The company’s private equity deal gives current and former employees who hold restricted stock units a big payday.
It’s generally been a dry season for IPOs, with companies’ internal valuations falling lower by the bell ring. Whenever we see a possible IPO, it somehow gets forestalled — the most recent of which is fintech Stripe.
To understand the nail-biter that was Stripe’s potential IPO tease requires a brief recap of how the company got here: Having been around since 2010, and with liquidity events throughout the years, Stripe is no newbie to equity compensation. In 2014, the fintech began offering its employees restricted stock units (RSUs) in lieu of 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 emailed employees with intentions to allow them to sell their stock holdings, but details of the liquidity event 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. Something to note is RSUs are taxed as wages, so when Stripe triggers the RSUs and releases actual shares to employees, it will owe $2.3 billion in withholding taxes. Stripe would need to cover payroll tax once it modified its restricted stock units by removing a requirement that the company must go public or be sold within seven years for the stock to vest.
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 fintech’s Series I has a large headline price, it’s not a regular, primary fundraise that dilutes shareholders. 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 the company’s RSUs, holding 60,000 double-trigger RSU shares. With its recent private equity deal, Stripe is offering employees $20.13 per share.
We’ll assume Stefanie has a 37% effective tax rate for federal taxes. At the end of the transaction, she’ll take home $760,914 (excluding any applicable state taxes) from this liquidity event.
Keep these things in mind:
- The standard withholding for this type of income is 22% for federal taxes.
- 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 employees
Expect to receive actual shares if you haven’t already. Remember, until Stripe’s announcement, any Stripe RSUs you held would become shares only after two conditions were met:
- You had to stay at the company for the required time-based vesting period
- A liquidity event had to occur
Stripe approved waiving the liquidity trigger on all RSUs subject to the closing and funding of the Series I, which will happen in the weeks following its announcement. By removing the second liquidity trigger, your vested RSUs become actual shares.
Expect your shares to be delivered to your account in the next few weeks. Receiving your shares will mean you’ll have taxes due. Stripe will “net settle” your shares, which means a fraction of your shares will be automatically sold to generate cash to cover the taxes you owe on those RSUs or options.
NOTE – Unless you elected additional supplemental withholding through Slack at the top marginal tax rate of 37%, there is a real chance that your withholding will NOT cover your taxes.
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’s 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.
In 2016, there was a significant downturn in IPOs, but Uber’s 2017 deal started a wave of activity leading to the IPOs of 2018 and 2019. If history repeats itself, we hope Stripe’s liquidity event causes a similar ripple effect in the tech industry.
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 aren’t affected by Stripe’s current deal, career planning for private equity firms can be crucial and having a knowledgeable sounding board is invaluable.
Google can only take you so far in your search for help. That’s why I’m here to take taxes off your hands so you can do something that thrills you instead. (Now, if taxes thrill you, let’s be friends!)
Book a call today to talk to myself or another expert advisor about your taxes.