Double-Trigger RSU

What it means

A double-trigger RSU is a promise from your company to give you shares of stock later. You must meet two specific goals to get these shares. First, you must work for the company for a certain amount of time. This is called vesting.

Second, the company must have a "liquidity event," such as an Initial Public Offering (IPO) where it starts selling shares to the public. If you leave the company before both things happen, you lose the shares. These units are used by private companies so employees do not have to pay taxes on shares they cannot sell yet.

A simple example

Imagine Sarah works for a startup. She receives 1,000 double-trigger RSUs. Sarah vests after one year, but the company has not gone public yet. Because the second trigger has not happened, she does not get the shares. Two years later, the company goes public. Now that both triggers are met, all 1,000 shares settle at once. If the shares are worth $10 each, she receives $10,000 of taxable income on that day.

Why it matters to you

• When the second trigger happens, you receive a large amount of taxable income all at once.
• You will owe ordinary income tax (taxes based on your normal salary bracket) on the total value of those shares.
• Your company will likely take out taxes from your pay automatically, which is called withholding.
• Because you receive a large payout at once, you might move into a higher tax bracket for that year.

Common mistakes to avoid

• Do not forget that the tax bill happens the moment the shares settle, even if you do not sell them.
• Do not assume you have enough cash on hand to pay the taxes, as the IRS expects payment quickly.
• A tax professional can help you plan for this large income spike.

Words used on this page

• Vesting: The process of earning the right to your company shares by staying employed for a set time.
• Liquidity Event: A major company change, like an IPO, that allows employees to sell their shares for cash.
• Settlement: The moment the shares are officially transferred to you and become taxable.
• Ordinary Income: Money you earn from your job that is taxed at standard government rates.
• Withholding: The process where your employer takes money out of your paycheck to pay your taxes for you.