Single-trigger vs. double-trigger RSU

Restricted stock units (RSU) typically have conditions that need to be met to vest. Once they do, the units are eligible for settlement by the company, which is when the employee legally gains possession of the shares. The employee must pay taxes on RSU income in the year the RSUs settle. Private companies generally have two options in structuring RSU vesting conditions—“single-trigger” or “double-trigger” RSU awards.

Single-trigger vs. double-trigger RSUs

1. Double-trigger RSUs restrict full vesting until an exit event, at which point the employee can receive payment for their stock in an acquisition or sell enough stock on the public market to cover the applicable taxes.

2. Single-trigger RSUs allow vesting without an exit event, but separate vesting from settlement to control the timing of both the settlement and the subsequent tax obligation.

What are double-trigger RSUs?

Double-trigger RSUs are a type of equity compensation that require two conditions to be met before they fully vest, the RSUs are settled and an employee can sell their shares. The two vesting conditions are usually time-based and event-based.

• Time-based vesting: The employee must stay with the company for a specified time period.

• Event-based vesting: The company must go through an exit event, like an initial public offering (IPO) or acquisition.

Double-trigger RSUs are commonly issued by private companies to provide equity compensation for employees, while adding incentives that align with the company’s growth and long-term success. Double-trigger RSUs can also offer tax benefits to employees, as taxation is deferred until the second trigger is satisfied, potentially reducing the tax burden compared to single-trigger RSUs, which would be taxed upon vesting and settlement following the satisfaction of the single-trigger condition.

Double-trigger RSU disadvantages

Although the double-trigger RSU model has historically been more common for private companies, it comes with downsides for employees. The liquidity vesting condition essentially blocks double-trigger RSU holders from participating in private market liquidity because a secondary transaction (such as a tender offer) typically doesn’t count as the second vesting condition.

Double-trigger RSUs can also lock employees out of the value of their equity compensation when companies attach additional stipulations to the award. For example, many employers attach a “must be present to win” condition on the double-trigger RSUs in the employee’s RSU award, which restricts the second trigger to only current employees at the time of the exit event. An employee who leaves the company before the exit event takes place will lose all of the equity in their compensation package if there is a “must be present to win” condition.

Waiving the second trigger

To help employees realize the value of their equity, companies that assign double-trigger vesting to RSUs may later decide to offer secondary liquidity to RSU holders before the exit event condition is met. To do so, they’ll need to issue a partial waiver of the liquidity vesting condition.

When a company waives the exit event vesting condition, employees who hold vested RSUs can settle and sell their stock for cash (as long as the terms of their award allow them to sell those shares), and then cover the applicable tax obligation with cash. However, waiving the exit event vesting condition is something a company can only do once without triggering immediate income tax consequences for all time-vested RSUs that have only met the first time-based vesting trigger.

Double-trigger RSU taxation

For RSU grantees to defer income taxes until vesting is complete, the IRS requires that there be “substantial risk of forfeiture.” That means there has to be a possibility that grantees won’t actually vest their RSUs. With typical double-trigger vesting, “substantial risk” could include the chance of the company failing, the employee not being “present to win” because they have left the company, or the company never having a liquidity event. But if a company issues multiple waivers of the second exit event trigger, the IRS will likely view it as removing that risk for all RSUs—even if the waivers don’t actually apply to all RSUs. In other words, the IRS will consider all time-vested RSUs as compensation income. All holders of time-vested RSUs would then owe supplemental income tax on the value of those RSUs—even those who decide not to participate in the secondary liquidity transaction.

If your company decides to waive the second exit event trigger, you should carefully consider the terms of the liquidity event, the tax risk, the company’s cash on hand, and which RSU holders are eligible for the waiver. Eligible RSU holders can’t choose whether or not to waive the exit event trigger themselves: The company must decide, and the decision will affect all time-vested RSUs.

If your company wants to switch to RSUs to help build employee ownership, but you’re not planning an exit soon, single-trigger RSUs may be the better fit.

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What are single-trigger RSUs?

Single-trigger RSUs are a type of restricted stock unit that only have a time-based vesting condition and do not require an exit event to fully vest. Once the time-based vesting condition is met, employees are able to settle their RSUs and fully own the shares. If the company offers private market secondary transactions, employees can then sell their shares to private market investors without waiting for a second exit event trigger. Single-trigger RSUs are more common in late-stage private companies and publicly traded companies.

Single-trigger RSU taxation

So why aren’t single-trigger RSUs the default? It’s mainly due to tax implications.

RSUs are taxed as supplemental income to the employee at the time they vest. In the case of double-trigger RSUs, employees gain liquidity at the same time their shares vest and settle because of the IPO or acquisition constituting the exit event, so they can use the cash from an immediate sale of some of their shares to cover the taxes they owe.

In the case of single-trigger RSUs, employees owe income taxes on the RSUs in the tax year the RSUs settle. But depending on when company liquidity events occur, employees may not have the cash on hand to cover the taxes.

Net settlement for single-trigger RSUs

To help employees cover the taxes due on settled RSUs, Carta uses net settlement. This means that when an employee’s RSUs settle, Carta will hold back a certain number of shares (based on the employee’s tax rate) equal to the taxes that would be owed on the shares. The employee then receives the balance of their shares of company stock and doesn’t have to pay any additional income tax on the shares to the IRS.

Net settlement comes at a cost to the company, which has to use cash off the balance sheet to actually pay the taxes that would otherwise be owed by the employee at vesting. But it makes an RSU program much simpler and more attractive to employees. With net settlement, taxes on employee RSUs will look and feel similar to how salary compensation works: What you receive is what you’ve earned, minus withholding for taxes, which your company coordinates on your behalf. However, the difference from cash salary is that the employee will later be able to capture any growth in value of the remaining shares they receive after the net settlement.

How can I set up single-trigger RSUs?

If you’re considering switching to RSUs, ask your company’s law firm about single-trigger RSUs designed with private market liquidity in mind. If you’re wondering if it’s the right time to switch to RSUs: check out Carta’s free option and RSU grant calculator to compare.

Private companies often switch their employee equity programs from stock options to restricted stock units when they reach the later stages of growth. On average, companies that make the switch do it when they reach a post-money valuation of $1.05 billion.

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Thinking about switching from options to RSUs, but not sure when the right time for your company to switch is? Our free option and RSU grant calculator lets you look at a specific grant and compare how it may change the total payout for the employee based on if they were granted options or RSUs (it does not account for taxes).