diff --git a/sshd/server_test.go b/sshd/server_test.go
new file mode 100644
index 00000000..a68257e1
--- /dev/null
+++ b/sshd/server_test.go
@@ -0,0 +1,167 @@
+package sshd
+
+import (
+	"crypto/ed25519"
+	"crypto/rand"
+	"encoding/pem"
+	"net"
+	"testing"
+	"time"
+
+	"github.com/slackhq/nebula/test"
+	"github.com/stretchr/testify/assert"
+	"github.com/stretchr/testify/require"
+	"golang.org/x/crypto/ssh"
+)
+
+// newTCPConnPair returns two connected net.Conn via TCP loopback.
+// net.Pipe() is intentionally avoided: SSH handshakes require both sides
+// to write simultaneously (kexInit, auth), which deadlocks on an
+// unbuffered synchronous pipe. TCP loopback provides kernel buffering.
+func newTCPConnPair(t *testing.T) (serverConn net.Conn, clientConn net.Conn) {
+	t.Helper()
+	ln, err := net.Listen("tcp", "127.0.0.1:0")
+	require.NoError(t, err)
+
+	type dialResult struct {
+		conn net.Conn
+		err  error
+	}
+	ch := make(chan dialResult, 1)
+	go func() {
+		c, err := net.Dial("tcp", ln.Addr().String())
+		ch <- dialResult{c, err}
+	}()
+
+	s, err := ln.Accept()
+	require.NoError(t, err)
+	ln.Close()
+
+	r := <-ch
+	require.NoError(t, r.err)
+
+	t.Cleanup(func() {
+		s.Close()
+		r.conn.Close()
+	})
+
+	return s, r.conn
+}
+
+// newTestSSHServer creates a minimal SSHServer with an ephemeral ed25519 host key.
+// If addAuthorizedKey is true, the returned signer's public key is registered for "testuser".
+func newTestSSHServer(t *testing.T, addAuthorizedKey bool) (*SSHServer, ssh.Signer) {
+	t.Helper()
+
+	l := test.NewLogger()
+	server, err := NewSSHServer(l.WithField("subsystem", "sshd"))
+	require.NoError(t, err)
+
+	// Generate ephemeral host key.
+	_, hostPriv, err := ed25519.GenerateKey(rand.Reader)
+	require.NoError(t, err)
+	hostKeyBlock, err := ssh.MarshalPrivateKey(hostPriv, "")
+	require.NoError(t, err)
+	require.NoError(t, server.SetHostKey(pem.EncodeToMemory(hostKeyBlock)))
+
+	// Generate ephemeral client key.
+	_, clientPriv, err := ed25519.GenerateKey(rand.Reader)
+	require.NoError(t, err)
+	clientSigner, err := ssh.NewSignerFromKey(clientPriv)
+	require.NoError(t, err)
+
+	if addAuthorizedKey {
+		authorizedKey := string(ssh.MarshalAuthorizedKey(clientSigner.PublicKey()))
+		require.NoError(t, server.AddAuthorizedKey("testuser", authorizedKey))
+	}
+
+	return server, clientSigner
+}
+
+func newClientConfig(user string, signer ssh.Signer) *ssh.ClientConfig {
+	return &ssh.ClientConfig{
+		User:            user,
+		Auth:            []ssh.AuthMethod{ssh.PublicKeys(signer)},
+		HostKeyCallback: ssh.InsecureIgnoreHostKey(), //nolint:gosec // test only
+	}
+}
+
+// TestHandshakeWithTimeout_Success verifies that a valid SSH handshake completes
+// and returns a non-nil ServerConn with the correct user extensions.
+func TestHandshakeWithTimeout_Success(t *testing.T) {
+	server, clientSigner := newTestSSHServer(t, true)
+	serverConn, clientConn := newTCPConnPair(t)
+
+	type clientResult struct {
+		conn ssh.Conn
+		err  error
+	}
+	clientDone := make(chan clientResult, 1)
+	go func() {
+		c, chans, reqs, err := ssh.NewClientConn(clientConn, "", newClientConfig("testuser", clientSigner))
+		if err == nil {
+			go ssh.DiscardRequests(reqs)
+			go func() {
+				for range chans {
+				}
+			}()
+		}
+		clientDone <- clientResult{c, err}
+	}()
+	t.Cleanup(func() {
+		if r := <-clientDone; r.conn != nil {
+			r.conn.Close()
+		}
+	})
+
+	conn, chans, reqs, err := server.handshakeWithTimeout(serverConn, 5*time.Second)
+
+	require.NoError(t, err)
+	require.NotNil(t, conn)
+	assert.NotNil(t, chans)
+	assert.NotNil(t, reqs)
+	assert.Equal(t, "testuser", conn.Permissions.Extensions["user"])
+	conn.Close()
+}
+
+// TestHandshakeWithTimeout_HandshakeError verifies that an authentication failure
+// (unknown user) is returned as an error without triggering the timeout path.
+func TestHandshakeWithTimeout_HandshakeError(t *testing.T) {
+	// Server has no authorized keys → any client will be rejected.
+	server, clientSigner := newTestSSHServer(t, false)
+	serverConn, clientConn := newTCPConnPair(t)
+
+	clientDone := make(chan error, 1)
+	go func() {
+		_, _, _, err := ssh.NewClientConn(clientConn, "", newClientConfig("testuser", clientSigner))
+		clientDone <- err
+	}()
+	t.Cleanup(func() { <-clientDone })
+
+	conn, chans, reqs, err := server.handshakeWithTimeout(serverConn, 5*time.Second)
+
+	require.Error(t, err)
+	assert.NotEqual(t, "handshake timeout", err.Error())
+	assert.Nil(t, conn)
+	assert.Nil(t, chans)
+	assert.Nil(t, reqs)
+}
+
+// TestHandshakeWithTimeout_Timeout verifies that when no client sends SSH traffic,
+// the function returns a "handshake timeout" error and closes the connection.
+func TestHandshakeWithTimeout_Timeout(t *testing.T) {
+	server, _ := newTestSSHServer(t, true)
+	serverConn, _ := newTCPConnPair(t)
+	// The client side is intentionally idle — no SSH traffic is sent.
+
+	conn, chans, reqs, err := server.handshakeWithTimeout(serverConn, 1*time.Millisecond)
+
+	require.EqualError(t, err, "handshake timeout")
+	assert.Nil(t, conn)
+	assert.Nil(t, chans)
+	assert.Nil(t, reqs)
+
+	// Confirm that handshakeWithTimeout closed the connection.
+	_, writeErr := serverConn.Write([]byte("probe"))
+	assert.Error(t, writeErr, "serverConn should be closed after timeout")
+}