Pre-IPO RSUs: the tax and liquidity problem for Indians

If you work for a private US company that grants RSUs — Stripe, Databricks, Anthropic, Plaid, Notion, Canva, dozens of others — you have one of the most awkward equity-comp situations possible. You owe taxes on shares you can't sell, valued at prices nobody can verify, with no liquid market for the underlying stock.

This post is for that situation. We'll cover how pre-IPO RSUs work, the double-trigger mechanism that some private companies use to delay the tax bill, and what to actually do about the cash-flow problem.

How public-company RSUs work, briefly

Recap: at a public US company (say, Microsoft), an RSU vests, FMV is the closing price that day, sell-to-cover handles the tax, and you walk away with post-tax shares you can sell anytime in the open market.

The key feature: there's a liquid market. You can always convert shares to cash within 24 hours.

How pre-IPO RSUs work

At a private company, no liquid market exists. RSUs work the same conceptually, but with two crucial differences:

Difference 1: FMV is determined by 409A valuation

The FMV at vest is the company's most recent 409A valuation. This is a third-party-determined fair-market-value assessment, refreshed every 6–12 months by valuation firms (Carta, Aon, etc.).

The 409A value is typically lower than the latest preferred-stock funding round price, because it values common stock (what you have) at a discount to preferred stock (what investors have). Discounts of 30–60% are common.

This is the FMV used for:

• US tax (if applicable to you).
• Indian perquisite tax.
• Cost basis going forward.

Difference 2: No liquid market for the shares

You cannot sell vested RSU shares on a public exchange because the company is not public. Limited options exist:

• Wait for the IPO (could be 3 months, could be 7 years, could be never).
• Wait for the company to be acquired (cash exit).
• Tender offer / secondary sale that the company facilitates.
• Sell to an outside buyer through a private secondary market (Forge, EquityZen) — only if the company permits.

So your shares are real on paper, valued at the 409A price, but you can't easily turn them into cash.

The Indian tax problem

Here's where it gets brutal for Indian residents:

Pre-IPO RSU vesting still triggers Indian perquisite tax

When your pre-IPO RSU vests:

1. The company computes FMV at the latest 409A.
2. This value × your shares × USD/INR = perquisite income in India.
3. You owe tax at slab + surcharge + cess.

For a senior engineer at a high-valued private company, this can be ₹10–50 lakh of tax per year.

Sell-to-cover often doesn't work

In a public company, sell-to-cover sells some of your vesting shares to fund tax. In a private company:

• There's no public market to sell shares.
• Some private companies still implement a form of "sell-to-cover" by reducing your gross share count (you keep N shares, the company "absorbs" M shares to pay the tax).
• Many private companies can't do sell-to-cover because they don't have a tender-offer mechanism. You owe the tax in cash, with no offset shares.

You owe Indian tax in INR cash

For an employee at a US private company:

• Tax owed at vest (at 409A FMV).
• Stock cannot be sold.
• You need to find INR cash to pay the tax bill.

A typical scenario:

• Your annual RSU grant at 409A: $400k vesting over 4 years.
• Year 1 vest: 25 × ($400k / 100 shares) = $100k worth at 409A (~₹83 lakh).
• Indian tax @ 35.88%: ₹29.8 lakh owed at vest.
• Cash on hand: probably your salary, partially invested.

Where does ₹29.8 lakh come from? Either:

• From your existing cash savings (depletes liquid wealth).
• From your salary going forward (skips other goals).
• Borrowed (loan against assets, personal loan).

This is the cash-flow trap.

The "double-trigger" RSU — the saving grace

Some private US companies use double-trigger RSUs:

• Trigger 1: time-based vesting (the standard 4-year schedule).
• Trigger 2: a liquidity event (IPO, acquisition, or qualifying tender).

Both must occur for the RSU to actually be considered "vested" for tax purposes.

In practical terms:

• Year 1, 25% time-vests. No tax triggered yet (no liquidity event).
• Year 2, more time-vests. Still no tax.
• Year 4, 100% time-vested. Still no tax if no IPO.
• IPO happens at Year 5. All time-vested RSUs now satisfy both triggers and become taxable.

This is a huge benefit. You don't pay tax until there's actual liquidity. The tax bill aligns with cash availability.

Which companies use double-trigger?

Common at high-valued late-stage private US companies. Examples (varies; verify with your specific employer):

• Stripe
• Databricks
• Anthropic
• Plaid
• Discord
• GitLab (pre-IPO)
• Reddit (pre-IPO)
• Most "decacorn" private companies in the past 5 years.

Less common at:

• Smaller private companies that haven't yet structured for double-trigger.
• Companies that converted from RSAs (Restricted Stock Awards) to RSUs without rethinking the structure.

Indian tax interaction with double-trigger

The double-trigger structure means the Indian tax event is also delayed. Your perquisite tax is owed when:

1. Time-based vesting has occurred AND
2. Liquidity event has occurred.

When IPO happens, suddenly all your time-vested RSUs become taxable simultaneously. This creates a massive tax bill at IPO — but at the same time, you can sell shares to pay it (sell-to-cover at IPO works because the stock is now liquid).

For Indian residents, this is much better than single-trigger:

• No cash-flow problem during private years.
• IPO-time tax matches IPO-time liquidity.
• Sell-to-cover is feasible.

What if your company uses single-trigger?

Some private companies still use single-trigger (time-based only) RSUs. The tax bill arrives with no liquidity to pay it. You're on the hook in cash.

If this is your situation, options:

Option 1: Tender offers

Some private companies hold periodic tender offers — opportunities for employees to sell some of their vested shares back to the company (or to investors). Frequency varies: some annually, some every 18 months, some never.

Tender offers solve the liquidity problem if they happen often enough. Usually you can sell 5–25% of vested holdings during a tender. Use tender proceeds to pay the accumulated tax bill.

Option 2: Loan against shares

Some specialty lenders (Hercules, ESO Fund, Quid) lend against private-company stock. You pledge shares as collateral; they advance cash; you repay on liquidity event.

The interest rates are high (8–15%) and the terms are stringent. But for someone with a large tax bill from RSUs and no cash, this can bridge to IPO.

Option 3: Negotiate cash refresher

When negotiating your offer, you can ask for cash sign-on bonuses larger than typical, specifically to cover anticipated tax bills on vest.

This is a legitimate negotiation — recruiters at private companies hear this. They can sometimes accommodate with larger cash.

Option 4: Personal loan / credit line

Less ideal but viable: a personal loan from your bank, paid off when liquidity arrives. High interest, but available.

Option 5: Selling other assets

Liquidating Indian equity, FDs, or other holdings to fund the RSU tax. Painful but a backup.

A framework for evaluating private company RSU offers

If you're evaluating an offer with pre-IPO RSUs:

Step 1: Determine the trigger structure

Ask explicitly: "Are these single-trigger or double-trigger RSUs?" Don't accept ambiguity. Get it in writing in the offer letter or equity plan documents.

Step 2: Calculate the worst-case tax bill

Assume the highest-likely 409A valuation over the vesting period. Calculate the perquisite tax you'd owe:

• For a $300k/year vest at 35.88% effective rate: ~₹90 lakh/year of tax.

Step 3: Identify cash-flow alignment

If single-trigger: you need ₹90 lakh/year of cash to pay tax with no offsetting liquidity. Is your salary + savings sufficient?

If double-trigger: tax is delayed until IPO. Cash flow during private years is fine.

Step 4: Check for tender history

Does the company have a history of tender offers? How frequently? At what ratio (% of holdings sellable)?

If you can sell 20% of your vested holdings every 18 months, the cash-flow problem is mostly solved even with single-trigger.

Step 5: Adjust the perceived value of the offer

A $400k/year RSU grant at a private company:

• Double-trigger + frequent tenders: ~$400k effective (delayed tax, decent liquidity).
• Single-trigger + no tenders: ~$200k effective (you can only realize value at eventual IPO, after all the tax bills already paid).

The discount is real. Negotiate accordingly.

The IPO event itself

When your private company eventually goes public:

Day 0–7 (post-IPO)

• Your double-trigger RSUs become taxable. All accumulated time-vested shares trigger Indian perquisite tax simultaneously.
• Many companies impose IPO lockups — you can't sell for 90–180 days post-IPO.
• During lockup, you owe tax but can't sell.

Lockup (90–180 days)

This is when the cash-flow problem peaks. Tax is owed but stock is restricted. Possibilities:

• Some plans provide early sell-to-cover at IPO specifically to handle this.
• Bridge financing as before.
• Pre-arrangement with employer.

Lockup expiry

Once lockup expires, you can sell freely. Use proceeds to:

1. Pay accumulated tax (if not already paid).
2. Diversify away from concentrated single-stock exposure.

This is when the sell-to-cover, sell-all, hold framework applies, just with multiple years of vesting all becoming sellable at once.

Schedule FA for pre-IPO RSUs

A subtle point: even before liquidity, you have vested-but-unsold private company shares (in the case of single-trigger) — or vested-but-not-tax-triggered shares (double-trigger).

For Schedule FA purposes:

• Single-trigger: shares are yours; disclose them in Schedule FA at FMV (409A value).
• Double-trigger: technically, you don't own the shares yet (no second trigger). Most CAs don't include them in Schedule FA. But some interpret conservatively and disclose.

Talk to your CA. The practice varies.

Indian regulatory considerations

A few additional wrinkles for Indian residents at pre-IPO US companies:

LRS doesn't apply (typically)

Pre-IPO RSU shares come to you as compensation. They're not a remittance from India. So LRS doesn't apply to receiving them.

If you eventually want to sell at IPO, repatriating the proceeds is also not an LRS event (inbound, not outbound).

W-8BEN still required

Same as public-company RSUs. Make sure your plan administrator has a current W-8BEN to ensure correct (typically zero) US withholding on vest.

Schedule FA for vested-but-unsold private company shares

Disclose, even though there's no public market. Use the 409A-valuation FMV as the disclosure value.

Form 67 for any US dividends

Most private companies don't pay dividends. Skip if so.

A worked example

You join a US private company at L5 with $500k of RSUs over 4 years. Double-trigger.

• Year 1: 25% time-vests. ₹100 lakh worth (gross). No tax (no liquidity event).
• Year 2: more time-vests. No tax.
• Year 3: more time-vests. No tax.
• Year 4: all 100% time-vested. No tax.
• Year 5: IPO at 2x latest 409A. All vested RSUs become taxable.

At IPO:

• Vest value: $500k × 2x = $1M total (the 409A from years 1–4 was lower; market-cap at IPO is typically higher).
• Perquisite tax in India @ 35.88% on the FMV at vest (which 409A = $500k? Or the IPO price? Tax law specifies FMV at the moment the trigger is satisfied — the IPO price, generally).
• Tax bill: ~₹3 cr.
• IPO sell-to-cover: 36% of shares sold to fund tax.

You walk away with 64% of $1M = $640k worth of shares (₹5.3 cr). All accumulated over 5 years, all converted to cash at lockup expiry.

Compared to a public-company offer of similar nominal value: you defer 5 years of tax bills, get them all at once, and have liquidity to pay them. Net-net, it's similar to public-company outcome — if the IPO happens.

What if the IPO never happens?

This is the risk. If your company never goes public and is never acquired:

• Single-trigger: you've paid tax on shares that may turn out to be worthless. Unrecoverable loss.
• Double-trigger: no tax was triggered. The shares might be worthless on paper, but you didn't lose cash to taxes.

The double-trigger structure protects you from the worst case.

The summary

Pre-IPO RSUs are a high-variance compensation. For Indian residents:

1. Always confirm trigger structure (single vs. double) before accepting an offer.
2. Discount single-trigger offers heavily unless tenders are frequent and reliable.
3. Plan cash flow for the tax obligation, especially if single-trigger.
4. Disclose in Schedule FA even without liquidity.
5. At IPO, expect a massive tax + opportunity event within a 90–180 day window.

The average outcome at a successful pre-IPO unicorn is excellent (large equity gains, IPO liquidity). The worst-case outcome at a failed startup is substantial (tax paid on worthless shares). Picking the right structure and the right company matters more than at public-company employers.