The short version
An IPO is a liquidity event, and for the double-trigger RSUs common at startups, that is the second trigger finally firing. All of your previously time-vested RSUs settle and become ordinary income that year, valued at the IPO-day price, which can be a very large lump sum.
The catch is timing. A lockup, commonly around 180 days, usually stops you from selling even though the tax is already owed, and the standard 22% withholding often falls short on a big inclusion. That combination, a large bill and no shares sold to cover it, is the classic IPO surprise. Options and post-lockup sales have their own treatment. Planning before the IPO is what prevents the crunch.
An IPO is a taxable moment, not just a milestone
Most startup RSUs are double-trigger: they require both a time-based vesting condition and a liquidity event before you actually owe anything. While the company is private, hitting your time-based vesting alone produces no taxable income, which is why you can be fully vested on paper and still have reported nothing.
The IPO is the liquidity event. When it happens, every share that already met its time-based vesting settles at once and is taxed as ordinary income, valued at the IPO-day price. If several years of RSUs have been piling up, they all land in a single tax year, which is how a routine vesting schedule turns into a six- or seven-figure income spike.
The lockup is where the cash crunch happens
Here is the trap. That RSU income is withheld at the flat supplemental wage rate, 22% up to $1 million of supplemental wages and 37% above it. For a high earner with a large inclusion, 22% is usually well short of the real marginal rate, so a balance is already building before you have touched a share.
At the same time, a lockup period (commonly around 180 days) typically prevents you from selling, even though the stock is now public and the tax is already owed. So you can owe a large amount on the IPO-day value and have no ability to sell shares to pay it. People are sometimes surprised to need cash from other sources to cover the gap.
It gets worse if the stock falls during the lockup. Your tax is locked to the IPO-day value, but the shares may be worth far less by the time you can sell. You can end up taxed on a high number and selling at a low one. Some companies offer to cover withholding or sell-to-cover at the IPO price to soften this, so it is worth knowing what your plan offers before the day arrives.
Your stock options at an IPO
If you hold options rather than (or in addition to) RSUs, the IPO does not by itself tax them; exercising and selling does. The treatment depends on the type. Exercising NSOs creates ordinary income on the spread. Exercising and holding ISOs can trigger AMT on the bargain element, and the lockup means you may not be able to sell to manage it.
There can be reasons to exercise before an IPO rather than after, such as starting the long-term capital gains clock earlier or positioning for the qualified small business stock exclusion, but those decisions carry real cost and risk and depend heavily on your specific facts. This is exactly the kind of thing to model rather than guess at.
After the lockup: selling and capital gains
Once your RSUs have settled and been taxed, you simply own shares. Your cost basis is the IPO-day value that was already taxed as income, and your capital-gains holding period runs from that settlement date. When you sell after the lockup, only the change in price since then is a capital gain or loss, long-term if you held more than a year, short-term if not.
Because a lot of insiders can sell at once when a lockup expires, prices often move around that date, and selling everything the moment you can is rarely a plan. A deliberate approach to selling (sometimes through a 10b5-1 trading plan set up in advance) tends to beat reacting in the moment, both for tax and for managing a suddenly concentrated position.
Where this trips people up
Assuming you can sell at the IPO to cover taxes
The most common IPO mistake. The lockup (commonly around 180 days) usually prevents selling even though the tax is already owed. Plan for where the cash to pay it will come from before the IPO, not after.
Trusting the 22% withholding
A large RSU settlement is withheld at the 22% supplemental rate (37% above $1 million), often well below a high earner's real rate. The shortfall becomes a balance due, sometimes with an underpayment penalty. Some employers let you elect higher withholding; it is worth asking.
Getting taxed high and selling low
Your tax is fixed at the IPO-day value, but a drop during the lockup can leave the shares worth much less when you can finally sell. The later decline is a separate capital loss; it does not undo the income tax you already owe.
Double-taxing your cost basis
Your basis is the IPO-day value already taxed as income. Brokers sometimes report a lower or zero basis, and if you do not correct it you pay tax twice on the same dollars. Check the cost basis on your 1099-B before you file.
Treating double-trigger RSUs as guaranteed
The liquidity trigger is out of your control. If the company never goes public within the grant's term, or you leave before the event, vested-on-paper shares can still expire. Read the term and the must-be-employed clauses in your grant.
IPO equity questions people ask
When do I actually owe tax at an IPO?
For double-trigger RSUs, the IPO is the second trigger, so your previously time-vested shares settle and are taxed as ordinary income that year, valued at the IPO-day price. The income lands on your W-2.
Can I sell my shares right when the company goes public?
Usually not right away. Most employees are subject to a lockup, commonly around 180 days, during which you cannot sell even though the stock is publicly traded and the tax is already due.
Why is my withholding not enough?
RSU income is withheld at the flat 22% supplemental rate (37% over $1 million in supplemental wages). On a large IPO-year inclusion, that is often below your true marginal rate, so the gap becomes a balance due unless you plan for it.
What if the stock drops during the lockup?
You are still taxed on the IPO-day value, because that is when the income was recognized. If the price is lower when you can sell, that decline is a separate capital loss; it does not reduce the ordinary income you already owe.
Can I file an 83(b) election on double-trigger RSUs?
Generally no. An 83(b) election applies to property transferred to you subject to a risk of forfeiture, and with double-trigger RSUs no shares are transferred at grant. The election tool is for restricted stock and certain early-exercised options instead.
What is a 10b5-1 plan and do I need one?
It is a trading plan set up in advance that lets insiders sell shares on a preset schedule, which helps with both compliance and an orderly approach to selling after the lockup. Whether it makes sense depends on your role and situation; it is worth discussing before the IPO.
Keep reading
RSUs and how they are taxed
The mechanics behind the IPO settlement: how RSUs are taxed and why withholding falls short. →
ISOs and AMT
Holding options into an IPO? Exercising ISOs can trigger AMT, especially when you cannot sell. →
QSBS
Some pre-IPO shares may qualify for a large capital-gains exclusion. Here is how QSBS works. →
All resources
Browse every equity-comp explainer in one place. →
Have an IPO on the horizon?
Planning the RSU settlement, the withholding gap, the lockup, and your sell strategy before the IPO is exactly the kind of work I do with clients. If your company is heading for a liquidity event, I am happy to help you get ahead of the tax and the cash. Here is how to start a conversation.
Become a ClientThis article is general information, not tax or legal advice for your specific situation. Tax outcomes depend on your individual facts, and the rules change over time. Talk to a qualified professional (I am happy to be that person) before acting on anything here. Reading this page does not create a client relationship.