Stripe faces $3.5B tax bill as employees' shares expire
bloomberg.com
bloomberg.com
The IRS mandates that stock option grants expire after 10 years. My best guess is these early employees are quickly approaching those grants' 10 year mark, and face an exercise or "lose it" situation.
If you exercise, you have to pay the gain. For early employees, this could/would be a massive bill -- probably well into the 7-8 digit range for some early hires.
Stripe seems to be teeing up a secondary sale of these stocks themselves -- where Stripe is offering to buy some of their shares back from those early employees, allowing the employees to exercise ('buy") all of those early options and (at least) pay their tax bill.
Usually, a company will limit the # of shares eligible for a secondary purchase so current/former employees can buy all the stock, sell enough to the company to cover that person's resulting tax bill, and keep the remaining stock until IPO. By limiting the # of shares they will allow to be purchased via the secondary, Stripe will almost certainly make sure the secondary does not create post-tax cash gains to make people wealthy!
It doesn't have to be that way:
Stripe could allow ANY investor to buy the shares directly from those employees -- but guessing Stripe has a blocking right on stock transfers-- so they have, and will continue to block early employee sales to new investors. Stripe and many companies have these transfer "veto right" to make sure they can control their ownership ("cap table") and also to make sure early employees don't get rich before the IPO.
This is my best guess-- I am not familiar with the Stripe's situation.
All of what you said is literally the content of the article.
Key concepts that were net-new from the article: * 10 year concept IRS restriction * Concept of a transfer Block essentially requiring a company sponsored secondary * Idea that Stripe could stay out of it, and just allow (partially) transfer waiver to 3rd party investor * The concept of most startups strong preference against creating liquid wealth events for early employees prior to IPO
Perhaps you knew all of this, but the other commenters didn't seem to have this knowledge top of mind.
But why? What's wrong with early people getting wealthy?
Why?
> They don’t want just any entity to be able to become a shareholder and by this virtue, acquire extra privileges and access.
They're early employees, why wouldn't they be rewarded? What makes a random person that just walked in with a wad of cash more deserving?
> They're early employees, why wouldn't they be rewarded? What makes a random person that just walked in with a wad of cash more deserving?
Not sure what you mean. The entire point is that people who run private companies often do not want random people/organizations to come in with a wad of cash and become shareholders, without people running the company having any say in it.
I don't think the issue is making employees wealthy or not: It's 10 year old RSUs, so most of them are owned by former employees. But consider the size: If the tax bill is 3.5B, the full size of the grants we are talking about here is over 10B! last valuations in the press are at something like 60b. So 1 in 6 shares in the secondary market? Might as well be an actual IPO.
Without 2022 going the way it did, I'd have expected that there would have been yet another regular round, where the investors ate enough common stock for current and former employees to vest the RSUs. That, or maybe the company really IPOs, which clears out all the comp problems. But Stripe finds it very valuable to keep the company closed, so instead of IPOing when everyone else does, they delayed too much.
So there's no real need for not wanting people to get rich here: It's just a very uncomfortable amount of stock to have to turn into liquidity either way.
EDIT: spelling
This is a slightly longer way of saying I'm not totally sure how what you're saying invalidates what valzam said: as far as the IRS is concerned, you did realize gains (you got something of value), just not on anything "liquid," hence AMT. Perhaps they (IRS) use different terms, but that's basically what's happening.
All of this to say, I think what you're saying is a much more precise way of saying what I was trying to get at. :)
>> If you hold actual stocks, there is no tax bill until you sell these to realize the gains
There are taxes to be paid as soon as you get the stock. If you are at google - have you noticed the number of RSUs which hit your schwab account are less than those which vested according to that chart in your schedule? That's taxes being withheld. The stock vesting is considered income at that moment and taxed as such.
(There is also a less important amount of tax due - by more ancient employees - which is about options.)
EDIT: That being said, I think it would be reasonable to contemplate regulations that prevent private companies from blocking secondary market sales if they offer stock options/RSUs to employees.
Let's hit the presses: tech startups hate engineers that think of edge cases
Either that, or IRS not consider the exercise as taxable until those conditions imposed by the company preventing secondary sale are lifted.
It's like taxing lottery tickets on potential win prize.
They are not unless you exchange them for legal _money_. Not stock.
>As long as you don't exchange them for the prize (the actual stock) you are not taxed.
Stock is not the prize - it's worth nothing alone, especially if you can't exchange it for mone. For some reason you don't tax unrealized gains on a stock you already owned, yet do the same for illiquid ones.
>When you do, you have to pay tax on the difference between how much the options cost and the value you get back.
And if you just taxed "at the end" when someone sells the stocks, you'd gain the same amount of money - difference between stock value and 0 - just in a different moment of time.
What I propose is logical and it's how it works in Poland.
(Disclaimer: not advice of any kind)
1) $1m in cash
2) $1m in stock
3) an option grant to buy 1m shares at $0.000001. Each share has a FMV of $1.
Without AMT, you could always take (3) and they would get $1m of stock for $1. Tax free.
The difference is that they wouldn't be taxed until the gains were realized not when they were imagined on paper.
That gap between strike price and FMV is much more like compensation than it is an investment.
It’s tempting to think that we should just tax cash income, but that introduces tax avoidance incentives like being paid in assets instead of cash, unless it’s paired with a corporate income tax.
If you can't sell them on a market (as the stocks are before IPO) they should not be taxed. At the very least, it's like that in Poland. Not that a lot of companies offer stock compensation here.
An employee is compensated with *contracts* to buy stock. Those contracts *themselves* are valued at the strike price, i.e. an employee is accounted to gain ${strike-price} worth of value.
At some point said employee decides to exercise said option contracts, i.e. convert contracts to stock. At the moment of conversion stocks are worth x and ${strike-price} previously paid to employee magically turns into x.
You can either think that employee gained `x - ${strike-price}`, or that employee was previously taxed on ${strike-price} and tax base was adjusted to x. In any case there is income equal to `x - ${strike-price}`.
How are those gains if you're explicitely forbidden to turn those gains into legal tender?
You'd get same tax when IPO hits - just without that earlier step.
It's just the it realizes it into an illiquid asset whos price is imaginary nonsense. The problem of imaginary prices is one of the reasons that we don't tax unrealized gains, but it can still arise when the gain is realized if its realized into something illiquid.
For ex: Stripe has marked itself down ~50% over the last year. Suppose you think the haircut should be more like the 70% comps like SQ and PYPL have taken, and build that into the X%. Then on top of that loss buffer, you prudently demand an illiquidity premium and a profit margin. That arithmetic doesn't leave much room for the employee to retain any stock.
I would think banks would do this again? But perhaps with a longer IPO window? Like the banks that would do this would also likely participate in the IPO anyways ...
Bankish Corp floats you the tax bill at some mutually beneficial interest rate, and in return gets a signed repayment guarantee for when you can actually cash out?
But I'm deeply ignorant of that world so may be making this much more complicated than it actually is.
If Stripe did this, wouldn’t they have avoided much of the tax issues here? It seems they’re only able to raise in this case because of their strong valuation and success. Like, most companies either could not do this, or would only do it for the founders.
Moreover, what about performance-based comp for employees instead of time-vested ISOs? For example, employee gets percentage X at different valuation targets where these is liquidity? The ISO basically prohibits employees from having shareholder voting power where they work. Perf-based comp could perhaps offer employees the same fraction of a percent of any windfall while simplifying the tax / equity risks, which are very outsized for employees who are not accredited investors.
I'm not sure what you mean with the performance-based comp to comment on that idea.
Performance-based comp could follow the public CEO comp model where the percentage of the package vests as a function of share price and/or milestones like liquidity events. Usually the milestones are also KPI-related, but ignore that for a moment. The packages could be RSUs and/or cash. This way the employees don't have to deal with the risk of options, and the company doesn't have to vest shares until they're actually worth something and taxes can be paid. Not sure how the package could survive after termination. It could end up being regulated the same way AMT was introduced but ... the reason ISOs exist is tradition, not because modern tax risks. Should be open for disruption / competition.
Could you explain this?
The downsides of ISOs are: - They cost money out of pocket to exercise. - They have to expire within 90 days of separation from the company. - They get complicated when you can't simply early exercise+83b them.
As I said earlier, I think RSUs are ultimately probably better after the exercise cost becomes non-negligble. But ISOs have their perks under the current tax code.
Ultimately, I think the IRS should scrap the ISO. Just let employers award stock with a cash basis at vest time and gains realized at the point of liquidity. It would be much simpler for everyone to deal with.
Edit: Also, RSUs are not eligible for 83(b) elections.
Often there's right of first refusal, but blocking rights? Do they actually have that? Is this common? If so, (why) would they need right of first refusal?
Note: I'm about to try this myself (though far less massive).
1. You exercise your options, for a paper gain of millions of dollars
2. However, you can't actually sell the shares (there are likely contractual restrictions on selling them, and even if not, there's not a liquid market)
3. So you have to pay millions of dollars of taxes even though your cash flow is zero.
And before you say "but they're ISOs", there's no such thing as ISO's under AMT so it doesn't help at all.
which is why this part should never have been taxed. Until there's a sale of those shares, the price is merely an estimate and thus is not and should not be considered the FMV.
PS: I feel for these employees. My question is: Did they have the same access to the secondary market as the founder?
if you did, you would not have access to make use of those "paper profits" for consumption - it would remain an investment. This makes taxing it egregious imho.
The problem unique to folks likely to be reading here is the exponential growth that can happen in early stage start ups. The options might’ve represented 100k in value when they were granted, but grown to 1m in value by the time they vested.
If you exercise you owe ~300k in taxes. Even if you have that cash the exercised shares could become worth 0 and you’ll just be out the money.
It's like if I handed you a coin that I promise is worth one million because I will buy it from you for one million right now, except I won't buy it from you now and I don't plan on buying it from you ever in the foreseeable future, and if I do buy it from you later it won't be for one million.
I agree with you the current rules kind of suck for employees at start ups increasing in value, but framing values as just made up is overly reductive.
Good thing that nobody is forcing you to take ownership of that worthless thing then.
So if those employee options transfer to outside buyers, they potentially hit the 2K limit really fast.
btw - Nearly this same set of circumstances forced the FB IPO. Dozens of early employees were allowed to sell their shares pre-IPO, triggering the max private shareholder rule.
Many angel investors will create pool their money to create an LLC to hold their shares so there's only one investor. It also makes it easier when you need to get "all the investors" to sign off on something. You have ONE signature to get instead of the N angels involved.
My problem with equity grants is that everyone treats them like they’re so valuable, when in fact the EV is usually close to zero. That wouldn’t be so bad if the upside was really good, but dealing with nonsense like this makes them even less attractive.
The whole point of working at a startup — of working very hard, instead of coasting — is to increase your standing in life. Some people care about skill set (you learn a lot more in a startup) but you end up a lot more stressed.
Stripe’s early employees are in the best possible scenario, short of winning the lottery: they joined a unicorn early. If they don’t come out of it with lots of after-tax cash, then that calls into question why to even work at one. Unless you really love hard work without proportional reward, logically you wouldn’t choose that path — pg said as much in many of his essays.
https://finbold.com/shopify-reportedly-buys-over-350-million...
I have heard that the average equity grant is ~40k of value. I suspect the median is in a very weird place towards the low end though, if that number is true to begin with.
Options are complicated and timing is crucial. They carry real and meaningful risk.
levels.fyi is pretty accurate. A staff engineer at Stripe gets around 260k base, 55k bonus and 360k in stock per year. I strongly doubt 40k is the average - $200k RSUs a year seems a lot more likely (unless they count commission-only sales people in the average, which would be weird).
I work at a FAANG, not coasting and make a lot of money and have made a lot of money every year for nearly a decade. I'll continue to make a lot of money and not worry about whether my startup will or won't succeed.
You’re right: if you’re going to work hard, you may as well choose the path with the highest rewards. If Stripe can’t make it worthwhile, is there a good reason to trade away what you’d get at FAANG?
So the hard workers have a lucrative path (FAANG), and the ones who want to spend more time away from work have a more lucrative path (BigCo). That doesn’t leave a lot of reasons to choose to be an early startup employee.
My RSUs are deposited into my account every six months and I can sell and diversify them.
I’m not one of those people who keep my RSUs after they vest. I diversify over six months. I wouldn’t buy 30% of my company’s stock with cash if I were getting paid in cash , why would I keep my RSUs instead of diversify?
Of course that doesn’t mean I think the company I work for is going to disappear anytime soon.
And it's good to remember, that while RSUs are nice for the reasons you state, companies that give them out tend to pay a lower cash salary because of that, and if those stock prices go down, so does your TC, and it could be quite a big drop.
I’ll know myself in a couple of months.
I’m in my 3rd year and my first full year of base + RSUs instead of base + 2 years prorated signing bonus + back heavy vesting schedule.
(Yeah I know, how do I say where I work without saying where I work)
Also, since our division is mostly remote (even pre-Covid) and most of us are established in our career, we have much more optionality, a larger network, and hopefully a larger nest egg.
Anywhere else in the world that has those kinds of options? China maybe?
And when you factor in the municipal bus network, a $40k salary at Klarna in Stockholm is basically the same as a $350k salary at Stripe in the US.
Not to mention in the USA, god knows what cookies might be put into your browser by any random cooking blog, without warning.
If you’re going to use that sort of reasoning, then you don’t get free anything other than air.
Yes, it’s paid for by taxes (or through insurance depending on country; yes we have cheap private insurance here). Thank you for bringing that to our attention, our feeble European brains were unable to deduce that on our own.
On the other hand, the insurance costs ~15% of income with a cap, so it has an element of solidarity to it - if you earn less, you pay less, and children and non-working spouse get covered without extra cost.
There's also Medicaid if you're poor of course.
Your public health insurance rate in Germany is based on your annual income up to €59,850 (i.e. you pay the same whether you make €59,850 per year or €200,000 per year). At the maximum rate, you usually pay €807.99 per month for health insurance (including the average extra fee of 1.6%, which varies slightly by insurer) if you're a salaried employee.
In addition to the public health insurance you also pay for public nursing care insurance, the rate of which depends on whether you have children or not and are older than 23. Assuming both of you are self-employed, have no children, are older than 23 and have not opted out of public sick pay (which for employed people giving birth includes a combined 14 weeks of pre and post-natal leave known as "maternity protection", or a combined 18 weeks for early births or twins) and assuming the same average of 1.6% for the extra fee, you indeed pay €977.50 or just above $1000 per month each.
For the record, if you're self-employed, the absolute minimum you have to pay for public health insurance is €158.43 (without sick pay) plus public nursing care insurance plus the variable extra fee. This basically assumes your income is at least €1131.67 in any given month even if you make less than that: you can't pay less than that as long as you're self-employed unless you switch to a private insurer instead.
Another issue for self-employed people is that because your insurance rate is paid by you in full (unlike salaried employees where 50% of it is paid by your employer and your rate is adjusted automatically if your salary changes in either direction) your rate is much less dynamic and will often have to be adjusted retroactively. Public health insurers are legally only allowed to adjust your insurance rate based on your tax returns which means even if you magically manage to file your taxes in January of the following year and the tax agency immediately processes it, you may end up having to backpay (or be refunded) the difference for an entire year if your rate changes. If you are self-employed and not incorporated, you can file quarterly tax advances and the insurers are allowed to use these to temporarily adjust your rate until the final tax return is available but once you incorporate you're stuck in the worst of both worlds.
As this hopefully illustrates, there are many problems with how the public health insurance system works, especially for self-employed people and founders (and especially people who can get pregnant as it's not common knowledge that "sick pay" includes "maternity protection" and self-employed people often opt out of sick pay because it's an easy way to cut costs), but pretending our public health insurance is "not cheap" is a bit dishonest.
To reiterate for emphasis: if you pay a combined 2000 USD together per month that means the two of you each make at least 60k USD per year and you will not pay a single cent more for health insurance no matter how much more money you make. Arguably this ceiling is the main problem and if it were abolished, the rates could be considerably lowered for everyone else. The insurance rate is very painful if you're self-employed and make less than 60k EUR per year. It becomes increasingly less painful the more you make beyond that and that doesn't seem very fair.
My point is that the German system is not a magical system of free healthcare. Rather, it's financially backed by charging a considerable chunk of earnings.
As a side note, the idea that the employer pays 50% of the contribution is a political slight of hand - an employee's labor covers 100% of the health insurance payment.
There IS No healthcare in this dump of a country. I am looking at flying to Barcelona to have her seen, and moving out of this dysfunction as soon as possible while I'm at it.
In Europe you don't go bankrupt on healthcare because you just die.
Yeah, yeah, anecdata, but right now I'm liking the "I get an appointment quickly and pay lots of money but that's OK because I earn lots of money" model more and more.
True, but there's no stress due to possible crazy variations in prices, "in network" - "out of network" garbage, etc. When people talk about "free healthcare", what they're really saying is: "out of pocket healthcare expenses are very small and always capped at a decent level, and I have access to healthcare even without a job".
> At least there is a chance in the US to make generational wealth for a middle class, but no way in hell in Europe.
https://www.oecd.org/economy/growth/49849281.pdf
TL;DR: The US has worse social mobility that many equivalent Western European countries.
What the US does is amazing marketing for their big outliers (and amazing marketing for everything, even piles of rocks in a desert, for that matter). I.e. 1 person in 100 million becomes a billionaire and suddenly you'd think 1 in 10 000 people did it :-)
Also:
https://en.wikipedia.org/wiki/Global_Social_Mobility_Index
The US is in 27th spot, after 21 (!) European countries.
But the quintiles aren't the same.
A good example is Canada vs the US vs the UK.
The top US income quintile is 153,000 USD.
Canada is 131,000 CAD (98,000 USD).
The UK is 87,000 GBP (105,000 USD).
So you could have less social mobility in the US (going from 1st to 4th quintile) than Canada (1st to 5th), but end up better off financially.
But the WEF reference for the grandparent uses a "social mobility index" which includes such factors as: "Adolescent birth rate per 1,000 women", "Pupils per teacher in pre-primary education (%)", "Extent of staff training (1–7 best)", "Internet users (%)", "Meritocracy at work (1–7 best)", so it's clearly quite subjective when it comes to "social mobility".
Sorry, I'm European but this is just silly.
There's no way $40k in Sweden buys you equivalent quality of life as $350k in the US, even when taking all the welfare state factors into account.
¯\_(ツ)_/¯
Sweden for the most part sucks these days but part of that is the idea that you can lounge through some average free education and then get $350k while leaving early on Fridays.
Yes, some Americans are born wealthy and some have a lot of privilege. Everyone else, at least that I've known, works at it. Often for 15 years. Then they might get $350k, or laid off.
The impact of unions is far-reaching and can be seen in everything from the salaries of grocery chain CEOs to startup stock option allocation for early employees.
Here in the UK, it's not uncommon to come across articles in major publications about a CEO's pay being multiple times higher than the average employee and you look at the number its peanuts compared to the US.
Like some people like working hard so they can up front all their work and retire earlier.
And others like coasting so they can live their 20s before it’s gone.
Different strokes.
Always include the odds in these calculations :-)
Startups are not a reliable path to riches, anymore than the casino is.
Additionally, at the time they joined FAANG those companies weren't as big and they might prefer that environment (I know I do, at least).
This isn't tech related but I have a friend that buys failing retail businesses and fixes them. She could just chill and make a lot of money but that's just not her thing.
Not all roles in these big companies are viewed as equal when it comes to how leadership views the value your team/department/org plays within the companies bigger picture. Be business smart, not just engineering smart and layoffs likely don’t come your way.
Further this with being non-financially illiterate, save money, don’t live beyond your means, treat your stock RSUs as bonus income and life will start to look a lot different.
It sounds mistaken, but exponential curves are hard to reason about.
50 x $15m + 100 x $5m = 1.25B post-tax, so probably north of $1.7B pre tax. Stripe had a post-money valuation of $10B+ in March 2021, so that’s around 15% of the company. I guess that’s in the right ballpark.
Hmm. Thank you for the concrete numbers. That’s a nice payoff for four years of work, even if you do have to wait ten years for it.
Happy to hear the startup reward structure still makes sense in 2023. In that case, it might be a good idea to join one that seems promising. The payoff is rare, but it’s a lot less rare than the lottery: there have been n YC startups, so the odds are around 10 in n. And I think n is something like 2k to 5k. (Edit: yeah, 4k according to Wikipedia.)
1 in 400 chance of $5m is still pretty low odds, though. But you do learn a lot, and you meet a lot of people that have a higher than average chance of being a future founder, so the benefits still seem to make sense. Interesting.
At least for people who joined a successful one ten years ago.
After Series A most should be paying competitive salaries.
Are you saying the cash component of post series A offer should be competitive with $200k, $230k, $305k, or $330k?
Of course it's not a fair comparison because google stock is liquid
The question is whether it is a no brainer to work for such a company because you get a competitive offer plus lottery tickets.
My sense is that this isn’t true. The claim of competitiveness is setting to zero the value of liquid google RSUs. But I’m open to being corrected.
In every case, the stock that the employees holds gets reclassified and diluted until it’s a funky employee-only stock that’s only saleable back to the company at nominal value, but the company isn’t buying.
So sure, maybe there’s some kind of nominal value, but actual cash money? $0.
I hold 10% of a business valued at £150M. My holding is worth £0 because I can never sell it to anyone.
Especially for pre-IPO companies that are beholden to fewer financial regulations.
Either you have power, or you have a promise.
... And promises depend on how much you trust your counterparty.
Also why pay $3.5bn of tax on $0 of value? Given how sharp tech is about tax minimization you would think they would have better tax people.
Adam Neumann even managed an extraordinary scam of being currently worth 2x the company that made him all his money ...
When joining any early startup, you really want to be able to do an early exercise of your options immediately when you join. If this is not possible for whatever reason, I consider it too risky to join.
When joining a startup one already knows it can fail the traditional way (bankrupcy), so that's the risk we take. But getting stuck in the position of having hit it big on paper but you can never leave the company because there is no liquidity, or having them expire.. just too painful.
If you are joining a company and taking less than 1% of equity in the company the best way to think about the equity is "This may end up being a yearly bonus of 50-150k, but probably will be worth nothing"
I will say that I think these conversations tend to be a little distorted because people who have had positive experiences feel awkward about saying “i made $xxMM from employee stock” but people who haven’t seem comfortable saying “stock based compensation was worthless”.
Also tbh a lot of people are just really bad at judging companies and wind up working at startups that are obviously going to fail. You really do have to make an honest assessment of if you are good at picking winners.
Yes, if you where one of the first 50 employees at Google you probably made low $xxMM, but it’s a long wait until IPO and the overwhelming majority of people at Google didn’t get anything close to that much. Worse the overwhelming majority of companies aren’t Google style success stories.
Also, don’t forget nobody at Stripe has gotten to cash out yet. Your looking for very early employees, at wildly successful startups, who started 10+ years ago, and are still poking around online forms, and willing to talk about it.
Grants that size don’t represent a typical employee either. It’s closer to a 2-30% annual bonus that happened to appreciate rather than some life changing payday.
That said, the double digit examples were 12M “software engineer 2” and 10M “first 10 employees”.
It's luck, not good judgement. No-one knows how to accurately assess whether an early-stage startup is going to succeed or fail.
If it was possible, accelerators would have better-than-background rates of success. Even YC, who get their pick of pretty much every startup, has barely better than background rates of success.
If it was possible, VC's would have better than background rates of success. They don't. They rely on the successes being much bigger than the failures because the failures are limited by bankruptcy while the successes have no limits.
I think blaming people for being bad at judging early stage startup success likelihood is poor form when no-one else in the entire industry has any idea how to do this.
I think luck is a big part of it absolutely, I just don't think it's the only piece. But I also know that IME some engineers looking at new roles think about likelihood of company success way less than they should relative to "do I like the technology/culture/whatever" and so it is not surprising if they don't end up at successful companies.
If you hate it there, you'll probably leave and never vest your equity. Even if you hang on and suffer through it to get your equity, it'll damage you in ways that money won't help with.
If you hate it, chances are that everyone else does too, which means the good people will leave and the startup is less likely to succeed even if everything else is good.
Most engineers enjoy interesting challenges, and this can be a big factor in choosing a role. If the startup is providing interesting challenges then it's doing interesting/difficult stuff. This is a factor in success - startups that aren't doing interesting/difficult stuff are easier to copy and have less barriers to entry for competitors.
Even if you don't get lucky and win the equity lottery, you had a good job and probably learned some interesting things.
Regardless, being able to identify "company success" is something that's always been taught as luck/lottery so I'd love to improve my ability here.
I'd say the mid-growth time (series B and nearby but of course depends on the company) is a particularly bad time to join a startup. It is too late to get favorable stock options but too early to tell if it's going to be a home run. So for individual contributors it's pretty much all blind risk with low probability of reward.
Good times to join a startup are very early when the valuation is a couple pennies or less so you can get meaningful percentage of stock and you can early exercise all of it for little money and file 83b.
Or join late in the game startups that are big hits and clearly going to the IPO. Way less stock, but risk of failure is now small.
Why is this relevant.
Wouldnt they still be ahead?
on paper, yes, you'd be ahead, but owning stock doesn't equate to cash, you'd have to liquidate by selling... in the interim, you'd still owe the tax bill, even though you haven't sold yet, and for some without the means to pay that bill, it can be a problem.
Essentially the company is going to intermediate that sale by selling shares to external investors and buying shares from you.
Together they have a 3.5 billion tax bill, but don't have the cash to pay it and cant sell the stock.
It is like if I gave you a magic bean worth 1 billion this year, but the only magic bean buyer will come to town next year (hopefully). how will you pay your taxes.
I get why a buyback makes more sense here.
What I don't understand is why they didn't just let the current options expire and issue new ones with a fresh 10 year expiry, an IPO vesting trigger, and no employment contingency.
Former stripe employee here. This is not the case - early employees have been able to cash out on favorable (or at least reasonable) terms. Some limits, not perfect, etc, but I don't think that part of the narrative applies in this case.
The founders are rich though, right? What a douche move.
1. Stripe has to pay $3.5B in taxes. This is unrelated to employee stock.
2. Lots of long term employees have expiring options, and if they exercised them they would face a massive tax bill.
To solve both 1 & 2 Strips is doing an additional raise of $2.3B from private investors which will (1) give them money to pay that tax this quarter and (2) let employees exercise their options and sell shares to the same investors ($600M worth) – so basically a buyback event.
They = the employees, right? But they also have massive gains, which they then could use to pay these taxes. What’s the problem, except that tax payments aren’t deferred into the future?
> 1. Stripe has to pay $3.5B in taxes. This is unrelated to employee stock.
According to the company that $3.5b withholding tax ($2.3b this quarter, $500m in Q2-Q4, $700m next year) is very much related to RSUs.
Stripe Is Raising $6B to Resolve Employee Tax Issue - https://news.ycombinator.com/item?id=35074633 - March 2023 (23 comments)
Edit: there's also https://www.reuters.com/article/us-stripe-funding-breakingvi... - thanks dvt (https://news.ycombinator.com/item?id=35075013).
Covering tax liabilities apparently is not part of "normal business operations" at Stripe.
GAAP is a set of accounting standards - it doesn't require taking actions, it's about how to record things if you want to meet those standards. So no, there is no GAAP requirement to build a cash reserve. For what it's worth, Stripe isn't even obliged to follow GAAP for their accounting (it is likely they signed a contract somewhere which calls for a set of financials meeting GAAP to be furnished periodically, but again GAAP doesn't require actions, it stipulates accounting entries).
Does anyone else feel these numbers aren't as high as expected? Sure $14B in annual revenue (and margins of ~$3b on that revenue) is nothing to scoff at. But $14B isn't even close to Amazon/Azure cloud big or even Amazon Ads big.
Perhaps Stripe's valuation assumes a steep uptick in this revenue in the years to come?
Granted, PayPal has a higher take rate than both Adyen and Stripe. But also much lower growth.
For example; stripe charges 1.5%+20p for UK cards. Revolut charges 1%+20p for online transactions, 0.8%+2p for in person. I'm sure other providers charge even less than this but they don't make the pricing public easily.
Ayden is perceived to be a lot cheaper than stripe too, so I am surprised they are only getting 20bps more.
What am I missing here? Are margins a lot tighter in the US market, and stripe is extremely US focussed (one possibility?), or are Stripe giving really heavy discounts for volume which really drags down their marigns?
This would be the meeting where the likes of Revolut, Transferwise, PayPal, Monzo etc. meet with the high-street bankers and with the eCommerce industry and agree to cutout the middle man and rollout a modern online payment system for the 21st century, cheap and architected to resist fraud. Many European countries already have local systems.
Luckily for Stripe, MC, Visa etc. those three groups hate each other, but the probably of this meeting happening in the long run tends towards certainty.
If the stocks are founder stock or RSU, then the employee should have done an 83b election to avoid paying tax as they vest.
If they are options, then the employee is under no obligation to exercise them, and owes no tax until they are exercised.
What am I missing?
And since these are the company’s early employees, I imagine that Stripe is doing this to try and ensure they retain them.
Later employees typically get options, which don't have the tax issue.
So I'm still unclear where the tax bill is coming from.
Those secondary markets have dried up in the general macroeconomic environment, so now this practice is leaving people with their pants down, complete illiquidity.
So again, I don't see why Stripe has a tax bill now.
Some of the RSU have upcoming expiration dates as required by IRS rule. To avoid those expiration dates Stripe wants to do something. That something probably involves a big tax withholding for Stripe that must be paid in cash.
Stripe doesn’t intend to go public soon so is seeking an alternate way to come up with that cash.
Options are for small companies, and 83b elections when the exercise price can be paid by the employee upfront. RSU are for unicorns. Once the company is public and there is liquidity you can do whatever. Except backdating stock options...
In a company where the fair market value share price is $1/share, if you get granted 100 options, you owe tax on $0 because options are not taxable.
If you get granted 100 RSUs which are all fully vested, you owe tax on $100 because stocks are taxable. If the RSUs are 0% vested you don't owe any tax yet.
Then, if the share price goes up to $2 a share, you still owe $0 tax on your options, but if you have RSUs and 50 of them now vest, you immediately owe tax on $100 (50 x $2) - unless you did an 83b election and paid taxes on the 100 shares at $1 a share at the time you got the grant.
If you exercise the options, now you owe tax on $200 (100 x $2), whether or not you can sell the stock.
So again, I don't understand why Stripe would have a tax bill under any of these scenarios.
The employees would have a tax bill connected with vesting of RSUs if they had not done an 83b election, but no one else would have any tax due until they (exercise in the case of options) and then sell the stock.
So if Stripe wants to let employees sell stock, they only have to exercise options equal to the number of shares they will sell, then they can use the proceeds to pay the tax.
I still don't understand why there is a tax bill for Stripe.
ISOs (not totally sure about NSOs) have a 10 year expiration from grant date[0].
Does someone has some rationale/speculation on why Stripe issued RSUs instead options?
With RSUs while the value has gone down, they are at least worth something, if you could sell them.
Also, Stripe was in hiring competition with companies who used RSU compensation as a major component of total comp. This allowed them to more easily do an apples to apples comparison.
Whether those employees may or may not have been able to ameliorate this by making an 83b election is moot at this point. They clearly didn't, so now something has to happen if the company wants to keep them around.
Edit: after reading the archive link, it seems that the former case is the most likely.
But as the stock vests, isnt that treated as income and taxed anyway? And then taxed again if I sell (as capital gains)?
If so then it comes down to a gamble of whether the stock is going to go up by the time the stock vests and whether you happen to have the spare cash around to pay a tax bill.
Am i reading that right?
The other thing to consider is your vesting timeline. As you vest, you'll owe additional taxes, which means a sizable tax bill before there's been a liquidity event. If you are rich enough to afford that then hey, go for it. But not everyone is in a position to be able to do that.
You need an 83b if you think the stock will vest before you can sell it. Imagine having $10M of stock vest, no option to sell it, and no way to pay the tax on it.
It is a weird artifact of the way vesting triggers taxation of unrealized gains and it fucks people all the time.
Change my view.
Stripe was already worth $9B in 2016. If you joined then, it could have been prohibitively expensive to do an 83b election. The whole point of RSUs is that you don't owe anything until there is a liquidity event, unlike options which you may be required to exercise or lose while the company is still private.
However, RSUs only get this favorable treated (i.e. you've been given something of value, but can defer paying taxes on it) because they technically expire worthless if the company does not have a liquidity event in time. Thus far no successful tech company (that I know of) has screwed over its employees by casually choosing not to have a liquidity event and letting years worth of RSUs grants all expire worthless.
Stripe is trying to arrange liquidity for its employees who were granted RSUs in e.g. 2016, and that expire in 2023. Those employees have not had to pay taxes as the RSUs vested, but will have a large tax bill if those RSUs do anything other than expire worthless...
That prevent the tax on exercising non liquid shares.
Similarly, why not just offer to buy the stock back at current valuation and leave it up to the employees to settled any taxes
If you give new RSU grants, what time period do they vest over? What happens to current employees who leave before then, if they are required to re-earn-out their comp? What can you do at all about former employees? Will the IRS still accept that this deferred compensation is subject to "substantial risk of forfeiture" and thus the taxes on it can be deferred (see U.S. Code 409A)?
Stripe is trying to do option b), buy back stock at current valuation. To do so, they need to raise a couple billion dollars. That money will go to the employees (in exchange for some stock) so that the employees can settle up their taxes, though the IRS will "cut out the middleman" so to speak, and requires Stripe to simple withhold the proceeds and remit to the IRS on the employees' behalf.
The $3.5B tax bill is not "corporate tax" owed by Stripe, but employee income tax that will be owed by employees if there is a liquidity event, and which Stripe will be, in practice, required to withhold on their behalf if Stripe arrange that liquidity for them.
Maybe I don't understand something in the tax law, which is entirely possible.
Whether this is a good deal for the employees remains to be seen and depends on the spread between the current buyback value and the eventual IPO price.
I don't have a full understanding of exactly what language in which laws/documents govern this, but my general understanding is that the IRS would definitely not be happy about that, as it undermines the whole point of the double-trigger RSU.
But the company and employees would definitely be in trouble with the IRS if they were granted new replacement rsu's with term limits that aren't contingent on employment.
https://www.kinetixfp.com/post/should-you-make-an-83b-electi...
It depends on if you want to rank Foursquare as "successful", but they recently did that, and it was big news in the don't-let-RSUs-expire community.
https://www.theinformation.com/articles/the-private-tech-com...
Uber and Foursquare are often used as examples on what not to do regarding equity and IPOs
>Stripe was already worth $9B in 2016. If you joined then, it could have been prohibitively expensive to do an 83b election.
I don't think anyone that joined on 2016 or after got more than 0.0000001% of equity or whatever, so it wouldn't have been a massive bill. Also, that's the point of 38b anyway. Tax now or later, but tax.
The 83b election is a provision in the Internal Revenue Code that allows employees who receive equity-based compensation (such as restricted stock) to elect to be taxed on the value of the stock at the time it is granted rather than at the time it vests. This can be beneficial for employees who believe that the value of the stock will increase over time, as they will pay taxes on the lower grant price rather than the higher vesting price.
However, RSUs are different from restricted stock in that they do not represent actual ownership in the company until they are vested and settled in shares. Therefore, they cannot be subject to an 83(b) election. Instead, RSUs are generally taxed as ordinary income at the time of vesting, based on the fair market value of the underlying shares on that date.
Early startup employees are typically granted stock options. Stock options can be exercised, and the spread is taxed. Very early stage employees typically opt to do a 83b and early exercise. In this case the tax is due right then, but because the strike price is low and spread is nominally 0, the overall cost is low as well.
If you join later when your strike price is already high, it’s not financially viable for most to early exercise.
The reason employees of early stage companies don’t take 83b elections for RSUs or exercise their options early is because that dramatically ups the risk: they have to front the money for exercise (strike price * number of options) or pay the tax bill on the RSUs as income.
If the company then goes belly up, the IRS doesn’t give the money back, so the employee is out of a job and also that money.
It makes sense to buy in like that if and only if the person is otherwise rich and diversified enough that choosing to make the equivalent of a speculative seed investment (and usually dead lost in terms of liquidation preference) would be reasonable for their overall portfolio. That financial situation is not a common one among early startup employees.
Where is "here"?
The headline "Stripe faces $3.5B tax bill as employees' shares expire" is about RSUs. The subheadline "Firm also expects to use $600 million to exercise some options" is about options.
In a pragmatic world, they'd just let them expire.
You're essentially suggesting discounting stock options: https://www.jdsupra.com/legalnews/section-409a-implications-...
Which, if that is the case, really is just a re-distribution of money. Nothing is gained, nor lost.
But the article wants it to look like stripe is about to take a $3.5B tax loss...
Hindsight is ofc 20/20, those contracts have long since been set in stone, but I can't help but think Stripe (and maybe other future companies) could have saved themselves a $6bn headache by not having the expiry in the first place.
Given that you use double trigger RSU to avoid getting taxed at grant, all double trigger RSU will have an expiration.
It can't be Stripe, they already know this. It can't be investors, this information is already priced in.
For instance: this is a big topic for folks that wants to join late stage scale-ups because since they are issuing RSUs instead options to be attractive for future employees it comes with a very risky dynamic that is the company let those RSUs expire, or worse: folks overhang in some financial obligations in some not liquid instrument.
What is the reason they give options instead of options? They want to reduce the amount of stock people own that no longer work at the company over time?
Best are options with early exercise, but they're still not perfect (you have a possibly significant upfront cost to exercise them).
Really they should just change the AMT rules.
I would always prefer the cash and be done with it.
But it isn't a lottery. If a startup _chooses_ not to go public then it I cannot realize any compensation from that valuation - given the founders always seem to be able to, why isn't that option available to the rank-and-file employees? Similarly there have been multiple start ups that sold the controlling class of stock off and rendered all other stock worthless.
A startup equity based compensation is only a lottery if the startup allows every employee who is being compensated with "equity" the opportunity to sell their "equity" back to the company at the current market valuation, or as part of the equity exchange in a funding round. Otherwise the value of the equity is determined by the company - what we're seeing here is that Stripe has realized that their scam compensation is running the risk of now actively harming their employees rather than just ripping them off. Stripe doesn't need to do any tax funding BS to "help" its employees: it just has to buy back the RSUs that are scheduled to expire at their apparent face value. The tax problem that employees are being faced with is entirely a result of stripe refusing to actually pay employees what they have earned.
Having worked for a company that (indefinitely) delayed its IPO, I can say that they may be doing the right thing today. But also there were plenty of observers who pointed out contemporaneously that there was no need for them to keep putting off the IPO. Sarbanes didn't put a $200B valuation floor on IPO registrants.
I've never taken a company public, so I don't know their rationale for holding out. I do know that had they gone public as early as 2017, they still would have been roughly big enough to be listed in the S&P 500 (so not "small" by any definition that didn't explicitly reference Microsoft or Apple).
Either way, their delay in filing likely deprived their early employees of some of the financial fruits of their joint labor.
Disclaimer: I don't have direct knowledge of any Stripe compensation plans. However, it is frequently noted (and this article touches on) the notion that Stripe comp plans are equity-heavy, in line with other big tech companies. That equity does not (to my knowledge) pay a dividend. Equity-heavy comp without a market for that equity and no dividend, in the context of a market where comp plans are equity-heavy with liquidity, is perhaps not a direct misrepresentation.
But it is misleading, and I would bet that if they truly planned on staying private indefinitely (which: great!), they would have a mutiny on their hands if they didn't start paying a dividend or providing a market for the equity.
Otherwise, folks have just been working for below-market rates to make the executive team rich. Which reads worse for the management team; I prefer the other interpretation that the leadership just erred in not going public (or selling) sooner.
In spite of all that, they are still doing the right thing by employees. Spinning this to suggest the founders were/are doing anything wrong by anyone is nonsensical.
What a mess where you need to pay a fortune to exercise options in a risky startup where any liquidity event is open to manipulation and you are operating with imperfect knowledge.
I certainly wouldn't say plenty. I'd say a lucky few at best.
10 years is a strained definition of overnight
At the time, Stripe said they can wait, no time to rush for an IPO. Now they know they need to IPO before their employee options expire and the down-rounds coming in.
My guess is founder/early employee stock has already exited as much as possible and notional value still on the books will be mostly wiped out
Stripe is a super paranoid company that knows it's valuation is tied to it's hype and they spend absurd $ on legal and "business intelligence" because the truth is they are really just a nicely documented API that any regulated entity can provide.
If/when they stop subsidizing their growth with investor $, Stripe common stock = 0
To generate this income, they are losing money.
10M USD / month in income for a valuation of 95B USD sounds really insane (even at 50B USD valuation).
This could be the real reason why the employees are not so excited to purchase the shares even at a supposedly deep-discount @ 10B USD.
Two weeks ago, Bloomberg said they process $1T in payment volume and expect to turn a profit this year. https://www.bloomberg.com/news/articles/2023-02-16/stripe-is...
From that, about 1.3% + 5c per tx go to interchange + assessment fees.
This leaves about 1.6% + 25c for the payment processor.
14.3 on 816b is about 1.7% which is consistent.
On 1T, that means about 17b in revenue.
Lets assume they have 7000 employees (i've seen 6000-8000 in searches). As rough estimates, these SFO-based SWEs + knowledge workers cost 1m/yr on average (which includes their total comp, insurance, federal + state taxes, and operating overheads amortized over all employees). So their cost of labor may be around 7-8b/year.
They may have other acquisition and marketing costs, but it means the co can feasibly be earning >8b before taxes, depreciation, amortization, etc.
That number could justify a 80b valuation.
If their current round cap is 55b, then my #s on costs are off, or the multiple has dropped to 6-7. Please debug.
Their revenue is probably more on the order of 5-10b - the vast majority of payments volume is from large customers which negotiate much better rates that 2.9%.
I know they're just barely not profitable, so rev of ~8b, and total OpEx (salaries + AWS + cost of sales, etc) being approximately 8b sounds right to me.
At 8b profit, with normal tech multiples, they would be closer to a 200b company!
> Fiserv is also the owner of First Data, which connects 2 million ATMs through the STAR network.
The plot is thickening...
This is wildly off, even for programmers. (Most knowledge workers are not programmers.) You're also conflating cash expenses with the equity-heavy compensation that makes tech employees expensive.
> Stripe charges 2.9% + 30c per transaction.
This is the baseline product. The resulting analysis is like analyzing Microsoft solely on the basis of Windows volumes and margins. (A great business, but not nearly as good as the real Microsoft!)
I would be surprised if the rest of their product suite (Invoicing, Billing, Radar, Identity, Tax, Capital, etc.) isn't generating a meaningful portion of their revenue (and a larger portion of their profit).
> multiple has dropped
Without high-level visibility into the relative revenue/profit contributions of their various products and their individual growth rates, it's hard to even guess at which numbers are driving investment multiples. Is this business more like Twilio, still trying to break from from the tyranny of COGS, or is it starting to look more like a pure SaaS a la Salesforce?