If you've been at a private tech company for several years or more, you may have a large pile of RSUs that have time-vested but haven't actually settled. That's because most private companies use a double-trigger structure: your shares don't convert to real stock (and real income) until the company hits a liquidity event like an IPO or acquisition.
What catches people off guard is the tax bill. When the liquidity event hits, all of those accumulated RSUs settle at once, and the full spread is taxed as ordinary income in a single year. For someone who's been vesting at a company that's grown significantly, that can mean $2M, $5M, or more hitting their W-2. Federal top rate of 37%, plus state income tax (13.3% in California, up to 10.9% in New York), plus the 3.8% net investment income tax. In California, the combined marginal rate can approach 54%. In New York, it's north of 51%.
There's no way to spread that income across prior years. The tax code treats it all as compensation in the year of settlement, regardless of when the vesting actually occurred.
This creates a planning gap that's hard to close after the fact. Before a liquidity event, the main levers are limited. You can't exercise RSUs early the way you can with options, and you can't make an 83(b) election on them. But you can model the expected tax hit, set aside estimated tax payments, and coordinate with other income (option exercises, bonus timing, spousal income) to avoid stacking even more into the same year.
For employees at companies approaching a liquidity event, the earlier you model the tax hit, the more options you have to manage it.
For educational purposes only. Not tax, legal, or investment advice.