
fragmede
Only $4k?
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!
fragmede
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.
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.
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.
NhanH
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.
rootsudo
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.
benjaminwootton
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.
flomo
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?
kelnos
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.
hansonkd
> 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.
greenspam
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.
danielmarkbruce
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.
fragmede
It was noteworthy that Stripe did that. The fact that it was unusual should speak to which behavior is more common by companies.
Ancalagon
Yet another reason working for most startups is a scam
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.
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.
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.
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.
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.
greenspam
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.
JumpCrisscross
Borrow against the RSUs. If you have more than $500k, this should be trivial to privately arrange. (If less, idk. Also, not legal advice!)
danielmarkbruce
They'll take your estimation ? Does it have to follow that formula?
danielmarkbruce
anyway, mail me at username at googles service. Some chance I have an answer
JumpCrisscross
> 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.
danielmarkbruce
It's not orthogonal. The agreement usually covers shares owned by employees and former employees.
bosky101
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.
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!
null
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.
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!
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.
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!