Stripe Co-Founders John and Patrick Collison. Source: stripe.com
In March 2023, Stripe, the payment processing giant of Silicon Valley, raised $6.5 billion in a Series I funding round. If you hold shares in the fintech company, here’s what you need to know:
- What will Stripe do with $6.5 billion?
- Meet the double-trigger RSU
- What is a tender offer anyway?
- How do taxes work in a tender offer?
- When will Stripe employees be able to cash out?
- Does this mean that all Stripe employees will be required to sell their shares?
- What’s the difference between a tender offer and a secondary transaction?
- Do you have Stripe employee equity?
Years in the making
Rumors of a Stripe liquidity event began circling in 2021, after a $600 million Series H financing round pushed the company’s valuation to a massive $95 billion. Come 2023, Stripe announced a one-year time frame for deciding whether to go public or facilitate a tender offer for employees holding company stock. The announcement of this $6.5 billion Series I round puts that timeframe to a close. The questions now remain: what will Stripe do with $6.5 billion, and how will Stripe employees holding company equity be able to cash in?
What will Stripe do with $6.5 billion?
Stripe is facing hefty tax bills associated with the equity compensation of its 8,000 employees. Stripe employees are awarded RSUs, or Restricted Stock Units, which are a form of stock that is typically issued by private companies valued over $1 billion, or with a high likelihood of going public. In the case of Stripe, many of these RSUs are set to expire in 2024. If a Stripe IPO were to happen before then, employees would sell their shares and use some of the proceeds to cover their own personal taxes. But given the macroeconomic headwinds of late, and its ongoing search for a new CFO, a private funding round remained more attractive, but the expiration dates still hold, and Stripe had to do something to prevent those shares from losing all value.
Stripe has made it clear that it “does not need this capital to run its business” and that the primary purpose of this funding round is to provide liquidity to its employees. In addition to facilitating a tender offer, the funding round also brings in new investors, including GIC, Goldman Sachs Asset and Wealth Management, and Temasek.
Meet the double-trigger RSU
To go one step further into Stripe’s RSU situation, let’s take a closer look at the way its shares are structured. Stripe’s equity compensation involves what is known as a double-trigger RSU. For a standard or “single-trigger” RSU, taxes are due when the shares vest, meaning that you owe taxes the day those shares become yours, whether or not you have the funds to cover the taxes due. In a private company, that isn’t going to make employees too happy, since the shares can’t easily be sold to cover the tax bill.
In a double-trigger RSU, taxes are not due until both the shares vest and a liquidity event or other change of control takes place, such as an IPO, acquisition, tender offer, etc. One final thing to note is that double-trigger RSUs are not actually converted into shares until both events take place. Until then, think of them as units that represent shares—an IOU of sorts.
So to recap, Stripe has thousands of employees with shares coming up on their expiration dates. To retain talent, and bring on new investors, the company is looking to raise capital on the private capital markets and facilitate a tender offer in place of a traditional IPO, before the RSUs expire in 2024.
What is a tender offer anyway?
A tender offer occurs when shareholders of a private company sell their shares to other investors in a liquidity event arranged and controlled by the company.
Smaller-scale secondary sales can take place, and there is a growing market for these types of deals, but a tender offer allows for greater control over the cap table.
Stripe wants to ensure that investors taking part in this deal can match the profiles they’re looking for, that it can raise fresh capital, and that all employees participating can get pre-determined terms on their shares.
Unlike buying or selling shares through a stock market or stock exchange (i.e. the New York Stock Exchange or Nasdaq), a tender offer takes place behind closed doors and is typically limited to accredited investors or venture capital or private equity funds. Retail investors looking to buy Stripe shares will need to wait for an IPO, should that ever happen.
How do taxes work in a tender offer?
Taxes can be complicated when it comes to RSUs sold in a tender offer. In the case of Stripe’s double-trigger RSUs, the dollar amount vested is recorded as ordinary income in the tax year, and the taxable amount is calculated as the difference between the fair market value (aka, valuation) and the awarded price. Stripe’s internal valuation, for tax purposes, is officially measured by something called Section 409A of the United States Internal Revenue Code. It’s a number that must be determined by a third-party firm.
The selling price of the RSUs in the tender offer will be determined by the 409A valuation. Stripe closed this $6.5 billion round with a $50 billion valuation, down from the $95 billion valuation it reached in March 2021. Because of that decrease, it will help employees by reducing taxes owed, potentially keeping some within a lower tax bracket too.
When will Stripe employees be able to cash out?
Current reports from insiders suggest that Stripe tender offers will begin in April 2023 before settling one month later in May.
Does this mean that all Stripe employees will be required to sell their shares?
No. Stripe employees will not be required to sell their shares in this tender offer. If that were the case, the round would be for $50 billion, or the entire value of the company, not $6.5 billion. The purpose of this funding round is to bring in fresh capital from new investors and to facilitate a liquidity event, allowing employees with RSUs expiring in 2024 to cash out. For the remaining shareholder-employees, they will need to wait their turn for the next tender offer or, perhaps someday, a Stripe IPO.
While a tender offer can consist of all shares of a company being bought all at once, it doesn’t always mean that. A tender offer is simply a group sale that is organized by the company with the help of outside broker-dealers and investment banks. Twitter was sold to Elon Musk in a tender offer for 100% of the company, but Stripe is not looking to do that. For what it’s worth, this isn’t even the first time Stripe has facilitated a tender offer. As recently as 2021, $1 billion worth of Stripe RSUs were sold to outside investors (Stripe tried to raise $4 billion that time around too).
What’s the difference between a tender offer and a secondary transaction?
All tender offers are secondary transactions, but not all secondary transactions are tender offers.
A tender offer is a sale of company shares that is organized by the company’s management. A good recent example would be the sale of Twitter to Elon Musk. While Twitter was a publicly traded company, the purchase of the shares was organized by the dealmakers, with the pricing and terms being the same for all shareholders. The same logic applies to a private company like Stripe. Tender offers can involve the sale of all shares, or a fraction of the shares.
Secondary transactions can take a number of different forms. As previously mentioned, there are a growing number of secondary share marketplaces popping up where startup employees can find buyers for shares, cashing out when they choose and on their terms. Before a sale takes place, the issuing company typically has a right of first refusal (ROFR), which allows them to buy back their own shares first, before the employee can move forward with an off-market deal. One more thing to consider is that secondary share marketplaces do not allow all equity on their platforms, and you will need to make sure that any equity you have in a startup is not bound by transfer restrictions that would prohibit you from selling on a secondary exchange.
Do you have Stripe employee equity?
If you’re one of the many Stripe employees with RSUs, now is the time to start planning ahead for the tender offer taking place in April 2023. At Harness Wealth, we specialize in helping startup equity holders manage their taxes and build for a better financial future. Our network of vetted tax, financial, and estate advisors is well-versed in company equity and can help you build a plan that works for your unique needs.
If you have equity compensation in Stripe or a different private company, come to Harness Wealth and get matched with an advisor well-versed in startup equity compensation.
Tax services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is an internet investment adviser registered with the Securities and Exchange Commission (“SEC”). Harness Wealth Advisers’ registration as an investment adviser with the SEC should not imply a certain level of skill or training.
This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, the reader is encouraged to consult with the professional advisor of their choosing.
