When you have options or restricted shares in a private company, your equity compensation is in an uncertain state. You might anxiously await news of an anticipated IPO or SPAC acquisition and strategize how to pay the tax bill on your shares when it comes due, since lockup and blackout periods will likely impede your ability to sell any of them. Of course, it’s also possible that your company won’t ever go through a liquidity event—a more pressing worry for many startup employees as economic factors dampen IPO activity.
Stripe’s Approach to Liquidity
Stripe is among the companies waiting for economic conditions to improve before launching into public markets. Its unhurried approach to IPO, however, is paired with mindfulness of how this uncertainty impacts its employees. Stripe has undergone more than 20 funding rounds. Most recently (as of this writing), the company signed agreements in March 2023 to raise more than $6.5 billion. Unlike most companies ramping up for IPO, however, Stripe is not using this infusion of cash to fund operations; instead, it’s offering liquidity for its employees.
Saving the Value of Expiring RSUs
Stripe has been around since 2010 and began offering equity compensation in the form of restricted stock units (RSUs) in 2014. RSUs are a type of restricted stock that’s popular in mature companies that have a relatively high fair market value, which can make it difficult for employees to afford the exercise price of stock options or the purchase price of restricted stock awards (RSAs). In this way, RSUs make it more affordable for employees to own shares in their high-value companies.
Stripe’s RSUs had two requirements for full vesting, also known as a “double trigger.” Single-trigger RSUs typically vest after an employee has been with the company for a certain amount of time; the second trigger is a liquidity event like IPO. Double-trigger RSUs are common in private companies, as this vesting structure can prevent employees from having to pay withholding on shares that can’t be traded.
Unvested RSUs can’t be held forever, though, and many of Stripe’s RSUs were set to expire in 2024, which means they would be worthless after that date. To protect the equity that is intended to incentivize their valued long-time employees, Stripe raised money to trigger vesting of all RSUs it has granted so far and pay withholding on the vesting shares.
Funding a Tender Offer
In addition to triggering existing RSUs, Stripe’s liquidity deal funds a tender offer that allows employees to liquidate newly vested shares. Additionally, employees will be allowed to “net exercise” vested stock options that are set to expire in 2023 or 2024—a practice that allows employees to tender a portion of their shares back to the company to cover the options’ exercise price. Stripe reports that the latest funding round won’t dilute share value, as new shares will be offset by providing liquidity for employees.
Stripe is expected to IPO in the near future, but the company has indicated that it’s in no rush to shed its private status. Providing opportunities for pre-IPO liquidity helps keep employees happy and focused on day-to-day operations rather than distracted by anxieties about the timing of the company’s IPO.
Making the Most of Early Liquidity Opportunities
If your company provides an early liquidity opportunity such as a tender offer, it’s important to carefully consider the volume of shares you will sell at this time. This will depend on both the specifics of your company’s financial position and your individual goals. For example, Stripe’s latest funding round resulted in a $50 billion valuation—significantly below the $95 billion valuation it received in 2021, when the company made its last tender offer, and below expectations. As a result, employees who sell their shares in the current tender offer are receiving just $20.13 per share, while those who sold in 2021 received $40.125.
Tax & Financial Planning
It's certainly possible that Stripe employees who hang onto their shares will be able to sell them at a much higher price in the future, but there is no guarantee of this. To make the most of the opportunity they have, employees must look at both their short-term and long-term financial needs and goals.
One important factor to consider is the immediate tax consequence of vesting shares. While Stripe is using a portion of its $6.5 billion in new cash to pay withholding on triggered RSUs, this won’t necessarily cover employees’ full tax obligation. Standard withholding on supplemental wages is 22% on the first $1 million in RSUs; however, many employees receiving equity compensation will be at a higher tax bracket than this. If you have vesting RSUs, it’s important to work with a tax professional to project your income and tax obligation for the year and make a plan to pay the tax bill. This might include, for example, increasing your employment withholding, selling a portion of your shares, and/or taking out a loan.
You should also work with a trusted financial advisor to align your share sales strategy with your financial priorities. It isn’t possible to know for certain what path will lead to the greatest net gains, but it is possible to create a strategy to generate the resources you need when you need them. For example, you might want to pay for your child’s college tuition in five years, buy a second home in ten years, and retire in twenty years. When you make these goals clear to your financial advisor, they can then design a plan to help you meet them.
WRP Wealth Management specializes in helping employees navigate the complex landscape of equity compensation, the IPO process, taxation, and investment management. For more insights into how to make the most of your equity compensation, browse our blog or our free resource library.