Double-trigger restricted stock units (RSUs) are a distinct form of equity compensation that requires two conditions before vesting. Instead of standard RSUs, these grants remain contingent on both employment duration and a qualifying liquidity event—generally an IPO or acquisition. But what happens if an employee departs before both triggers are met?
Key Takeaways
- Double-trigger RSUs remain unvested until both conditions are satisfied.
- If employment ends before the second trigger, unvested shares are forfeited.
- Taxation occurs only upon vesting. In other words, unvested RSUs do not create tax obligations.
- Strategies may present assistance in optimizing tax burdens when RSUs fully vest.
Understanding Double-Trigger RSUs
Companies issue double-trigger RSUs to retain talent while aligning compensation with long-term business growth. For these RSUs to become fully vested, employees should fulfill the below asğects:
- A time-based employment period.
- A liquidity event, like an IPO or acquisition.
Until both conditions are met, the RSUs remain ineligible for conversion into company shares.
What Happens If You Leave Before Vesting?
If an employee resigns or is terminated before both triggers occur, the fate of their RSUs changes in accordance with the company’s equity agreement. Typical scenarios can be listed as below:
- Leaving before the first trigger: No RSUs vest, and all are forfeited.
- Leaving after meeting the first but not the second trigger: Most plans state that RSUs remain unvested. It means that they expire without value.
- Leaving after both triggers: RSUs become taxable as ordinary income, and capital gains tax applies upon sale.
No tax is owed on unvested RSUs. Since the shares do not legally belong to the employee until vesting, there are no tax implications if they are forfeited.
Final Considerations
Double-trigger RSUs can be highly valuable. However, their benefits depend on continued employment and company performance. Employees should review RSU agreements to acknowledge forfeiture risks alongside tax implications.