yes the illiquid RSU dilemma: if the valuation of the RSUs have gone up by the time they vest, then you owe a boat load of tax but can't liquidate the RSUs to pay said tax.
I am curious what is the purpose of this withholding strategy then? I am not familiar with this. Doesn't sound great to me, at least with a quarterly vesting schedule you can generally go and sell them on the secondary market.
Because it's impossible to know each employee's tax situation, and better to withhold too little than too much. In most cases it works out, but early employees and executives can easily be affected.