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

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

#101

Post by 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.

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

#102

Post by kelnos »

blindriver wrote: post #69

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…

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.

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

#103

Post by kelnos »

breakds wrote: post #38
jhj wrote: post #30

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 amou…

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.

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

#104

Post by 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.

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

#105

Post by 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?

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

#106

Post by rwmj »

emilsedgh wrote: post #94
vessenes wrote: post #74

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 Californ…

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.

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.

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

#108

Post by 0xFF0123 »

rwmj wrote: post #106
emilsedgh wrote: post #94

Earlier quoted context omitted.

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.

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.

For someone based in London, are you able to share?

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

#109

Post by 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.

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

#110

Post by kdmtctl »

pavlov wrote: post #105

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 rec…

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.

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