When Tech Companies Go Public, Employees Can Strike it Rich – Or Not

IPOsFive years ago when Facebook went public, employees of the social network were glued to office televisions airing CNBC, waiting for the company?s trading price.

?Everyone was hoping for a pop,? said Dan Fletcher, a former Facebook employee, referring to the spike in stock price that some companies experience after an initial public offering.

Facebook debuted at $38 a share. When the first trade of the day came back at $42.05 ? a gain of nearly 10 percent ? everyone erupted in cheers.

Then, a moment of quiet.

?You could see everyone?s eyes sit back in their heads as they did the mental math,? said Fletcher. ?How much are my shares worth??

Tech IPOs have minted millionaires, with stories of even janitors who worked at Google striking it rich after the company went public in 2004. As Snap Inc. hurtles towards its own IPO, which is expected to be one of the biggest in Los Angeles history, many await a life-changing payday.

By the end of 2016, the LA company had issued $679 million in stock options that had vested or were expected to vest. These allowed early employees to buy shares that had vested well ahead of the IPO. It had also issued $2.7 billion worth of restricted stock units ? shares typically offered to later hires that only become liquid after a certain date is reached or certain personal or corporate performance benchmarks have been met.

This means that of Snap?s 2,000 employees, hundreds could potentially become on-paper millionaires if the company goes public at its ambitious $22.2 billion valuation. But many also stand to come away with much less, or nothing at all.

?People assume that everyone who works at a company that has just gone public is instantly, phenomenally wealthy,? said Lise Buyer, an IPO consultant at Class V Group. ?It doesn?t work that way.?

Many factors determine how much money an employee makes from an IPO, including when a person joined a company, how many stock options or restricted stock units they received, and when they decide to sell. An early employee might be able to exercise stock options at, say, 50 cents a share, while a later employee might pay $30.

?Timing is everything,? Buyer said.

Yet, despite the precarious nature of stock-based compensation, it remains a deeply ingrained tech industry tradition. Employees routinely forfeit higher salaries for more stock. A startup?s likelihood of going public is often a determining factor in joining a company. And even though the entire premise is a gamble ? one that can breed anxiety, envy and resentment ? many tech workers cross their fingers and place enormous hope in their bet.

Employees at Snap who received stock options were offered the opportunity to buy at different strike prices pegged to the company?s private-market valuation when they joined. Restricted stock units, meanwhile, are outright given to employees and are pegged to the company?s valuation at the time they vest. Different amounts are typically awarded to employees based on seniority, start date and performance.

When it comes time to cash out, though, the two kinds of stock receive different tax treatments: Stocks may be treated as long-term capital gains, which are generally taxed at 15 percent, whereas restricted stock units may be taxed at ordinary income rates, which can exceed 39 percent at the federal level, not to mention applicable state taxes.

These complexities are rarely discussed, often leading outsiders to assume a person who was part of an IPO has suddenly come into enormous wealth. Employees who have been at companies that went public speak of financial managers circling them on professional networks such as LinkedIn with the hope of managing their new-found, on-paper wealth. There are the awkward conversations with family and friends, who assume they?ve become millionaires. And there?s also the so-called Google premium ? the markup on homes and cars when sellers learn that the buyer was part of an IPO.

Young tech companies such as Snap are typically valued on their growth potential, rather than how much money they?re making today. Which means the $22.2 billion valuation Snap is seeking could easily fall short if the company fails to meet its growth and revenue goals. Just ask Twitter.

(Source: TCA)