IPO Lockups and the Double-Trigger RSU Tax Bomb

Updated August 24, 2026·5 min read·Reviewed by the StockTools.ai Research Team

key takeaways

▸Double-trigger RSUs need both time-based vesting and a liquidity event, so nothing is taxed until the IPO, at which point every previously vested share becomes taxable at once.
▸The standard lockup is 90 to 180 days, which can leave you owing tax on shares you are contractually forbidden from selling.
▸Withholding at the 22% supplemental rate against income that pushes you into the 37% bracket leaves a shortfall that routinely runs into six figures.
▸Many companies now sell shares on employees’ behalf at the IPO or use staggered early-release provisions specifically to prevent the funding gap.
▸Lockup expiry releases a large block of supply at once, and insiders selling into it are usually diversifying rather than signalling.

Why nothing was taxed until now

Private companies moved to double-trigger RSUs to solve a real problem. A single-trigger RSU taxes an employee on vest, at a 409A valuation, in a company whose shares cannot be sold. That produces a tax bill with no way to pay it, so plans added a second condition: the shares are only delivered, and only taxed, once a liquidity event such as an IPO or acquisition occurs.

The consequence is that time-based vesting runs silently in the background for years. An employee who joined five years before an IPO may have satisfied the first trigger on thousands of shares without a single taxable event. Nothing appears on a W-2, nothing is withheld, and the accumulated position is invisible in tax terms right up to the moment it is not.

When the second trigger fires, every share that already cleared its time-based vesting becomes taxable simultaneously, at the IPO price or shortly after. Five years of deferred compensation lands in one tax year. Someone with 40,000 doubly vested shares at a $30 IPO price recognizes $1.2 million of ordinary income, on top of their salary, in a single year.

The withholding gap, quantified

Supplemental wage withholding is a flat 22% on the first $1 million of supplemental wages in a year and 37% on amounts above it. On $1.2 million of RSU income, that produces withholding of about $220,000 on the first million and $74,000 on the rest, roughly $294,000.

The tax actually owed is higher, because this income stacks on top of salary and pushes most of the total into the 37% bracket. Federal tax on that $1.2 million, at the margin, is closer to $444,000. The gap is roughly $150,000, and it is entirely federal: add a state with a 10% top rate and the shortfall grows by another $120,000 or so.

The specific danger is that this bill is due while a lockup prevents selling. The shares that created the liability cannot be converted to cash during the restricted period, so the money has to come from savings, a loan against the position where a broker permits it, or estimated payments funded some other way. This is the mechanism behind the stories of newly public employees who appear wealthy on paper and are genuinely short of cash in April.

How lockups work, and how companies mitigate the squeeze

A lockup is a contractual agreement with the underwriters not to sell for a set period after the offering, most commonly 180 days and sometimes 90. It exists to prevent a flood of insider supply immediately after listing, while the float is small and the price is still finding a level.

Because the tax problem is now well understood, most companies build in relief. A sell-to-cover arrangement at the IPO sells enough of each employee’s shares to fund the withholding, notwithstanding the lockup, which converts the crisis into an ordinary shortfall. Some use net settlement, withholding shares rather than delivering them. Others negotiate staggered early-release provisions, where a portion of the lockup lifts after the first earnings report or once the stock trades above a threshold for a defined number of days.

What varies is how much of the true bill the mechanism covers. A sell-to-cover sized to 22% withholding still leaves the bracket gap unfunded, and employees frequently assume that because something was withheld, the obligation was met. The number worth computing early is your expected total liability at your real marginal rate, against what the company will actually withhold, with the difference set aside before it is spent.

What happens at expiry

Lockup expiry is a scheduled supply event. On one date a large block of previously restricted shares becomes sellable, held by people with concentrated positions, elevated tax bills and every planning reason to diversify. Prices often soften into the expiry as the market anticipates it, and the effect varies enormously with float size and how much of the register is locked.

It is also usually a bad moment to infer anything from insider behaviour. Executives and employees selling in the weeks after expiry are doing what any advisor would tell them to do with 90% of their net worth in one stock. Section 16 officers and directors will generally be trading through Rule 10b5-1 plans adopted earlier, and the Form 4 checkbox will say so.

Two consequences for employees. Your cost basis is the price used to tax you at settlement, so a share taxed at $30 and sold at $22 during the post-expiry drift produces a capital loss of $8 while the $30 remains taxable ordinary income. And the entire position is untaxed appreciation only above that settlement price, so holding on for long-term treatment is once again a decision to keep a concentrated bet in exchange for a discount on part of a gain.

The checklist that actually helps

Establish which structure you hold and how many shares have satisfied the time trigger. That number times a plausible IPO price is your taxable income, and it is knowable months in advance rather than a surprise.

Ask what the company intends to do about withholding: sell-to-cover, net settlement, or nothing. Ask at what rate. Ask whether the lockup has staggered release provisions and what triggers them. These are ordinary questions for a stock administration team and they are answered far more readily before the S-1 than during the quiet period.

Then compute the gap between what will be withheld and what you will owe at your marginal rate, including state, and hold that amount rather than spending it. The people who come out of an IPO in good shape are rarely the ones who timed the stock. They are the ones who knew the size of the bill before it arrived and had a plan for funding it that did not depend on the share price being high on a particular day.

FAQ

What is a double-trigger RSU?

An RSU requiring two conditions before shares are delivered and taxed: time-based vesting and a liquidity event such as an IPO or acquisition. Until the second trigger fires there is no taxable income, however many shares have satisfied the first.

Why do people owe so much tax at IPO?

Because every share that already cleared time-based vesting becomes taxable at once. Years of deferred compensation land in a single tax year, at ordinary rates, stacked on top of salary.

How long is an IPO lockup?

Most commonly 180 days from the offering, sometimes 90. Many companies now include staggered early-release provisions tied to the first earnings report or to the stock trading above a threshold.

Can I sell shares during the lockup to pay the tax?

Generally not on your own initiative, which is the core of the problem. Many companies arrange a sell-to-cover at the IPO or use net settlement to fund withholding, but those are company-run mechanisms rather than something an individual can elect during the restricted period.

Does the company withholding cover my whole tax bill?

Often not. Withholding uses the flat 22% supplemental rate up to $1 million and 37% above it, while the income itself may sit in the 37% bracket from the first dollar once stacked on salary. On $1.2 million the federal gap alone can approach $150,000.

Does the stock always fall at lockup expiry?

No, but expiry does release a large block of supply on a known date, and prices often soften into it. Sellers are typically diversifying concentrated positions rather than expressing a view, and Section 16 insiders are usually trading through preplanned 10b5-1 arrangements.

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Share this guideAt IPO, years of vested RSUs become taxable at once while a lockup stops you selling. How the timing works, why the withholding falls short, and what the expiry does to the stock.

Sources & further reading

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Educational only — not financial advice. Concepts simplified for clarity; markets are messier than definitions.