In January 2018, Bloomberg reported that Dropbox filed for an initial public offering (IPO) in the U.S.
While certainly newsworthy, there was one factor in this particular filing that made it especially interesting: Dropbox filed confidentially, and may be the first of many non-public filings to come.
When the Jumpstart Our Business Startups (JOBS) Act was passed in 2012, only companies with less than $1 billion in annual revenues could file confidentially. But in July 2017, the Securities and Exchange Commission expanded that to allow all companies to file this way.
By “secretly” filing an IPO, Dropbox doesn’t have to formally release the filing documents until 15 days before its roadshow, when company executives travel to make presentations to potential investors to generate excitement and interest in the IPO.
The filing occured on February 23 — and now that it’s finally happening, we should take a moment to discuss how we got here and what a Dropbox IPO means for employees.
How We (and Dropbox) Got Here
Dropbox was founded in 2007 and officially launched in 2008. Early employees who received option grants in 2008 may have surpassed or be approaching the 10-year expiration date on the original grant of options.
It’s worth noting the Dropbox IPO taking longer than the standard 10-year expiration date on stock options is unusual. It’s not entirely unheard of, though (think back to the Uber-Softbank deal for a refresher) and it’s something we may see more of in the future.
IPOs on the whole are down since 2014, which was the best year of the decade for tech IPOs. After that yearlong frenzy, massive flows of venture capital followed in its wake and set a new benchmark for tech companies.
During this time, Dropbox raised nearly $1 billion in debt and equity at a $10 billion valuation. Blackrock and Fidelity paid $19.10 a share in January 2014 in a Series C round.
The next year, the IPO pace slowed. Valuation of large private tech companies cooled with it.
Blackrock marked its Dropbox holding down to $14.46 in July and Fidelity marked holdings down to $13.06 in August. In December, T. Rowe Price marked Dropbox shares down to $9.40 — and only continued, hitting $7.91 in 2016.
To put that in even greater perspective, that price was lower than the $9.05 paid in 2012 as part of the Series A and Series A-1 funding rounds.
Although things looked bleak, Dropbox didn’t lose its sense of humor. During the years where shares stumbled, the company kept what became known as the “austerity panda.” Dropbox acquired the large chrome statue that allegedly cost $100,000 back in the company’s days of extravagant spending.
It was a reminder, said Dropbox, of the need to spend more thoughtfully moving forward.
The strategic changes and focus on what really mattered paid off and today, two years after its shares saw that sad $7,91 price, we’re looking at a Dropbox IPO.
What Does The Dropbox IPO Mean for Current and Former Employees?
The type of employee you are will influence what the Dropbox IPO means for you. You could classify yourself as either an early-stage, late-stage, or fast-track executive employee.
(Learn more about stock option strategies for these specific employee types here.)
The group you belong to typically depends on when you started, how early you were in the company, and the length of your employment. This kind of timing influences the amount of equity and type of equity.
Early employees will receive more through incentive plans — and if you’ve been with the company for an extended period of time, you may be set to receive a considerable amount of wealth.
Position level matters, too. Salary, bonus, and equity go up by multiples as you move from lead to director to head to C-suite.
The Multiple Types of Equity You Could See from the Dropbox IPO
In the length of time that Dropbox has been private, we’ve seen a roller coaster of valuations. Combine that with the war for talent in the Bay Area and the result is a smorgasbord of possible equity combinations that Dropbox employees could receive.
This experience is not limited to Dropbox. We’ve also seen it at Airbnb, Uber, Pinterest, and more — and we expect to keep seeing this trend in similar tech companies (meaning, companies that have been private for a long time and have raised a lot of money during that period).
But here’s what really matters and what you need to understand: all this means increased planning opportunities for you, as well as increased complexity.
Here are the types of equity you could be looking at:
- Incentive Stock Options (ISOs): This type of stock option comes with a tax benefit. When you exercise your option, you pay no regular income taxes, and you might be able to avoid (or recoup later) the Alternative Minimum Tax (AMT). Shares from ISOs can later be taxed at the capital gains rate rather than your ordinary income tax rate.
- Nonqualified Stock Options (NQs): This option doesn’t offer a special tax benefit, so you pay ordinary income tax on the difference between the fair market value and exercise price at the time of exercise. For some former Dropbox employees, these may include ISOs that were converted to NQs in exchange for an extended exercise window after employment ended.
- Restricted Stock Units (RSUs): This is a grant valued in terms of company shares. But you only receive the shares once you’ve satisfied the vesting requirement. These may include RSUs with dual vesting with a timed vesting schedule with final vesting triggered by the IPO, and RSUs exchanged for stock options that only have the timed vesting schedule.
- Shares: This includes shares from the exercise of stock options or shares from RSUs with single vesting.
What’s Next for Dropbox Employees?
The key is to be ready, aware and organized. Here’s how to do it:
Get ready.
Start by making a list of your stock options, RSUs, and shares. A spreadsheet may be helpful here to keep all your data straight.
Then, consider cost basis. Determine the accurate cost basis for each type (but don’t rely on your equity awards portal to do this for you!).
Know there will be gaps between the income reported by Dropbox employees on Forms W2 and Form 3921 Statement of Taxable Income and the gains reported by your brokerage account on Form 1099-B.
Get set.
Stay informed and do your research on the types of equity you possess. Understand how taxes come into play, including exactly how your equities will be taxed.
This should be part of your plan now so you don’t have to worry about it later. Also, evaluate new benefits that may be offered, like an ESPP or 10(b)5-1.
Go!
Mark your calendar for the following events in the Dropbox IPO:
- Listing
- Lockout period
- First earnings call
- First trading window
Then, create a liquidation strategy to prioritize which equities to sell first. You can execute your plan when the time comes.
A general framework to use might be to handle any equity and options in this way:
- Shares: Sell shares that qualify for long-term capital gains.
- Options: Exercise and sell your options on the same day.
- RSUs: Sell these as soon as possible. RSUs are taxed as ordinary income. If they’re single vest triggered by time only, they’ll be taxed when they vest. If dual vesting, taxes are triggered by the IPO.
All this being said, you need this quick warning for dual-vesting RSUs: Depending on the success of the IPO, your RSU alone may push you into the top tax bracket.
Our experience is that withholding on your RSU will be insufficient and that you will owe a large tax bill the year after the IPO (and no, there’s no tax advantage to holding RSU shares).
Determining the Best Approach for You
It’s important that you know your goals. For example, if you’re buying a house and need cash, your strategy is going to look different than someone looking to grow wealth through investments.
Consider the potential value of your equity. Map out the potential value at different future share prices and know what you’d do if the share price doubles or halves.
Is the upside potential worth the downside risk?
Think about your career plans, too. An IPO will speed up the talent drain that tech companies already deal with.
Our experience is that holding stock of a former employer is much harder than holding stock of a current employer. You lose both involvement and attachment to the company.
As a result, if you’re planning to leave Dropbox for another company, you may want to accelerate your plans to sell.
Be honest about your belief in Dropbox as a successful company. If you believe Dropbox is a transformative company like Amazon, Google, or Apple, then you’d be foolish to sell now.
But if you don’t believe it has staying power, selling makes more sense.
Here’s a best practice to consider: Identify a target percentage of your net worth and agree not to allow Dropbox to exceed that percent of your net worth.
After the IPO, sell enough to reduce Dropbox to your target. If Dropbox goes up, continue to sell to maintain your target percentage. If it goes down, hold.
By doing this, you can reduce the amount of risk you’re taking. In other words, if Dropbox tanks, you don’t tank along with it because all your eggs won’t be in one basket.
The Bottom Line on the IPO for Dropbox Employees
The Drive-By Truckers have a tune called “Sounds Better in a Song.” Vocalist Mike Cooley bemoans that things that seem simple can often be really complicated.
The IPO for Dropbox employees is a situation where this applies.
The ideas and strategies behind preparing for an IPO are easy enough to understand but hard to execute. You may be dealing with more money at one time than you ever have before.
That should impart on your the importance of being proactive and avoiding costly delays (or even more expensive mistakes).
Do your research and your due diligence — which may include starting a relationship with a fee-only financial planner who can work as your fiduciary throughout this process.
