Tech start-ups face dilemma over expiring staff share awards

Tech start-ups that have delayed plans to go public during an industry downturn are facing a new dilemma: how to deal with restive employees whose share awards are set to expire without a blockbuster initial public offering on the horizon.

Over recent years, some of Silicon Valley’s leading private companies, including grocery delivery app Instacart and autonomous ride-sharing group Cruise, attracted staff by offering “restricted stock units” that are triggered when a company has a liquidity event, typically going public.

In the case of payments group Stripe, RSUs worth millions of dollars will start expiring from 2024 and risk being forfeited unless the company buys them out, changes the terms of the awards or launches an IPO.

Employees face a personal tax liability when RSUs vest. But staff are unable to sell any of these shares without the company launching a flotation. To get around the problem, Stripe wants to withhold a portion of the stock equivalent to the tax liability from employees’ awards. Separately, it plans to sell stock to investors, using the money raised to pay the employees’ tax bills and buy up any stock they wish to sell.

Stripe’s situation is typical of prominent late-stage private tech groups that benefited from a decade-long bull run to attract staff and investment but now instead face a funding crunch.

“There is pent-up pressure among employees who had been promised an IPO in 2021 or ’22, but are now saying ‘RSUs don’t pay my mortgage or my kids’ college fund’,” said Cisco Palao-Ricketts, partner at law firm Goodwin Procter.

RSUs have been part of employees’ total remuneration at Stripe since 2017, at Cruise since 2018 and at Instacart since 2019, according to company statements, job adverts from the time and others with knowledge of the situation.

But the awards carry risks. “Once you go for RSUs the fuse is lit,” said Kelly Rodriques, chief executive of private securities marketplace Forge Global. “They have liquidity and tax implications.”

Cruise said it was “not going to make any predictions on what may or may not happen in the future”. Stripe and Instacart declined to comment.

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According to a survey of mid- to late-stage private tech companies, about 15 per cent offered RSUs to staff in 2021 and 2022, according to remuneration data tracker Thelander Consulting.

These companies and others must act to prevent RSUs expiring, which typically happens after seven years.

To resolve its dilemma, Stripe is tapping existing investors, including Josh Kushner’s venture fund Thrive Capital, for more than $2bn, according to people briefed on the fundraising effort.

“Stripe has the luxury to go to Thrive, a previous investor, because they have a strong business,” said Robert Le, an analyst at PitchBook. “Not a lot of start-ups have that luxury.”

The move is the latest problem for one of Silicon Valley’s most prominent fintech start-ups. The company was valued at $95bn at its last public valuation in 2021, but cut its internal valuation to just over $60bn in January, according to people with knowledge of the process.

Stripe intends to raise enough to cover the tax bill associated with the RSUs handed out to many of its 8,000 employees since 2017, and will hold back some of the value of employees’ shares as compensation, according to a person familiar with the matter.

Companies with RSUs due to vest have “realised they have to help the employees out,” said Glen Kernick, Silicon Valley leader at valuations provider Kroll. “When they [RSUs] vest, that’s a taxable event. As an employee, you now own the shares and owe tax but you don’t have the ability to pay your tax bill by selling shares. That’s obviously viewed as a hardship.”    

Facebook was among the first private companies to issue RSUs ahead of its 2012 IPO. As money poured into tech start-ups and the war for talent grew fiercer in the following years, RSUs were increasingly used to tie employees to companies that had a clear runway on to public markets.

“We try to guide only late-stage companies to do RSUs,” said Goodwin Procter’s Palao-Ricketts. “For companies that adopted RSUs too early or haven’t been successful enough to have that liquidity event yet, this is something that is coming down the pipeline in two or three years.”

More desperate companies could choose to accept “punitive terms” — ceding more control or larger stakes to investors — when raising new funds, or pass the problem on to their employees, said PitchBook’s Le.

According to Palao-Ricketts, RSUs are a perilous bargain for employees: taxes do not need to be paid until there is a liquidity event, but if there is not one then stock can be forfeit.

“We as tax practitioners have known this is out there as a problem,” he added. “Everyone could have predicted the market we would be in now: you can’t have 10 years of uninterrupted growth and not expect a downturn.”

This story has been amended to remove a company reference from a quote.