February 16, 2023

Part I: What are “Double-Vest” RSUs and Why Are They Making Headlines?

Double-vest restricted stock unit awards (Double-Vest RSUs)1 made headlines a few years after the end of the Great Recession when they were awarded by pre-IPO tech giants. Since that time, it has become increasingly common for mature startup companies and other high-value pre-IPO companies, primarily in the technology industry in the United States, to award Double-Vest RSUs in lieu of, or in addition to, stock option awards to attract and retain talent.2

Fast-forward more than a decade and Double-Vest RSUs are again making headlines, but this time because the expiration date of older Double-Vest RSU awards is approaching at the same time that many companies may be confronted with less access to capital markets, coupled with pent-up desire for liquidity by employees.

This alert is the first of a three-part Goodwin series on Double-Vest RSUs and is intended to provide readers with a deeper understanding of these awards beyond the splashy headlines.

  1. This Part I of the series is foundational in nature, and describes the mechanics and applicable tax considerations underlying Double-Vest RSUs.
  2. Part II of the series will delve into the advantages and disadvantages of implementing a Double-Vest RSU program.
  3. Part III of the series will focus on considerations for companies with Double-Vest RSU programs that have been in place for some time, and identify possible mitigation strategies to consider in connection with expiring RSUs.

What Equity Awards Do Early Stage Companies Typically Grant?

In the early days of a startup company, restricted stock3 and stock option4 awards are generally the favored choice of equity compensation for two primary reasons.

First, a nascent startup company is likely to have a low valuation of its common stock, which likely diminishes the grantee’s capital risk and creates a perception that there is significant upside to their award. Further, for restricted stock and certain stock options, paying a low purchase price may be an acceptable risk to a grantee relative to starting the capital gain holding period on their common stock with a view toward future tax savings.

Second, stock options usually provide holders with the ability to control the timing of when to pay the purchase price and any associated taxes. A typical stock option award in the US should not be taxable until exercised and the grantee typically has the right to elect when to exercise the award. When considering the illiquid nature of private company stock, the ability for a grantee to vest and hold the option provides the grantee with time to (1) assess if the capital risk of paying the purchase price is “worth it” and (2) collect funds to pay the purchase price and any associated taxes (assuming there is appreciation in the underlying stock).

On the other hand, companies that have already seen significant appreciation in their common stock value may view restricted stock and options as insufficient to provide necessary employee retention, as employees may perceive there to be less upside potential on a per share basis compared to that of an earlier stage company. For this reason, such companies may look to “full value” awards such as RSUs that settle when there is cash liquidity to fund tax obligations.

What is an RSU?

An RSU, on the other hand, is a promise to issue a share of the company’s common stock in the future after vesting conditions have been met.5

For public companies, RSUs typically “vest” over a three- or four- or five-year period, with a one-year “cliff” for new hires and the remainder of the RSUs typically vesting on a quarterly basis thereafter. RSUs structured in this manner are taxable as ordinary income upon vesting and settlement based on the value of the shares underlying the RSUs at that time, subject to the company’s collection of withholding taxes for employees.

This structure usually works well for public companies because the service-based vesting schedule encourages retention, the company’s capitalization is not expanded until shares are actually transferred, the burden on the company’s payroll and stock administration departments is limited to a handful of vesting events annually, the value of the award is simpler to communicate on the grant date to the grantee, and vesting dates can be aligned with open trading windows to allow for “sell-to-cover” broker arrangements that allow employees to use a stock market to pay taxes.

For privately-held companies, this solely service-based vesting structure does not work as well due to the illiquid nature of private company common stock and the inability to use a stock market to fund the payment of taxes, as a participant would be taxed on the value of the shares received at settlement without any cash liquidity to satisfy the associated tax obligations.

How Do Double-Vest RSUs Work?

Due to the liquidity “problem” that most private companies encounter in funding the taxes associated with RSU vesting, Double-Vest RSUs are awards that require two events to occur before the grantee is vested:

  1. A service-based condition (a Time Condition); and
  2. A performance-based condition tied to the occurrence of a liquidity event prior to a specified expiration date (a Liquidity Event).

As with stock options, the Time Condition of a Double-Vest RSU can be structured over the desired period of service, although, unlike stock options that frequently vest monthly following a one-year “cliff”, vesting for Double-Vest RSUS may include a cliff vest, but vesting thereafter is generally structured with quarterly or annual vesting dates, rather than monthly vesting dates, in order to ease the administrative burden of these awards on the company following the Liquidity Event, especially if that Liquidity Event is an IPO.

The Liquidity Event is usually structured to be satisfied upon either the occurrence of a change of control (i.e., a sale of the company) or an IPO, in each case occurring prior to an expiration date. Some companies have also structured their Double-Vest RSUs to include a direct listing or an acquisition by a SPAC entity as a trigger for the Liquidity Event vesting condition.

The expiration date of a Double-Vest RSU is a critical component of the award because, in order to delay taxation until the Liquidity Event (and avoid the liquidity problem), the term/expiration date must give rise to a “substantial risk of forfeiture” for tax purposes (i.e., there must be a meaningful risk that the Liquidity Event may not occur within the specified term of the award).

A five- or seven-year term/expiration date is common; however, the initial time period is company-specific and should be evaluated periodically as new awards are made to ensure that the term/expiration date gives rise to a substantial risk of forfeiture at the time of grant, after considering the stage of development of the issuing company and market forces.

Most companies only require continued service through the Time Condition and do not additionally require continued service through the Liquidity Event. This means that an RSU holder’s service terminates after meeting a portion or all of the Time Condition, then the portion of the RSUs for which the Time Condition is met remains outstanding through the term/expiration of the award (i.e., typically seven years from grant), and should the Liquidity Condition occur before the term/expiration date of the award, the grantee would then fully vest and receive the benefit of that portion. On the other hand, if the Liquidity Condition does not occur before the term/expiration date of the RSU, the RSUs will expire and be forfeited even if all or a portion of the Time Condition was previously satisfied.

We note that some companies require the grantee to remain in service through the Liquidity Event, either as a mechanism to retain employees or, as a Liquidity Event becomes more likely, to ensure that a substantial risk of forfeiture is present to delay taxation. If a grantee is required to remain in service through the Liquidity Event, the grantee will forfeit all of their RSUs if their service terminates prior to the Liquidity Event, even if the grantee satisfied a portion of the Time Condition.

What Happens Upon Vesting of a Double-Vest RSU?

Upon satisfaction of both the Time Condition and the occurrence of a Liquidity Event prior to the expiration date, the shares underlying the RSUs will be issued to the grantee in settlement of the vested RSUs.

To avoid adverse tax consequences under Internal Revenue Code Section 409A, shares are typically issued in settlement of the award as soon as practicable but no later than March 15th of the year, following the year in which vesting occurs.

In the event the Time Condition has not been satisfied for some or all of the Double-Vest RSUs at the time of a Liquidity Event that is an IPO, the RSUs will generally continue vesting based on the Time Condition following such Liquidity Event and settlement of the unvested RSUs will occur in connection with each applicable vesting date under the time-based vesting schedule.

In the event the Time Condition has not been satisfied for some or all of the Double-Vest RSUs at the time of a Liquidity Event that is a change in control (i.e., a sale of the company), the award would typically be structured to provide for one or more of the following outcomes: (1) accelerated vesting and settlement of the shares underlying the Double-Vest RSUs in connection with such change in control, (2) forfeiture of the Double-Vest RSUs for which the Time Condition has not been satisfied, and/or (3) assumption of the Double-Vest RSU by the acquiring company, with settlement of the Double-Vest RSUs to occur over the remainder of the time-based vesting schedule after the change in control.

How and When Are Double-Vest RSUs Taxed for US Federal Tax Purposes?

Generally, once both vesting conditions (i.e., the Time Condition and Liquidity Event) are satisfied and the Double-Vest RSUs become fully vested, a company must transfer shares to the RSU holder to settle the vested RSUs. At the time the company initiates the transfer of shares to settle the vested RSUs to the RSU holder, the value of those shares should be included in the RSU holder's federal gross income as wages, subject to the company’s collection of applicable withholdings and required taxes for employees.6 If properly structured, and unless the award includes an additional deferral feature, the value of the shares underlying a Double-Vest RSU becomes taxable income for federal employment (e.g., FICA) tax purposes upon satisfaction of both vesting conditions (i.e., the Time Condition and the Liquidity Event).

Next Up…Part II

In Part II of this three-part series, we will discuss the typical considerations in pivoting from stock options to Double-Vest RSUs, as well as the relative advantages and disadvantages of Double-Vest RSUs.


[1] Double-Vest RSUs may be called “double trigger RSUs” colloquially, but because “double trigger” often can signify a severance benefit following a change of control (or a similar) transaction, we have chosen to use the term “Double-Vest” to discuss RSUs that must meet both a time-based condition and an event-based condition in order to vest prior to expiration of the RSU award.
[2] RSUs became popular after 2006 because changes to Generally Accepted Accounting Principles (GAAP) led to restricted stock and restricted stock units having a more favorable accounting treatment than stock options. Public companies were the earlier adopters of RSUs, but after the Great Recession and rising valuations, many compensation advisors pivoted to advising private companies to adopt Double-Vest RSUs because of the benefits of granting full value awards.
[3] A restricted stock award is a grant of capital stock that is transferred for cash or other property, or that is paid for with services. Typically, the right to purchase is limited (e.g., purchase may only occur 30 days after issuance). Unlike an RSU, a Section 83(b) election may be made on an award of restricted stock. [4] A stock option award is a grant that provides the right to purchase stock at the election of the holder, typically after the right to purchase vests, before the term of the award expires.
[5] An RSU should not be confused with restricted stock; a grant of restricted stock is a transfer of shares (which may or may not be held in escrow) with a lapse of a repurchase right in favor of the issuer over time (i.e., a vesting schedule) and which allows an election under Section 83(b) of the Internal Revenue Code. A grant of restricted stock typically carries a purchase price (through payment in cash, property or services).
[6] The calculation and timing of taxation of Double-Vest RSUs is complex and we recommend that any company consult with its tax accountants and advisors to ensure all federal, state and local taxes are properly calculated, reported and withheld.


This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.