Shulou(Shulou.com)11/24 Report--

Beijing, February 20 (Xinhua)-- it is reported that tech start-ups that delayed their listing plans during the tech downturn are facing a new dilemma: how to deal with restless employees whose equity awards are about to expire if they fail to complete their IPO as planned.

In recent years, many leading private companies from Silicon Valley, including grocery distribution app Instacart and self-driving sharing car group Cruise, have attracted high-level employees by offering "restricted stock units" (RSU), which are triggered by liquidity events (usually going public).

Take Stripe, the payments group, whose multimillion-dollar RSU expires from 2024 and is at risk of confiscation unless the company buys them out, changes the terms of incentives or launches IPO.

When RSU finishes attribution, employees will face personal tax liability. However, if the company does not start floating, employees will not be able to sell any of these shares. To solve this problem, Stripe wants to withhold some shares equivalent to tax obligations from employees' rewards. In addition, the company plans to sell shares to investors, use the money raised to pay employees' taxes, and buy back any shares that employees want to sell.

The case of Stripe is typical of private technology groups that benefit from a decade-long bull market and attract employees and investment, but are now facing a shortage of funds.

Sisco Palau-Cisco Palao-Ricketts, a partner at law firm Goodwin Procter, said: "there was pent-up pressure among employees who had promised that the company would go public in 2021 or 2022, and now they find that RSU cannot pay for mortgages or college funds for their children."

According to company statements, job ads at the time and other people familiar with the matter, RSU has been part of total employee compensation in Stripe since 2017, in Cruise since 2018 and in Instacart since 2019.

However, this kind of reward carries risks. "once you choose RSU, the fuse is lit," says Kelly Rodriques, chief executive of Forge Global, the private equity market. "they face liquidity and tax issues."

Cruise said it "does not intend to make any predictions about what may or may not happen in the future". Both Stripe and Instacart declined to comment.

A survey of mid-and late-stage private technology companies conducted by Thelander Consulting, a compensation data tracker, found that about 15 per cent of companies provided RSU to their employees in 2021 and 2022. These and other companies must take action to prevent the expiration of RSU, which usually happens seven years later.

To solve this dilemma, Stripe is using existing investors, including Josh Kushner's venture fund Thrive Capital, to raise more than $2 billion, according to people familiar with the matter.

Robert Le, an analyst at PitchBook, said: "Stripe can go to the previous investor Thrive because they have a strong business. But not many startups have such luxury resources."

The move is the latest problem for one of Silicon Valley's best-known fintech start-ups. The company was valued at $95 billion at its last public valuation in 2021, but cut its internal valuation to just over $60 billion in January, according to people familiar with the matter.

Stripe intends to raise enough money to pay RSU-related taxes to its 8000 employees since 2017 and will retain the value of some employees' shares as compensation, according to a person familiar with the matter.

Glen Kernick, head of Silicon Valley at Kroll, the appraisal agency, said: "Stripe has realized that they have to help employees out of trouble. When their RSU ownership is completed, they have to pay taxes. As an employee, you now own these shares and have tax arrears, but you do not have the ability to sell shares to pay your taxes. This is obviously seen as a difficulty."

Facebook was one of the first private companies to issue RSU before it went public in 2012. Over the next few years, as money poured into technology start-ups and the battle for talent intensified, RSU was increasingly used to connect employees with companies that wanted to go public.

"We try to guide only late-stage companies to provide RSU to their employees," Palau-Richter said. "for companies that adopt RSU prematurely, or that are not successful enough to have enough liquidity, this is something that should be done in two or three years."

PitchBook's Mr Le says companies in despair can choose to accept "punitive terms" in which they cede more control or larger shares to investors when raising new capital, or pass the problem on to their employees.

Palau-Richter says RSU is a risky deal for employees: they don't have to pay taxes before liquidity events occur, but if the company doesn't go public, their shares could be forfeited. He added: "as tax practitioners, we already know that this is a problem. Everyone should have reasonable expectations of the market. You can't just expect the market to grow for more than a decade without a recession."

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