March 10, 2021
The long-awaited Airbnb IPO was last week. Employees had awaited this moment for YEARS. How did their stock options and RSUs do? And how does it compare to the IPO of DoorDash the day before?
The story is bit different. The DoorDash narrative is one of continuous hypergrowth. Regarding stock options, that means lots of money made – but also:
These things happened at Airbnb too, but while Doordash was a major beneficiary of the global pandemic, Airbnb was hit hard due to travel restrictions.
That impacted employees and their equity in 3 major ways.
In May, Airbnb laid off 1900 (25%) of its employees. Because their unvested equity was cancelled, employees missed out on ~$839,000 worth of equity on average (assuming a $145 share price).
Those shares are now worth $1.6 billion.
It's not weird to lose your remaining unvested shares when you don't work somewhere anymore. But it still really sucks. Especially with a killer IPO just a few months later.
(To clarify: losing your equity when laid off is not a given – some employers did generously accelerate vesting in the face of COVID-layoffs.)
Due to the pandemic though, Airbnb could justify a 409A devaluation of the company. That sounds bad – but it helps employees who own stock options.
Say you join Airbnb as an engineer in 2014, and was granted 50,000 stock options (ISOs) at a $3.50 strike price.
If you don't exercise and sell after the IPO, you’ll make $3.38 million (based on a $145 share price). That's amazing.
But... you would have netted an additional $1.10 million through tax savings if you exercised pre-IPO.
Sounds worth it! So in January you consider exercising your ISOs.
The problem? At a 409A valuation of ~$60, that would trigger a tax bill of... $1,013,092.
At most startups, the 409A would continue to grow. So delaying the exercise would just make it worse. But in the midst of the pandemic, Airbnb was able to get the 409A down to ~$30.
If you exercise now, the tax liability is ‘just’ $488,092.
Still enormous – but 52% less.
It was a brief window of opportunity for the handful of Airbnb employees who still had unexercised stock options. As the company recovered and began planning for the IPO, the 409A also recovered and increased.
While the trend seems to be reversing, startups generally take a long time to exit. Airbnb took 12 years.
The problem? Whether it's ISOs, NSOs or RSUs: employee equity has to eventually expire.
For companies like Airbnb that have been private for awhile, many employees were coming up on their typical 10 year window. This was a major cause of stress for Airbnb employees.
The (unverified) rumor is that Airbnb did the right thing and worked out a solution for the employees with expiring options or stock grants so their equity was saved, but I'm sure it caused a lot of employees to sweat for awhile.
Startups don't grant employees outright stock. Technically they could do that... but it would trigger a tax bill for the employee.
With no cash to pay for it (because the stock is still illiquid: you can't sell it anywhere) that would cause problems.
Instead, employers give things that (may) become stock in the future: stock options and RSUs.
In this way, taxes don't need to hit before the stock is liquid, allowing the employee to avoid the cashflow problem.
However, for this ‘tax trick’ to work there needs to be a substantial drawback to the granted thing. There should be some drawback relative to plain stock – something that justifies the fact that the option or unvested RSU isn’t itself taxable yet.
The risk of expiration is that drawback.
Take the risk of expiration away, and the IRS will consider the thing that you’ve been granted not to be substantially less valuable than getting plain stock.
They'll then directly tax you as if it is indeed stock, defeating the purpose.
So, technically, there's a reason it works like this. Still, the practical implications are backwards. The idea of equity compensation is to reward employees for taking a leap of faith. That's true especially for early employees. Now it's exactly them who get in trouble.
Not every path to IPO is the same. Companies go through many ups and downs on the path to an exit and Airbnb is no exception.
The rocky 2020 road to the Airbnb IPO unfortunately created some winners and losers. Those impacted by layoffs lost out on future equity value, but those early enough with stock options were granted a golden window of opportunity to take home more cash.
Feel free to hit me up for a quick chat in the bottom-right if you have any questions. ↘️
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