Stripe's Late IPO Will Cost It $4B – The Cost Of Expiring Stock Grants

Stripe is looking to raise money again.

After the company admitted to becoming bloated and laid of 14% of its workforce in late 2022, it is now working to raise another round of funding at a valuation of $55 billion. The company was valued at $95 billion in 2021 during the peak of venture capital hysteria. No one can blame companies for taking lofty valuations when available, but today, whether Stripe is worth $55 billion has garnered debate from both sides.

But one piece of the most recent pitch deck warrants an in-depth discussion. Stripe will need $4 billion by the end of 2024. This was self-declared as much more than previously anticipated because of the need to cover tax withholdings related to stock grants that are scheduled to expire before any public listing.

Stripe is a transaction processing company founded in 2010. The key to its success has been allowing its customers to drop a fragment of code into an app that enables payment processing. Stripe has been crowned by many to be the one of the most successful private companies in the world today.

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Private companies, especially Silicon Valley startups, generally offer stock options and restricted stock units (RSUs) to its early employees. These forms of compensation qualify as W2 income, they come with an expiration date. Ten years is a typical duration for these forms of compensation to come up for expiration.

To keep these incentives alive for its many early employees, Stripe will need to modify the expiration dates attached to these grants, and the IRS classifies this as an event requiring withholding tax. With this in mind, Stripe is taking the necessary steps to set these dollars aside to help their early employees retain the value they’ve worked for.

Foursquare, a cloud-based location technology platform, recently announced it will not be modifying the expiration dates on some of its employees’ grants, rendering them worthless.

There are two key takeaways from these developments:

Employees need to be aware that their “vested” shares are only truly vested six months after a public listing or after some sort of acquisition event. Even an employee who acquires 100% of their grant after four years may not recognize that value if their grants expire before one of these eve
Companies may have many valid reasons for wanting to remain private for as long as possible — keeping employees motivated, avoiding onerous reporting requirements and audits or waiting for the proper macro environment — but there can often be significant costs, and this is a prime example.

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