Stripe announced a new Series I funding round on March 15th to provide liquidation for employees that face expiration of their double trigger RSUs. Stripe plans to raise $6.5 billion from a mix of existing and new shareholders.
In the announcement, Stripe has confirmed the funds are not needed for operations. Instead these funds are expected to be primarily used to assist employees with soon to expire double trigger RSUs.
Double trigger RSUs are often used at pre-IPO companies. The two triggers are a time based vesting schedule that is particular to the grant of stock that you receive and a secondary event – normally an IPO that gives employees some liquidity to sell their shares.
In Stripe’s case, many had hoped for an IPO as soon as last year, but the financial markets had cooled. As we enter 2023, some early employees are facing an expiration of their 10 year RSUs and at risk of their RSUs expiring without the second trigger vest.
Stripe employees have a couple of key decisions to make over the next few weeks (and days)!
1) Withholding Rate Election
Stripe has given until this Friday, March 17th for employees to elect to increase their withholding from 22% to 37%.
Most employees with significant equity positions will want to consider electing into the 37% withholding rate.
RSU compensation, along with other compensation like bonuses, commissions, etc., is considered “supplemental compensation” by the IRS. Employers are only required to withhold at 22%. This rate is much too low for most Stripe employees. The 22% rate would only be appropriate for taxpayers earning $89,000 single (or $178,000 married).
Most of our Stripe clients are normally in 32%-35% Federal tax brackets. This liquidity event will push some of them to the top 37% tax bracket.
If you’re reading this before Mar 17th, please choose the 37% withholding election. You don’t want to have any surprises next April when you file your return.
If you’re reading this after the withholding election deadline has passed, it’s not too late to take action. The liquidity event is expected in April. If your shares are sold with 22% withholding, hold back between 10%-15% of your shares value for tax purposes. Tuck this away in a safe place for next April.
2) Consider Tax Deferral Options
If you’re expecting a windfall from RSU sales, now is the time to consider tax planning opportunities.
Your income may be at the highest this year. This means you might also be in a much higher tax bracket this year than you normally are. Your goal should be to reduce taxable income as much as you can with proper tax planning.
Here are some popular ways to reduce taxable income for employees:
401(k) contribution amount – If you haven’t already done so, consider electing the full $22,500 deferral before the end of the year. Your deferral percentage can be changed throughout the year, as long as you have enough payroll left to get the max deferral amount. Making the change now will give you more time to hit the maximum.
40(k) contribution type – If your earnings will be significantly more in 2023, you may want to consider switching your 401(k) contributions from a Roth to a Traditional 401(k) contribution. Roth contributions come out after taxes, which means additional contributions to the Roth don’t reduce your current year taxes. Traditional contributions reduce your taxable wages and might be more appropriate this year. (Both are still good options overall since earnings grow tax free until retirement, when compared to taxable investment accounts. In this year though, we will generally want to prioritize current year tax savings.)
Charitable Giving – If you would like to consider charitable donations this year or in the future, now might be a good time for some tax planning with a Donor Advised Fund (or “DAF” for short). A DAF allows you to give cash today and parcel out this money in the future to your charity of choice. Once the money is transferred to the DAF, it is considered a complete donation (you can’t get it back!). This enables you to deduct the full amount on your taxes as an itemized deduction in the year you contribute. This strategy is most appropriate for someone that is already able to itemize deductions (think, mortgage interest) or for someone making a significant donation that would be greater than your standard deduction.
3) How Many RSUs to Sell
Stripe has indicated that they expect the liquidity event to happen in April at a valuation of $20.13. It is currently unclear if employees will have a limit placed on how many vested RSUs they will be able to sell.
There are a few considerations here:
Selling shares that are at risk of expiration – At this time, we don’t have a sense of if or when Stripe might IPO or have another liquidity event that would enable you to sell shares. You may not feel great about the current valuation, but you’ll feel even worse if shares expire and you receive zip…nada. By not taking shares off the table now, you’re risking them expiring in the future.
Concentration Risk – You might have a lot of your family’s wealth tied up in Stripe right now. If you are a current employee and you have a significant value in RSUs, you have a lot riding on a single roulette number. If Stripe were to falter, your risk is being out of a job and having RSUs worth a lot less than they are now. On the flip side, with much risk comes much rewards (sometimes!). Balance your risks wisely.
It’s Time to Tax Plan!
This is an exciting time for Stripe employees. Now is the time to roll up our sleeves and plan around taxes. If you need assistance with tax planning and projections – we’re here to help!