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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

#21

Post by JumpCrisscross »

danielmarkbruce wrote: post #20
JumpCrisscross wrote: post #16

Earlier quoted context omitted.

> 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.

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

#22

Post by danielmarkbruce »

greenspam wrote: post #18
danielmarkbruce wrote: post #11

Earlier quoted context omitted.

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,…

They'll take your estimation ? Does it have to follow that formula?

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

#23

Post by JumpCrisscross »

andrewf wrote: post #13

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 pul…

> 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.

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

#24

Post by danielmarkbruce »

JumpCrisscross wrote: post #21
danielmarkbruce wrote: post #20

Earlier quoted context omitted.

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…

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).

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

#25

Post by danielmarkbruce »

JumpCrisscross wrote: post #19
greenspam wrote: post #18

Earlier quoted context omitted.

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,…

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.

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

#26

Post by ryandrake »

JumpCrisscross wrote: post #17
ryandrake wrote: post #12

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 signific…

> 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.

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

#27

Post by greenspam »

danielmarkbruce wrote: post #14
hansonkd wrote: post #6

> 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 forfei…

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.

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.

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

#28

Post by andrewf »

greenspam wrote: post #15
andrewf wrote: post #13

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 pul…

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…

(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.

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

#29

Post by danielmarkbruce »

greenspam wrote: post #27
danielmarkbruce wrote: post #14

Earlier quoted context omitted.

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.

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.

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

#30

Post by 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.

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