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.
Could anyone translate this into “The early employees will get wealthy from this” or “they’ll get slightly more than they would’ve gotten from getting a job at BigCo over 4 years”?
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.
> 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.
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.
Based on internal data I have from similar companies my guess would be the first 50 employees average about $15-20m each and the next 100 average about $5-10m each just from their initial 4 year grants, with a lot of variation based on team and seniority. Stripe options have probably grown about 100x in value since the Series B so if you were an engineer who joined around that time, received $100k in RSUs, and left upon fully vesting then you'd be looking at around $10m in value today.
Stripe employee #130 made $5m (after taxes) from 4 years of options? Is there any data to support that?
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.
Also worth noting that in today's market a company like Stripe isn't paying significantly below market rates, so there's not huge downside in that regard.
Just so I understand correctly, levels.fyi is saying that a Google L5 offer in a HCOL city is around $200k/$100k/$30k right now. If we are very conservative and value the RSUs at 75% that’s still $305k total.
Are you saying the cash component of post series A offer should be competitive with $200k, $230k, $305k, or $330k?
I don't know why you didn't just look it up, you were right there. Stripe pays about the same as google if you just consider base+bonus, much more if you consider stock.
Of course it's not a fair comparison because google stock is liquid
Based on personal experience and friends who have been at unicorns in their early days - the first 50 employees average about $0. The next 100 average about $0.
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.
Anyone reading this comment, know that this is the other end of the extreme to saying everyone does well. The truth is far more in the middle with many shades of grey.
Without data it is all just anecdotes. I don't know where the definitive data is to say it is white or black, or reasonable characterized as gray rather than a shade of one of the two extremes. IPO data is public of course, but not the pre-IPO contortions affecting the set up for that moment.
Doesn't that mean these the decision makers also don't have liquidity? If so, wouldn't the lack of liquidity not be for them still believing that there's a bigger payday behind the horizon? Still sucks if you want/need the cash now, of course.
At least in the US, this will only be true before a company goes public. After that point, the shares will all be freely salable and have the same value (except for a small premium for supervoting shares which some founders may retain).
Zuckerberg, Brin, WeWork Guy etc all first 50 employees of unicorns ... you saying that their 100's of billions are actually zero value because they are 100's of billions of funky employee-only stock that’s only saleable back to the company at nominal value?
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.
After the 2000 dotcom bubble equity for employees became a lottery. If you got really lucky your shares were priced at a 50k market cap and the company ended up only diluting those down by 50% and the company went public making your shares worth 800k. But now that situation is rare. The investors and founders and bankers ensure that they take the vast majority of the upside when going public.
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 don’t really buy this, but that’s largely based on own fairly positive experience of stock compensation at private companies.
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.
> 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.
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.
You don't need to join an early-stage startup – as a mid-to-senior engineer, even if you only join places that are series-B or later you can still get equity packages that ultimately end up netting to >1MM/year with the kind of valuation growth that the successful companies in that profile see.
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.
> You don't need to join an early-stage startup – as a mid-to-senior engineer, even if you only join places that are series-B or later
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.
I think the reverse: that entering a company based on "am I going to enjoy it here?" is a better bet.
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.
Can you speak as to how you would develop the skill to identify companies that end up having success but _also_ compensate their employees well? Also, if you're actually good at that skill, aren't you incentivized to just be an investor instead?
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'm in that situation, I've made more money on investing in technology companies than working at them. Unfortunately the skillsets are somewhat orthogonal so I was unable to get a job at Google, but was able to buy in at the IPO.
Sure people may not want to talk about it, but a big part of this is so few people make $xxMM from employee stock.
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.
If you take a look at some of the examples in https://blog.pragmaticengineer.com/equity-for-software-engin... you see that you really don't have to be at a "first 50 at google" level of success to see 8 digit equity values. Bear in mind that even private companies have some level of liquidity for option holders via secondary sales.
Highly compensated employees handed grants aren’t startup employees taking risks they are well compensated employees getting deferred compensation. Even if the stock stays flat they still get the face value of the grant.
That said, the double digit examples were 12M “software engineer 2” and 10M “first 10 employees”.
I think Google employees did alright. Let's say you joined in Sep. 2013 (random date). 4 years later, the stock was up 200%. So if you got a $500K grant over 4 years, you'd have 1.5 million. After taxes, that'd be around $1 mm.
People getting 500k grants in 2013 from Google were just making a lot of money in general. Remember a grant isn’t an option you’re getting actual stock even the company stayed roughly flat they could have sold the 500k worth of stock.
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.
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.
Indeed. Apart from option A (work hard at startup, get rich if startup exits successfully) and option B (work less hard FAANG, get paid with very high likelihood), there are also at least option C (work hard at startup, get almost nothing because the startup fails) and option D (work less hard at FAANG, don't get paid). Option C is much more likely than option A, but option D is much less likely than option B (unless you work at Twitter I guess).
I think you focused too much on the "FAANG" part of my previous post and not enough on the "odds" part. Let me rephrase my previous point:
Startups are not a reliable path to riches, anymore than the casino is.
A "normal" career, whether in FAANG or in the less flashy parts of the industry, has a vastly lower variablility than the startup route with the same or higher expected value when measured over a few decades. Don't get fooled by the marketing posts that feature only successful founders while ignoring the mountain of failed startups that cost their early employees millions in opportunity costs.
There's this certain FAANG vs. startup dichotomy in this thread. There are a ton of IT-related jobs that pay very decent professional salaries (in not necessarily the very most expensive locations to live) and have interesting --if not necessarily cutting-edge--work. A ton of people are just fine with that. It's not like you need to work at Google or a startup to not be a failure.
Is that surprising? They've probably already made lots of money at a large company and want to do something they consider more exciting albeit financially risky.
Nah, it's that they feel they didn't make enough from FAANG cos they got there too late (everyone in a successful growth company feels this way) and want to try again.
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).
Not at all, this is in response to the notion that it’s easier/lower barrier of entry than FAANG. The ones I’ve interviewed at were basically FAANG interviews conducted by ex FAANG engineers and managers.
There's also many other options. My buddy works 15 hrs/week at a non-FAANG and non-startup tech company making 200k base. It's not FAANG money but it's still very good and he has a lot of free time.
Their goal IS the startup environment. By being in a startup, they have already achieved their goal.
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.
I think I misread your comment, so I deleted my earlier one. Sorry.
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.
I understand that my opinion may be controversial, but I believe that the presence of unions is a contributing factor.
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.
India also has jobs that pays a similar wage compared to the rest of the population. But these are more outliers than the norm. Europe doesn't seem to have that many options at upward mobility, even a salary of 80,000 euros seems paltry when compared to the housing crisis across board, inflation and the general lack of innovation when compared to the US or China.
On the other hand, an €80k salary also includes not going bankrupt if you dare get cancer or cost you $19k if you want to birth a baby, and also allows you to live in a place where there's decent public transportation so you don't need a car and all that stress if you don't want. It means not going $200k in debt to go to college. It means drug laws that are more aimed at harm reduction rather than moralizing. I'm sure there's others.
$40k is less than the average salary in Sweden while $350k is probably at least top 5% in the US (even without all the very relevant differences).
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.
Is it? The numbers may be pushed a bit to their respective limits, but with all the talk about cost of living in the Valley, $200k there may poorly approximate a similar quality of living as a sub-$100k salary does in a European city. Something about apples, oranges, and generalization.
You dont have free healthcare. You pay for it like tech employees in the US do and you probably get worse service. At least there is a chance in the US to make generational wealth for a middle class, but no way in hell in Europe.
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.
I just spent 3 hours calling around every damn pediatrician in Ireland to have somebody, ANYBODY check my 3 year old daughter who hasn't grown in 5 months and is under the 1st percentile in height now. I am happy to pay them a lot of money to do so.
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.
Nor is it universal: I can count at least one extended family member who is not insured and is one accident away from bankruptcy - not unlike some people in the US - except that personal bankruptcy is exceedingly difficult process in their EU country, and it would be quite doable (if not straightforward) to go to prison for the debt.
Not good. Basically bankruptcy insurance, you pay for all your typical health expenses outside disaster. I don't know what Germany offers for that price, but given the overall lower cost of healthcare, presumably it actually covers your healthcare.
It's fairly good coverage without frills (i.e. you get a shared room in the hospital). Doctors tend to de-prioritize public insurance when giving appointments, because they earn less from them, particularly for elective or non-urgent issues, so you usually have to wait a bit longer than privately insured patients.
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.
It's not public insurance though. It's private insurance companies on a given state's exchange which may be pretty similar to what you have through an employer. The big thing with Obamacare is that you can now get private insurance even with pre-conditions. I'm not going to especially defend health insurance in the US but the idea that you can only get it through an employer is just not true.
If you pay $2000 per month combined (which btw includes all children up to the age of 18 and all children not in full employment up to the age of 25) you're paying the maximum rate.
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.
> You dont have free healthcare. You pay for it like tech employees in the US do and you probably get worse service.
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.
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 :-)
But that's not how economic mobility is generally measured. It's usually movement from bottom to top quintile. The measure is relative mobility within a society, not absolute mobility.
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".
FWIW I joined stripe at around 600 people and almost certainly will prove to have done much better there than at faang financially (and quality of life/work). N=1 but I expect the same is true of most people who've worked there even until recently.
But statistically, the chance of any startup succeeding is about 10% and buy “success it just means that the investors didn’t lose money - not that you made a killing
Joining Stripe at 600 was not that kind of bet. It was significantly derisked by that point was really a question of how far that early momentum could carry them.
Eventually the tech market will turn around, and they will be able to IPO. Stripe is projected to turn a profit this year, so there is no runway, and they can wait as long as the want for the right time. So Stripe equity isn't that risky. For 95% of startups it would be, though.
How does that help someone with financial needs now?
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.
It doesn't, but if you accepted an offer where the base salary doesn't cover your financial needs, then that's on you.
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.
Well, all indications are that the BigTech companies are issuing new stock to at least keep people at their initial cash+stock compensation grant+a modicum of a raise.
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)
I work in Professional Services as a billable consultant (cloud app dev). Most of us are much older with families and wouldn’t deal with interference with our home life. Our division is much more “enterprisey”.
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.
First, for some people front loading their earnings is important so they can enjoy more of life. Second, as another thread goes into, the risk-adjusted picture of startup vs established tech company is quite different.
Skill doesn’t but choosing what parts of a global conglomerate you chose to work in does. Going to build the newest AWS service that will change th world, maybe you will see a layoff, maybe you fail, maybe you succeed. Going to work in a core money printing factory for your business like Google ads, layoffs are less likely. GOing to work on HR/recruiting software to help your company hire more people, you sure as shit will see layoffs coming your way.
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.
There are a whole bunch of conditionals here. If you excised your options as soon as you could (and constantly paid small amounts) then you own a good amount of shares.. but don't have anyone to sell to.
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.
>I have heard that the average equity grant is ~40k of value.
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).
It's pretty accurate: Employees don't have a few million in change, each, to turn the RSUs into plain stock.
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.
One thing I've never understood about this: why on earth aren't there financial products specifically for people in this situation? Especially around Silicon Valley?
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?
Well, it might be a good idea, but there is a lot of risk. There is, for example, a risk that the employees get utterly screwed and are never permitted to cash out.
You can price risk. People buy distressed debt. No reason why they wouldn't buy illiquid private company stock (at a discount the holder might not like obviously).
You're right, I guess it would just be a loan with interest rate and terms fit for the risk. But I wonder if the financially rational terms might fall afoul of usury regulations or something. So I wondered if the lender would have to structure it other than a simple "loan" to get around that.
But I'm deeply ignorant of that world so may be making this much more complicated than it actually is.
According to the story, Stripe's need to withhold billions in (employee's) taxes is related to (waiving the second trigger in) the double triggered RSUs it has been using to compensate them.
Typically a company starts with ISOs or similar, and then moves to RSUs when they are confident there will be an IPO or other liquidation event in the foreseeable future. In this case, Stripe did that, and only later started issuing RSUs.
The gains are realised, you just aren't getting cash but company stock. The 'gain' is the difference between option strike price and market value of the shares. Since stripe is privat the market value is a bit murky but that doesn't deter the IRS.
What's realized about these gains if the company is blocking the sale of the stock on the secondary market? This is toilet paper these people were duped into thinking was worth something. Sounds more like a lawsuit.
Yes for sure it's a raw deal for the employees, but I think Stripe is planning to enable a secondary market? In any case, we are all adults, they accepted stock options as part of your renumeration. If they don't know the risks then don't work at a private company that offers stock 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.
> 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.
Either that, or IRS not consider the exercise as taxable until those conditions imposed by the company preventing secondary sale are lifted.
To be fair, a venture-backed company remaining private for 10 years wasn't terribly common and probably wouldn't factor highly in anyone's risk assessment. If someone asked "what happens to these options in 10 years if you don't go public or get acquired?" they'd likely be ridiculed for being difficult. And I don't think start-ups want that to become the new mentality or they'll get more push-back on comp structure.
No, this is completely incorrect. The issue in question is about stock options, not stocks themselves. If you hold actual stocks, there is no tax bill until you sell these to realize the gains, and you can hold these forever. Instead, the issue at hand is about stock options. For those, the tax bill is due on exercise. For as long as you can hold the options without exercising, you don’t owe any tax, but the problem here is that you cannot have options that do not expire or have expiration date longer than 10 years. As this deadline is getting closer, option holders need to choose between exercising (and owing taxes on resulting difference between strike price and FMV), and forfeiting the options.
If they are ISOs, tax won't be due _upon_ exercise but will show up on that years tax return. Usually the AMT will hit you (if the exercise was worth it), and you'll owe the following year.
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.
when the gain shows up is irrelevant - IRS requires taxes to be paid on income in the quarter it is realized. Everyone needs to pay the estimated tax and then file the return for the final adjustment.
I'm not super familiar with this aspect, so this could be totally off-base: because this is sort of "out-of-band" income, it might factor into what you should be paying, but you won't be penalized for it; you didn't know exactly what the estimated income was (i don't believe you have to get a 3921 immediately upon exercise) so you can't necessarily estimate the taxes owed. This could be totally wrong? Also, I think there's a lookback period of a year that you can base your estimated taxes on.
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 the stock is given to you as income, you owe tax on the $$ value as though it was income. Ask anyone who works at Google or any of the big corps who give RSUs. The number of them that hit your account is always about 2/3 of the number which actually vested. The rest are withheld as taxes.
Again, you are talking about stocks. Options work completely differently. Unlike with RSUs, you don’t owe any tax on options when they vest, only when you actually exercise. I know how RSUs works, I have actually worked at Google for a number of years. Instead, you should ask someone who works at an earlier stage company how options work.
>> 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.
I may be woefully misunderstanding here but say you exercise your options, sell them then get real cash for the sale all in the same day. Can you use that cash to pay your taxes when tax season comes around?
It's about double-trigger RSUs with a 7 year limit. Stripe is now in year six. If they wait any longer, the RSUs become worthless (and the employees riot).
Actually that's not a bad analogy but against your point: options are winning lottery tickets. As long as you don't exchange them for the prize (the actual stock) you are not taxed. When you do, you have to pay tax on the difference between how much the options cost and the value you get back.
>Actually that's not a bad analogy but against your point: options are winning lottery tickets.
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.
The problem is that "unicorns" in general or companies exploding in market cap are a relatively recent (i.e. dotcom era and afterwards) phenomenon, and the rules of the finance world didn't keep up with developments. At the same time, it affects only relatively few people, so the political incentive for fixing the situation in an increasingly grid-locked Congress is not very high.
the biggest joy is that you get it back in the form of a credit over several years, all the while paying interest and fees on the tax bill you cant initially pay because your "gains" are in a private company's stock that you cant sell! I've yet to get a rational explanation of why the current AMT law is fair. sure for some people it makes sense, but for the exercise of ISOs in a private company, it's basically robbery where they give you a chunk of what they stole back every year, and hopefully a liquidity event comes along sooner rather than later
Per Buy, Borrow, Die, they could take a margin loan using that $1M and use borrowed money (say $100K) to pay the rent. With enough accumulated shares, they wouldn't need to sell the shares in their lifetime. After they've passed away, they would pay off the loan and the stock gets a free step up to the appreciated cost basis.
The reason we have capital gains is to encourage investment. They're not investing $1 for 1m shares to build something better. They're getting $1m worth of something for $1, risk-free.
That gap between strike price and FMV is much more like compensation than it is an investment.
Because receiving any kind of asset is a gain. For tax purposes an asset is valued at market or assessed rates depending on the type of asset (real estate, cars, stocks, etc.)
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.
>For tax purposes an asset is valued at market or assessed rates depending on the type of asset (real estate, cars, stocks, etc.)
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.
While I personally think there ARE gains, even if you insist on there being no gains then there is simple tax adjustment.
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}`.
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.
I wonder whether there could be space here for a bank to come in and specialise in loans to cover the tax bill, using the currently pre-IPO stock as security
Taking out 7-8 figure loans to exercise start-up options in a private company in a time of decreasing valuations and market uncertainty sounds like a pretty poor idea.
You can get loans backed by the shares themselves. Ie, the lender gets x% of the shares, rather than being paid back a specific dollar amount at a later time.
In this market, the X% might well need to be so near to 100% as to make the transaction not worth doing.
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.
Right, that's what banks were doing for Uber employees, for AFAIK, as low as 7-digit packages. I believe the interest was conditional on an IPO happening tho, and in some cases the IPO not only got delayed but the IPO price was actually a little below secondary market price right before the IPO (same as Facebook).
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 ...
If the shares to go 0, and the loan is discharged, the discharged amount is still considered taxable income (at least if you are subject to US taxation)
> to make sure early employees don't get rich before the IPO
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.
Some start-ups will both help employees exercise 83b as well as even bonus them the amount to cover the strike. Then if an employee leaves, the non-vested shares are clawed back and the bonus is not returned.
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.
Yeah, but they would have had to have spent a lot more cash upfront, both in the bonus amounts and the payroll taxes on those amounts. ISOs are pretty ideal for early stage companies because they are very cash efficient and very light on taxes pre-liquidity. They begin to get more complicated when the company has non-negligible value. But they're still alright as long as you don't get to the point where the options are expiring without liquidity. The real question is why has Stripe allowed this to happen?
I'm not sure what you mean with the performance-based comp to comment on that idea.
While it's true that cover-to-exercise is more cash-intensive, if it's only for the first 50 or so employees, it would seem viable for a company like Stripe that has strong cash flow. The problem with ISOs is they effectively halve the value of the award due to taxes, and furthermore can impose extremely risky tax situations on people who can't afford to lose much (e.g. employees who exercise before IPO).
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.
RSUs are less tax efficient because they are considered ordinary income, marked to market, at the time they vest. ISOs, on the other hand, are subject to moer advantageous capital gains, and there's more control over when taxes will be realized.
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.
An 83(b) election is only useful if the value of the shares is low. The income tax is negligible and the capital gains tax is zero. The price of many RSUs was not low when they were granted, so the income tax bill would have still been higher than many could pay.
Edit: Also, RSUs are not eligible for 83(b) elections.
Other people asked a bunch of q's so I tried to present it a little differently
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.
IIRC there's still a limit of 2,000 shareholders for private companies.
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.
Dumb question, but does another company count as a single shareholder?
Could you setup some kind of SPAC that only owns shares in the given company, to open up another 1,999 shareholders?
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.
The concern could be a brain drain. If lots of your early employees cash out and leave, you are potentially losing a lot of historical knowledge and expertise at a time when you are trying to build up to a successful IPO. Early employees often leave after an IPO. At that time, it is still disruptive but the company's priorities have changed.
It's difficult to sympathize with Stripe when these options coming up on the ten-year mark, especially because we all know the reason it has been taking so long is that they would really like to just raise private capital forever instead of giving these employees their due.
The employees can always exercise and quit even if they cannot sell it, this doesn’t do a lot for the brain drain. Instead, the main reason is that company wants to control who its shareholders are. They don’t want just any entity to be able to become a shareholder and by this virtue, acquire extra privileges and access.
For the same reason why you might want to borrow money from one person, but not from another: people typically want to choose to whom they are responsible. You don’t want to suddenly acquire an activist minority shareholder, who’ll sue you for alleged breaking of your fiduciary duty to him, and distract you or force you to change your plans.
> 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.
> guessing Stripe has a blocking right on stock transfers
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?
Yes, it's common. They'll say that it's because they don't want unapproved investors on their cap table, which I guess is reasonable, but obviously the main reason is "because they can".
>f 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.
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.
No, the stock cannot be sold until stripe has an IPO. This is the bind employees are in.
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.
perhaps technically (I'm not very familiar with private futures), but now we have a large number of employees looking for niche buyers to acquire $3.5 billion of stripe futures, which doesn't seem very realistic.
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.
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.
Not sure what you mean by "should" here, but the IRS definitely considers it to be a gain that you have to pay taxes on, regardless of whether you can sell the shares.
Yes that's exactly the problem. Why does it seem okay for the IRS to demand a million dollars from someone who has no way to pay that? Like, doesn't that seem like something is wrong/broken somewhere? There's a cottage industry of loan sharks who will lend people money so they can pay, but how about instead the IRS not take money from people who don't yet, and may not ever, actually have the money to pay, until they, y'know, have the ability to pay off that tax bill.
Would I own tax then on the classic car I bought 20 years ago which is now worth 10x the buying price and I can actually sell it for that, even though if I won't sell it?
> I can take any financial gain and turn it into a "paper profit"
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.
Because in this case they're going to be taxed on money they can't, and possibly won't ever, be able to access. It's like being required to pay tax on lottery winnings before you get a chance to enter the lottery.
Why is that even treated as income then? That's like the government asking for more taxes from me because I have the potential to make money in the future if I'm lucky.
Because shares in a company represents something of value. Just because a company’s shares are privately held doesn’t make them worthless. The IRS has ways to estimate valuations of privately held companies.
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.
I understand how the law works, but it's quite silly to consider the shares as having value when it's literally impossible to convert them to that "value" to pay the tax. By definition the shares do not have value.
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.
In this context companies aren’t a pinky swear “I promise this has value”. A 10x valuation increase for a private company happens for a reason: for VC funded start ups that is often because they did an up round. Someone else put a lot more money on the line than an employee exercising their options would.
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.
If they become worth zero do you not have a capital loss to deduct from future income? So you would gradually recover the tax paid when you got the now worthless shares in the form of future taxes you don’t have to pay.
You would have a capital loss to carry forward, and this is part of why the current rules aren’t great for people who aren’t already wealthy. If the tax bill is a big chunk of your net worth it makes it hard to take advantage of what might be a great opportunity.
>>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.
The founders are rich though, right? What a douche move.
The article title is mixing up two different problems, and I think that's what is causing all the confusion in this thread.
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.
yes, also Stripe will need to offer employees some relief (buying them out due to lack of liquid mkt mostly) which compounds to their expenses for the tax bill
> 2. Lots of long term employees have expiring options, and if they exercised them they would face a massive tax bill.
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?
Problem #1 is not ordinary tax. It's indeed about employee's stock compensation and the withholding tax that the company sends to the IRS on behalf of the employees when giving the (net) amount of shares to them. The problem is that there is no market for those shares.
It not people who want to cash out. Actually it’s people who can’t cash out otherwise, but will still have a huge tax bill if they exercise before the options expire. The only other choice for these employees would be to simply allow millions of Dollars (each) of options to expire.
If your SOP is handing out options, yes it is. I’d also say GAAP likely requires building a cash reserve to cover such liabilities. I’m not an accountant but I’m pretty sure they have to be ready to cover the difference between the option and strike price until the expiry of the option. One would imagine that is less than tax when the option remains unexercised.
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).
> Winning Competitions
> In the presentation, Stripe said it generated $14.3 billion in revenue as it processed $816 billion in payments volume last year. The company’s so-called transaction margin before losses — a measure of net revenue — rose to $3.17 billion, or 0.38% of total volume. That compares with 17 basis points for rival Adyen NV, according to the presentation.
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?
The main problem with investing in Stripe is they are one meeting away from being disrupted into oblivion.
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.
I'm unsure how stripe is only making 0.38% on transactions, given at least in the UK they are vastly more expensive than other providers on their public pricing.
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?
If you do an 83b election on RSUs, you'd recognize the entire present value of the RSU grant as income in that year, and pay taxes on it. I believe you're then limited to claiming capital losses on that if you leave before it all vests, or it all ends up worthless.
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...
Holy shit. Can't believe that didn't make it to HN. You really should price startup equity compensation at zero. Even if the startup becomes successful.
So it depends on when you invested in Uber. Because late stage investors (which includes employees compensated with equity) didn't make life changing amounts of money because the price since IPO has actually gone down, unlike, say Apple. But everyone forgets that the VCs, who are the real players in this game, angle invested at sub-cent strike prices. Approximately, what's the math on how much you make if you sell a hundred million shares at $40, with a strike price of $0.0001. Compare that to a later employee 100k shares with a strike price of $39.50.
They certainly can let the old RSUs expire worthless, but holding up the "social contract" (as opposed to the strict legal contract) with their employees (and former employees!) while also not drawing the ire of the IRS may be a challenge.
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.
I don't think the company would be in trouble with the IRS if the rsu's are not exercised. I also don't think it would be breaking the social contract if the employees were granted new replacement rsu's with term limits that aren't contingent on employment. It's not that different then unemployed sitting on vested stock waiting for an IPO or liquidity event.
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.
The whole point of the double-trigger RSU situation is to create a "meaningful risk of forfeiture". It's only that condition that makes the IRS okay with not taxing the RSUs until they're liquid. If employers just top up employees when their old RSUs expire, there really isn't any meaningful risk of forfeiture anymore.
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.
Sitting on vested stock is different than being granted new stock (as a replacement) without being a current employee. That may open Stripe up to some additional tax/liability.
> I don't think the company would be in trouble with the IRS if the rsu's are not exercised. I also don't think it would be breaking the social contract if the employees were granted new replacement rsu's with term limits that aren't contingent on employment.
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.
>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.
Only if you join early enough for the early exercise cost to be low. Anyone that joined after the first few years probably won’t be able to or want to pay the upfront cost for early exercising.
Also to clarify, RSUs are not exercised. They are yours when they vest and taxes are due when they vest (hence the double trigger)
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.
First of all, the issue here is with options, not RSUs.
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.
> First of all, the issue here is with options, not RSUs.
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.
Like you said, if the employees filed an 83b, they would be in the clear. However, the article’s talking about some of Stripe’s earliest employees, who might not have elected to file an 83b because the company was still unestablished and risky, and filing the 83b meant potentially paying taxes on shares that might ultimately be worthless.
And since these are the company’s early employees, I imagine that Stripe is doing this to try and ensure they retain them.
Shouldn't the strike of the options make them worthless at grant time? I was under the impression that the 83b election is awesome because it basically gives you tax free grants.
Making sure I get your point: if I get a job at a mature company, like amazon, and they give me, say, 100k in stock options, then AIUI filing a 83b would be painful as I'd owe taxes on 100k even before they vest.
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.
AIUI, If you file 83b you dont pay any taxes when the the options vest. You own the stock in clear. You still pay capital gains if you sell the stock and realize profit.
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.
But as a mature company, Amazon's stock price is not likely to undergo huge swings. Thus you wouldn't file an 83b. However, a startup aiming for unicorn status will have a huge inflation in valuation on the way to being a unicorn (and beyond). If you're unlucky, doing an 83b early exercise will hit right as the valuation jumps, leaving you with a five figure tax bill. I mean, that's better than, say, an eight figure tax bill, but taking a five figure risk so early on in a companies life cycle when there's not even a proven product market fit is, well, risky. If you're in a place where losing that kind of investment because of a remotely possible potential upside, your risk tolerance is simply higher than mine.
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.
The main difference between a company like Amazon and a smaller startup is that Amazon grants RSUs whereas a smaller startup will grant options. The value of options is the (current price - strike price), which will be close to 0 at the grant date. So you can do an 83b election and owe nothing at both grant and vest time.
I don't know why you believe later employees get options. It is true that at public companies, employees often are compensated with options, but at "startup"s where the FMV of a new employee grant would be prohibitively expensive to either early exercise or pay income taxes on, employees get RSUs.
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...
Someone here is confused, and it might be me. As I understand it:
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.
If I'm understanding it correctly, the employees won't have a tax bill if they let the options expire, but they are presumably worth millions so they don't want to just throw that money away. If they exercise then they will owe taxes and they will also have no way to sell the shares (currently) to pay the tax bill.
Sure, but options don't expire while you are an employee.
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.
But one thing that I did not follow: in my experience most of the companies that offers RSUs are mostly public. I have been in some companies as Stripe and all of them gave options due to this exactly kind of issue.
Does someone has some rationale/speculation on why Stripe issued RSUs instead options?
RSUs tend to be considered lower risk to employees. For instance if you were issued options last year when stripe was valued at double what it is now, there is a good chance your options are underwater.
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.
They way I'm reading the article is that there are employees that would incur large tax liabilities by exercising their options, but have no way to sell those option, so Stripe is looking to cover those taxes.
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.
Yeah, I think it's the former, so it'll feel more like "sell to cover" for the employee. I'd have to imagine that paying it as a perk would trigger its own tax liability.
Because they didn’t get options. Stripe was flirting with going public for so long that they gave RSUs and people were trading the shares on private secondary markets.
Those secondary markets have dried up in the general macroeconomic environment, so now this practice is leaving people with their pants down, complete illiquidity.
RSU don’t allow an 83b. Stripe issued double trigger RSU so the tax is only due when the second trigger occurs, which hasn’t happened yet.
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.
I've always been curious, what happens if they just let these shares just expire? It wouldn't look great for Stripe, but presumably they would just get back for free (modulo taxes) any shares employees could not afford to exercise. The value of those shares alone could be pretty enticing to the people in charge.
I think the point the previous commentator was trying to make was, why can't they let them expire and issue new options/RSUs of equivalent value to the same people.
This is completely Stripe’s fault for not going public sooner. I hope Stripe and Uber become lessons on how not to let your company stay too long as a private company.
Would the strike price be the same? If it is then I believe the employees are still on the hook for the same tax bill, because it's lower than the current fair market value.
I'm curious, why even have the 10 year expiry cutoff? Is there a regulatory ask that this be the case, or is there logic I'm not seeing?
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.
I thought it was interesting because it shows what other companies are doing for their employees that have been there for 10 years. This was a big topic at a previous company I worked at who had employees getting close to their 10 year mark and it looks like that previous company is just going to let those employees options expire and screw them over.
For is interesting because as an employee I can see different job dynamics being played out and learn from that for the next position.
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.
This is a very interesting situation. Generally at startups, is there no room to negotiate to get RSUs instead of options?
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?
The knife cuts both ways. Just as these stories exist, there are plenty of folks who have fell into life changing or generational wealth through equity comp. Treat it for the lottery ticket it is.
I would treat it as a lottery if I thought it was a lottery.
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.
This take isn't right. Stripe has done the right thing here. They've always been honest about what the comp was, what the risks were, and now they are doing the right thing, again. The employees involved recognize it as such and the only people making disparaging remarks are either not involved or don't understand it.
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.
There is also no need for them to do it. Being a public market has downsides. They've been consistent with this message that they may well stay private forever. They never misled anyone. All the folks involved in this are grown adults. If people wanted to work a company which promised to go public, they'd have worked somewhere else. Again, the employees knew it, know it, and Stripe is now doing the right thing, again. Every step.
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.
They said it could happen. It was all made clear. One can't reasonably claim to be misled when they are told explicitly before they join, when they join and continuously while they are there.
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.
I imagine the percentage of people happy with the outcome of their equity grants is vanishingly small. Maybe people did well at FAANG, but outside of those 5 companies it seems to be full of broken dreams. There are so many games played with equity, and the tax treatment in the US sounds like a nightmare.
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.
This article is literally about how a significant number of Stripe employees are going to become multi-millionaires overnight. Where is the "train wreck" exactly?
And the time to IPO was in 2019 when everyone there was heading for the exit as I said before. [0]
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.
The employee never pays out of pocke. Note it's not a loan, but an investment.
Upon a liquidity event, the employee needs to pay back the investment amount + certain percentage of their shares. If the total amount is lower than the investment amount, the payback amount is capped by the amount they received for their shares. Thus, the employee will never pay out of pocket.
Regarding the share %, that varies based on the demand by the investor community for the specific company, and the specific employee strike price.
Stripe was trading at $150 a share in the private market which valued it at ~$135B at some point. I think the investors who got in at $10B would be lucky to see a return.
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
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.
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?
I’m a bit surprised their employees cost so much. I’d imagine engineers might, but other orgs like Hr, sales, recruiting, or support (which should be most of the headcount) would be compensated way less.
Employees do not cost that much, not even in SF. There are also many employees in sales roles in non-SF locales.
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!
Yes, but stripe is not the actual processor, correct? IIRC they use first data as their processor. Pretty sure there are only like 4-6 actual processors. Fiserv, Chasepaytec, first data, etc. I'm sure their actual revenue after interchange and processor fees is much less than this.
