At a private company an RSU has a problem. If it vested on time like a public company's, you would owe tax on shares you cannot sell.
At a private company an RSU has a problem. If it vested on time like a public company's, you would owe tax on shares you cannot sell.
So private companies commonly attach a second condition. The units vest only when both of these are true. You have served the time, and a liquidity event has happened, meaning the company has gone public or been sold. Two conditions, which is why people call it double-trigger vesting.
The consequence arrives all at once. On the day the company lists, every unit that has already served its time satisfies the second condition simultaneously. Years of accumulated grants vest on a single date.
For the employee that is a payday and a tax event on the same morning. For the company it is an enormous one-time accounting charge.
Airbnb went public in December 2020.
Look at the two years together. $97.5 million in 2019 and $3,001.9 million in 2020. The expense multiplied roughly thirty times, and the company had not suddenly started paying thirty times more. The liquidity condition was met and the backlog landed.
Set the 2020 expense against revenue. $3,001.9 million against $3,378.2 million is about 89%. For one year, share-based compensation was close to the entire revenue of the business. That number describes an event rather than a run rate, which is exactly why you check whether a figure is one-time before you use it.
The employee side of the same day. Reddit's options carried an average strike of $17.83 and the IPO priced at $34.00. Those holders went from an unsellable position at a board-determined valuation to a public price in one step.
The trap is expecting to sell on the first day.
There is almost always a lockup, a period after listing during which employees and insiders cannot sell. So the tax on vesting can be triggered at listing while the shares remain unsellable, and the price at the end of the lockup may be very different from the price at the open. The length and the terms are in the offering documents and they vary.
The second trap is planning around the IPO price. That price is what institutions paid in the offering. Where the shares trade afterwards is a separate question, and the answer arrives over months.
The third trap is reading a company's IPO-year financials as normal. Airbnb's 89% ratio is not a business model. It is one charge in one quarter. When you see a ratio like that, look for the word one-time before drawing any conclusion, and check the year either side.
A friend's private employer has filed to go public. She holds 8,000 units, all past their time-based vesting, waiting on the liquidity condition.
What happens to those units at listing?
The second condition is met and all 8,000 vest at once.
What does that create for her?
Compensation income measured at the listing-day value, and withholding on it, in a single event.
She plans to sell immediately to cover it. What should she check?
The lockup. If she cannot sell for months, the tax is due on a value she may not be able to realise, and the price may move meanwhile.
What should she do with that?
Find the lockup terms in the offering documents and take the tax timing to a professional before the listing rather than after it.
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