Comment by cyan_atrus | Hacker News Reader

Comment by cyan_atrus | Hacker News Reader

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i think you're saying this, but just to clarify:

RSUs (even facebook-style) are definitely taxable. With options, you're in control of when to take the tax hit. With facebook-style RSUs, the tax hit comes when the stock gets distributed (taxed as ordinary income) -- usually in the form of withholding some amount of shares.

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Important to remember with RSUs in pre-IPO companies: even though you might get shares distributed at IPO, you're usually subject to a lock up. This is unfortunate because if you receive stock at IPO, you have to pay taxes at them -- so if your company IPOs at $50, then drops to $20 when the lockup expires, you have to pay taxes on the shares you received at $50 value even though you couldn't sell shares at that value.

Yes, thanks for the clarification.

My understanding is they're taxable, but only after they're liquid which makes it easier for the employee. I think most companies doing FB style do something fancy to avoid the distribution tax lockout issue (witholding some to cover tax or direct listing to avoid lockout).

The situation where you have a huge tax bill and no cash to pay it (or worse a huge tax bill and your illiquid stocks have crashed to $0) shouldn't happen, though I guess there's still a chance in the pathological case you describe? Not sure if that's avoidable.

The other thing I forgot to mention is that if you do risk all this cash on option exercise/taxes and your company does go to $0 you do get to take a $3000 AMT tax credit each year until you die (but maybe only if you don’t have kids or something, can’t remember) - it’s not great.

Actually, underwithholding can still happen. Employers may withhold at a flat 22% federal rate, which can be significantly lower than a highly paid employee's actual marginal tax rate. So the employee may still need to increase the withholdings on their regular pay, or make an estimated tax payment for each quarter of RSU income.

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