Stripe’s latest tender offer could mean a major payday for current and former employees holding Stripe RSUs… a welcome change after a long drought of tech IPOs.
It’s generally been a dry season for IPOs, with companies’ plans frozen and in limbo. One of the most anticipated IPOs, Stripe’s, has once again been postponed, but the company’s private equity deal is creating new liquidity opportunities for employees.
To understand the nail-biter that was Stripe’s potential IPO tease requires a brief recap of how the company got here: Founded in 2010, Stripe has gone through several liquidity events over the years and is no stranger to equity compensation. In 2014, the fintech began offering its employees restricted stock units (RSU) instead of traditional stock options, a common practice for valuable tech companies that are IPO bound. The kicker here is that RSUs come with a major caveat: an expiration date. A liquidity event of some kind must occur before RSUs reach the end of their 10-year shelf life, otherwise more than 10,000 employees and alumni would lose their valuable equity altogether.
On January 26, 2023, Stripe informed employees with intentions to allow them to sell their stock holdings, but the details were unclear. Less than two months later, on March 16, the company announced that it had raised more than $7 billion in Series I financing at a $50 billion valuation, which is significantly lower than its 2021 valuation. In an ideal world, Stripe would have likely opted for an IPO, but it’s not a good time considering current stock market conditions. If anything, the company’s private deal will further delay its plans to go public.
The company will use its new cash to trigger all the RSUs it granted, pay withholding taxes on those RSUs and then allow employees and alumni to sell as many of their shares as they want at the $50 billion valuation.
Because RSUs are treated as wages, Stripe owes roughly $2.3 billion in payroll and withholding taxes on the transaction. The company modified its RSU plan by removing the requirement that a public offering or sale must occur within seven years for vesting, enabling these new liquidity options.
The Information claims Stripe’s Series I is the largest venture capital deal of all time. The liquidity event is even being compared to Uber’s 2017 deal with SoftBank, which we wrote about in real time.
News commentary aside, Stripe’s liquidity deal is an exciting milestone for longtime employees who’ve been waiting around for their big payday.
Private equity offer at $20.13 per share
Stripe’s 409A price has been updated to $20.13 per share, effective as of March 15, 2023. While the $7 billion headline sounds like a traditional fundraise, it’s not. The shares Stripe will retire from employee tax withholding, and the tender offer will offset the new shares that are given to Series I investors, making its plan share-count neutral.
What you can expect to pocket post taxes
Let’s see what a Stripe employee’s payday can look like in this hypothetical example:
Stefanie is a current employee who’s been granted and fully vested in her Stripe RSU, holding 60,000 double-trigger RSU shares. With its recent private equity deal, Stripe is offering employees $20.13 per share.
60,000 × $20.13 = $1,207,800 (gross value)
Assuming a 37% effective federal tax rate, Stefanie would take home approximately $760,914, excluding any state taxes.
Keep these things in mind:
- The standard federal withholding for this type of income is 22%.
- Your company can elect for a higher withholding rate.
- You might also have state income taxes that are applicable on the income. For example, California withholds 10.23% on these types of transactions.
- For 2023, the social security wage limit is $160,200, and additional medicare taxes kick in at $200,000 ($250,000 for married individuals). Depending on your situation, you may or may not have medicare taxes.
- This example focuses purely on the federal income tax.
Next steps for Stripe RSU Liquidity
If you haven’t already, expect to receive your actual Stripe shares soon. Previously, your RSUs only became shares once two conditions were met:
- You had to stay at the company for the required time-based vesting period
- A liquidity event had to occur
Now, Stripe has waived the liquidity trigger, meaning all vested RSUs will convert into shares following the Series I funding.
Once shares are delivered to your account, taxes become due. Stripe will handle this through net settlement, automatically selling a portion of your shares to cover withholding taxes.
NOTE – If you didn’t elect for additional supplemental withholding (37%), your taxes may not be fully covered. Be prepared for a potential tax shortfall next year.
Be Tax Aware!
Do not get caught unprepared for a surprise tax bill next year.
Expect a tender offer in April, which will permit you to sell shares you’ve vested up to this point, in most cases with no restrictions. The offer will remain open for a limited time and is separate from the RSU net settlement (which will happen beforehand). Stripe anticipates funds from the tender offer to settle to employees in May, and it will provide detailed instructions about how to participate beforehand. In addition to allowing you to tender your shares, holders of vested options that expire in 2023 or 2024 will be eligible to net exercise their options as part of the tender.
Stripe RSU deal may foreshadow a wave of IPOs
We’re thrilled about Stripe’s private equity deal because as we’ve mentioned on our blog, IPOs have been virtually non-existent this year. There are many employees at Stripe and other companies who have “screen wealth” that they can view online but are unable to access. These employees are waiting for a liquidity event that’ll allow them to finally do things like buy a house or create an investment portfolio that gives them financial independence.
History suggests this could spark a trend. After a similar lull in 2016, Uber’s 2017 SoftBank deal reignited IPO activity, leading to the public listings of 2018–2019. Stripe’s move could trigger a similar wave across the tech sector.
Spend less time stressing over your taxes
Everyone’s situation is unique, which calls for careful planning for things like non-qualified stock options. Fortunately, this isn’t KB Financial Advisors’ first go around, so we have the expertise to provide personalized advice for you.
Even if you’re not directly affected by the Stripe deal, career planning can be crucial, and having a knowledgeable sounding board is invaluable.
Because let’s face it… Google can’t give you personal tax advice. That’s what we’re here for.
Book a call today to talk to myself or another expert advisor about your taxes.
