Working in Israeli Tech? Here’s Why Double-Trigger RSUs Might Be a Blessing (Or a Curse)

What is a Double Trigger for RSUs?

A double-trigger RSU is a type of equity compensation where two separate events must take place before the employee gains full control of their Restricted Stock Units (RSUs). The first event is typically time-based vesting, meaning that the employee earns the right to their shares over a set period of employment. The second trigger is tied to a liquidity event, such as an initial public offering (IPO) or an acquisition of the company. Only after both triggers occur does the employee receive the actual shares and can sell them.

This double-trigger structure is common in private companies, where shares aren’t readily tradable until a significant corporate event provides liquidity. For employees in private firms, particularly those in high-growth industries like tech, the double-trigger RSU aligns their compensation with the company’s long-term success and protects them from certain financial risks.

Why It May Be Beneficial for a U.S. Person in Israel to Have Double-Trigger Vesting

For U.S. citizens living in Israel and working for private companies, double-trigger RSUs can provide a significant tax advantage. Under U.S. tax law, RSUs are typically taxed upon vesting, meaning that an employee owes taxes on the value of their RSUs even if they cannot yet sell the shares. This creates a situation commonly known as?phantom income, where taxes are due on a theoretical value before the employee has the liquidity to cover the tax bill.

Double-trigger RSUs help alleviate this problem. Because the shares do not fully vest until both the time-based condition and the liquidity event occur, the employee does not owe U.S. taxes until they have access to the shares and can sell them. This eliminates the burden of paying taxes on RSUs before they can be monetized, which is particularly beneficial for employees in private companies where liquidity events can be unpredictable or delayed.

Moreover, for U.S. citizens in Israel, double-trigger RSUs help synchronize the U.S. and Israeli tax timelines. While Israel taxes RSUs under 102 plans upon sale, the U.S. typically taxes them upon vesting. With a double-trigger structure, both tax obligations occur at the same time, reducing the risk of?double taxation, where U.S. taxes are paid in the year of vesting and Israeli taxes in the year of sale.

How to Know if You Have Double-Trigger RSUs

Understanding whether your RSUs include a double-trigger clause is essential for tax and financial planning. The easiest way to verify this is by reviewing the details of your?grant letter?or?equity compensation agreement, where the conditions of your RSUs are clearly outlined. If the document specifies that vesting is contingent not only on your continued employment but also on a company milestone or liquidity event like an IPO or acquisition, you have double-trigger RSUs.

Additionally, you can inquire with your company’s?HR?or?finance department?for clarification. Some companies provide this information through the platforms they use to manage equity compensation, such as?E*TRADE,?Fidelity, or Israeli trustee systems like?IBI or ESOP. These platforms can offer insights into the specifics of your vesting schedule and triggers, helping you determine if you need to wait for a liquidity event before accessing your shares.

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Other Benefits of Having Double-Trigger RSUs

Beyond the immediate tax advantages, double-trigger RSUs offer several other important benefits. One of the key advantages is their ability to align employee interests with the company’s long-term goals, encouraging a deeper commitment to the company's success.

Double-trigger RSUs also protect employees from being taxed on shares they cannot sell. In a private company, where shares may not be tradable until a liquidity event, this type of RSU ensures that employees don’t face a tax burden on illiquid assets. Without a double trigger, employees would be forced to pay taxes on vested RSUs without having the means to sell the shares and cover the tax bill, which could put a significant strain on their finances.

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Why It May Not Be Such a Great Thing to Have Double-Trigger RSUs

One of the main downsides of double-trigger RSUs is the?"must be present to win"?clause. This provision means that even if an employee has met the time-based vesting condition, they must still be employed at the time of the liquidity event (such as an IPO or acquisition) in order to receive their shares. If the employee leaves the company before this event occurs, they will forfeit their RSUs entirely, potentially losing a significant part of their compensation package. This can be particularly frustrating for employees who have invested years in the company but decide to move on before the liquidity event takes place.

Another potential drawback is that when a company finally experiences a?liquidation event, such as an IPO, the RSUs may vest at a?much higher stock value?than they would have under a single-trigger structure. While this can seem like a positive outcome, it means that the employee will owe taxes based on the higher value of the stock. Without the double trigger, the shares may have vested at a lower price point, allowing the employee to benefit from?long-term capital gains tax rates?if they held the shares for over a year. With double-trigger RSUs, however, the employee is taxed on the full value of the stock when both triggers are met, often resulting in a higher tax bill than if the shares had vested earlier at a lower value.

These two factors — the risk of forfeiture due to the "must be present to win" condition and the potential for higher taxes at the time of the liquidity event — are important considerations when evaluating whether double-trigger RSUs are the best option for your financial situation.

How to Protect Yourself in All Situations

Double-trigger RSUs can be both a blessing and a curse for U.S. citizens working in Israeli tech. While they provide significant tax deferral benefits and protect employees from being taxed on illiquid shares, they also come with the risk of forfeiture and the potential for higher taxes during a liquidity event. Understanding the nuances of double-trigger RSUs is essential to making informed decisions about your compensation package and ensuring you don’t face unexpected tax burdens down the line.

If you’re navigating the complexities of RSUs as a U.S. citizen living in Israel, visit our website for useful information and resources. We specialize in this area and prepare our clients using the best techniques available before their eventual exit.? We’ll ensure that when you do get that big payout, you are in a great position to mitigate taxes and keep your money.