After the I.P.O., a Billion-Dollar Bill for Employee Paydays

When does it become “probable” that a start-up will go public? It’s a seemingly arcane question that can have serious implications for investors.Is an I.P.O.probable when the board of directors first discusses the possibility? When the company starts confidentially engaging with the Securities and Exchange Commission? Or when it files its S-1 registration document publicly? Do we start the clock 30 or 7 days out?Over the past decade, Wall Street and the big accounting firms have converged on a surprising answer: As companies from Uber to Robinhood have prepared to list their shares, they’ve taken the position that an I.P.O.

isn’t probable until the moment before it actually occurs.This extremely conservative definition of “probable” has allowed companies to defer booking billions of dollars in expenses until after their I.P.O.— a practice that new research argues may hurt retail investors.At the center of the debate is a type of stock-based compensation that has become popular with start-ups.

Known as a “double-trigger restricted stock unit,” it means that shares are not issued to employees until after a liquidity event, such as a public offering, and they’re not required to appear on company income statements until that event becomes “probable.”A significant proportion of large start-ups now grant employees at least some double trigger R.S.U.s.When those companies take the stance that the I.P.O.

isn’t probable until it happens, their compensation expenses may look very different as a public company than when private.And in the quarter they have their I.P.O.s, companies sometimes post billions of dollars in catch-up expenses.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access.

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