In recent weeks, a lot of ink has been spilled criticizing Stripe, a darling of the VC world, for missing its opportunity to go public when the IPO window was wide open.
Despite grabbing a valuation of $95 billion in March 2021—a more than 2.6x step-up from the $36 billion it was worth the year prior—the payments company seemed to be in no hurry to float its stock.
Since most tech stocks dropped dramatically last year, the missed stock market debut would seem in retrospect to be a blessing for Stripe, a company with an enormous customer base and market opportunity. Why spend the first years as a publicly traded entity trying to convince Wall Street that its slowing revenue growth is a function of temporary economic headwinds when it could quietly continue to build as a private company?
But that’s not how things are playing out for the payments giant, nor for other highly valued startups that find themselves in a similar bind. The culprit is an obscure tax rule related to restricted stock units like the ones Stripe granted to employees as a part of their compensation packages about seven years ago.
This article appeared as part of The Weekend Pitch newsletter. Subscribe to the newsletter here.
Some of these early stock awards are expected to start expiring next year unless Stripe goes public, purchases the shares or finds a way to modify the award. With the IPO window shut for now, Stripe is hoping to appease the early RSU holders at risk of losing a chance to cash in on a company they helped build. The company is trying to raise $4 billion in a massive down round, The Information reported, to pay for taxes associated with restructuring the grants.
Stripe is not alone.
“Privately held companies that are over $3 [billion] to $5 billion in value—a lot of them have this problem,” said Cisco Palao-Ricketts, a partner at law firm Goodwin.
But current and former employees of those companies may not be as lucky as Stripe RSU holders.
Restricted stock usually expires within five or seven years, and the startups that issued these awards had expected to be public within that time frame. Here’s the rub: Many startups have stayed private for longer, pushing restricted shares to the brink of expiration. An IPO is the obvious solution, but with continued volatility and deflated equity prices, companies and their investors are loath to go that route.
There are no good solutions or silver bullets for this issue, Palao-Ricketts tells me.
Although Stripe is slashing its valuation to $50 billion, according to The Information’s report, it is in a relatively advantageous position due to a lot of demand for its stock.
Other companies may be unable to attract new capital to modify their RSUs. That leaves them with no choice but to let the grants expire. After exploring various options, geolocation startup Foursquare reportedly concluded that it couldn’t do anything for former employees whose RSUs are set to expire.
Scott Chou, co-founder of ESO Fund, a VC firm that provides financing solutions for employee stock options, says there’s never an obligation for a company to pay the RSU tax bill. "[Stripe] is doing this out of the goodness of their hearts and the generosity of [current] investors. It’s very expensive.”
Companies are, of course, mindful that letting RSUs expire may make it more difficult to recruit talent in the future.
But now that most startups have switched to cash preservation mode and many businesses are in danger of failing entirely, employee retention and recruitment is no longer top of mind for the tech ecosystem.
“Stripe is doing [a raise] because they have a plan around retention,” said Frank Rotman, a founding partner and CIO at fintech-focused QED Investors. “If another company decides not to do this, they might have a different plan.”
At a time when all VC-backed companies are laser-focused on survival, letting employee RSUs expire may—barring new tax rules or the emergence of innovative third-party solutions—end up in the same camp as down rounds: an unfortunate but necessary evil.
Featured image by Jenna O’Malley/PitchBook News
Learn more about our editorial standards.