RSU in Private Companies: How They Work and Why They're Different

A Restricted Stock Unit (RSU) is a promise from your employer to deliver shares of company stock — or the cash equivalent — once specific conditions are met. Unlike stock options, you pay nothing to receive RSUs. Unlike RSAs, you do not own shares at the time of grant. An RSU is a contractual obligation by the company to give you something valuable in the future, contingent on conditions you must satisfy first.

At public companies, RSUs are the dominant form of equity compensation. The mechanics are simple: you work for the required time, shares vest, they are delivered to you and taxed as ordinary income, and you can sell immediately if you choose. At private companies, the same basic framework applies — but a critical additional layer changes the entire tax and timing picture: the double-trigger structure, which defers share delivery (and the resulting tax bill) until a liquidity event occurs. Understanding why private companies use this structure, and what it means for you, is essential before accepting any RSU grant from a pre-IPO company.

Why Private Companies Can't Use Public-Company RSU Mechanics

At a public company, an RSU vests and shares are delivered immediately. The employee receives the shares, recognizes ordinary income equal to the FMV at delivery, and can sell shares to cover the tax bill the same day. The system works because there is a liquid market for the shares.

At a private company, there is no liquid market. If RSUs vested on a time-based schedule alone — the way they do at public companies — employees would recognize ordinary income at each vest date but have no way to sell shares to fund the tax bill. You would owe taxes in cash on illiquid assets that might not pay out for years, if ever.

The solution is the double-trigger structure: add a second vesting condition — a liquidity event — that must be satisfied before shares are actually delivered and before any tax is owed. This defers the entire taxable event until there is liquidity to fund it.

The Two Triggers

Trigger 1 — Time-based vesting. The standard employee vesting schedule: typically 4 years with a 1-year cliff. You must remain employed through this schedule for your RSUs to be eligible for delivery. See Vesting Schedule: How Startup Equity Vesting Works for how vesting mechanics work.

Trigger 2 — Liquidity event. The company must complete a qualifying liquidity event before shares are delivered. The most common qualifying events are:

• Initial public offering (IPO)
• Acquisition or merger (change of control)
• In some plans: a company-sponsored tender offer or secondary sale program

Both triggers must be satisfied — in either order — for shares to be delivered and for the taxable event to occur. An employee can be fully time-vested (all four years served) and still hold RSUs that have not settled if no liquidity event has occurred.

Tax Timing Under Double-Trigger RSUs

The tax event for double-trigger RSUs is delivery of shares, not the time-based vesting date. This is the central advantage of the double-trigger structure from an employee's perspective.

When both triggers are satisfied and shares are delivered:

• The FMV of the shares at delivery is ordinary income, taxed at federal rates up to 37% and California rates up to 13.3%
• Your employer withholds federal and state income tax, plus FICA (Social Security and Medicare)
• Withholding is typically handled by the company holding back shares equal to the tax owed — called "sell-to-cover" or "net share settlement"
• Your cost basis in the remaining shares equals the FMV at delivery

Any subsequent appreciation or decline from the FMV at delivery is a capital gain or loss — short-term if held less than one year after delivery, long-term if held more than one year.

Example:

You are granted 10,000 double-trigger RSUs in March 2023. By March 2027, all 10,000 units are time-vested. The company completes an IPO in June 2027 at $40/share. At IPO, both triggers are simultaneously satisfied:

• Ordinary income: 10,000 × $40 = $400,000
• Federal income tax withheld (22% supplemental flat rate): ~$88,000
• California income tax withheld (10.23% supplemental flat rate): ~$40,920
• Payroll taxes (FICA & CA SDI): Medicare at 1.45% (~$5,800) applies to all wages with no cap; California SDI at 1.1% (~$4,400) applies to all wages with no cap since 2024. Social Security (6.2%, capped at $184,500 for 2026) will be $0 in most cases — tech employees at IPO-stage companies typically earn a base salary that already exhausts the $184,500 wage base well before the liquidity event.
• Shares withheld to cover taxes: approximately 3,503 shares (based on income + Medicare + SDI withholding)
• Net shares delivered to you: approximately 6,497 shares

Note: Withholding rates (22% federal, 10.23% California) are the statutory supplemental wage withholding rates — not your actual marginal tax rates, which may be higher (up to 37% federal + 13.3% California for top earners). The difference between what is withheld and what you actually owe will be settled when you file your tax return.

If the share price rises to $55 by the time the IPO lock-up expires (typically 180 days after IPO) and you sell:

• Capital gain: ($55 − $40) × 4,970 shares = $74,550
• Held less than 1 year post-delivery: short-term capital gain, taxed as ordinary income
• If you wait until June 2028 (more than 1 year): long-term capital gain at lower federal rates

The 7-Year Expiration

Double-trigger RSUs do not last indefinitely. Most private company RSU plans set a maximum term of approximately 7 years from the grant date. If both triggers have not been satisfied within that period, the RSUs expire and are forfeited entirely — regardless of how long you have worked and regardless of whether your time-based vesting is complete.

This is not an IRS mandate for RSUs specifically, but rather a structural necessity driven by the requirement that RSUs must have a "substantial risk of forfeiture" to defer taxation. A grant that can never lapse — because the company promises eventual settlement no matter what — arguably does not have a substantial risk of forfeiture, which would make all time-vested RSUs immediately taxable. Setting a firm expiration date preserves the deferral structure.

What this means for employees: If you join a company at Series A and receive double-trigger RSUs with a 7-year term, and the company has not had a liquidity event by year 7, your RSUs expire worthless. This has happened at notable late-stage companies — Stripe is the most widely discussed example, where RSUs with approaching expiration dates created significant retention challenges before the company conducted a tender offer. As of 2025–2026, this pattern has prompted a broader market shift: a growing number of companies are extending RSU terms to 10–12 years, or proactively conducting tender offers, to prevent employee equity from expiring as companies stay private longer. When evaluating an RSU grant, always ask for the specific expiration date — and factor in the company's realistic timeline to liquidity.

Single-Trigger vs. Double-Trigger: The Key Distinction

Some private companies — particularly earlier-stage ones — issue single-trigger RSUs that vest on time alone, with no liquidity event requirement. This is uncommon but does occur.

Single-trigger RSUs at a private company create the exact problem double-trigger was designed to solve: ordinary income is recognized at each vest date, on shares that cannot be sold. If the 409A FMV is meaningful at vest, the employee receives a tax bill in cash for illiquid equity.

If you are offered single-trigger RSUs at a private company, ask immediately:

• Does the company provide cash support to cover taxes at vesting?
• Does the company facilitate secondary sales at vesting so shares can be sold to cover taxes?
• What is the current 409A FMV, and what will your tax bill be at each vest date?

Without an answer to these questions, single-trigger RSUs at a private company with a non-trivial 409A valuation can create a serious cash flow problem.

What Happens to Your RSUs When You Leave

Before time-based vesting: Unvested RSUs are forfeited upon departure. You receive nothing for them.

After time-based vesting but before a liquidity event: This is where it gets complicated. Some plans require employees to be actively employed at the time the liquidity event occurs — sometimes called a "must be present to win" clause — meaning fully time-vested RSUs are also forfeited if you leave before the IPO or acquisition. Other plans allow departed employees to retain fully time-vested RSUs and receive shares at a liquidity event even after leaving.

Before accepting any RSU grant, verify: does your plan require you to be employed at the time of the liquidity event for vested RSUs to settle? This is a critical negotiating point. See Negotiating Equity Compensation at a Private Company for the full checklist.

What to Ask Before Accepting Double-Trigger RSUs

• Single or double trigger? Double is standard and preferable for tax reasons. Single-trigger at a private company with no liquidity support is a red flag.
• What qualifies as a liquidity event? IPO and acquisition are standard. Does the plan also include secondary transactions or tender offers?
• What is the expiration date on the RSUs? Know when they expire if no liquidity event occurs.
• Must I be employed at the time of the liquidity event? Some plans require active employment even for fully vested RSUs to settle.
• Does the company provide sell-to-cover or share withholding for taxes? At IPO, most public companies do this automatically. Confirm it is in place.
• What is the current 409A FMV? Not directly relevant for tax timing (taxes hit at delivery, not at grant), but useful for estimating potential value.

For the full RSU negotiation checklist, see Negotiating Equity Compensation at a Private Company.

California Note

California taxes RSU income at ordinary income rates up to 13.3% at the time shares are delivered — the same event that triggers federal income tax. The 13.3% rate is the combined top rate: 12.3% base bracket plus the 1% Mental Health Services Act (MHSA) surtax on income exceeding $1 million. For employees receiving RSU income at IPO, where a single delivery event commonly produces seven-figure ordinary income, the 13.3% rate is the operative one. There is no deferral at the state level and no capital gains preference. For California residents, the combined federal and California marginal rate on RSU delivery income can reach 50%+ for senior employees.

One California-specific consideration at IPO: if the company IPOs and shares are delivered in the same tax year as significant RSU income from other vest events, the combined income may push you into higher marginal brackets at both the federal and state level. Planning the timing of additional exercises or sales — particularly in the year of an IPO — benefits from advance tax modeling.

This article is for educational purposes only and does not constitute tax, legal, or financial advice. RSU taxation at private companies is complex and depends on plan-specific terms. Always review your grant agreement and consult a qualified tax advisor before making decisions about RSU grants.