If a startup issued RSU’s, then every vesting event would trigger income tax in that year, which employees would have to pay out of pocket, else they would be forced to sell their illiquid pre-IPO non-preferred shares in some secondary market to pay the tax bill.

This would also make every employee into an actual shareholder as of their first vest, and startups really hate having lots of shareholders, because it generates a ton of administrative overhead and paperwork. In fact, if you reach 2000 shareholders, you have to start filing SEC reports as if you’re a public company, which nobody wants to do.