How Instacart’s IPO Delivers Liquidity Payday For Employees’ Stock Options And Restricted Stock Units

Instacart is the highest-profile venture-backed company to go public since December 2021. As with many later-stage startup companies, Instacart’s initial public offering (IPO) is as much about its human capital as its financial capital. Grants of restricted stock units (RSUs) and stock options are important forms of compensation for Instacart employees—but to cash in, they needed a liquidity event for the company’s stock.

That is why, in an interview with CNBC on IPO day, Instacart CEO Fidji Simo proclaimed: “This IPO is not about raising money for us. It’s really about making sure that our employees can have liquidity on stock that they worked very hard for.”

Filed under its formal corporate name Maplebear Inc., the company’s S-1 registration statement with the Securities and Exchange Commission (SEC) discloses details about Instacart’s equity programs for employees.

RSUs With Double-Trigger Vesting

Larger, later-stage pre-IPO companies often grant RSUs instead of stock options for many reasons, including concerns about shareholder dilution and high valuations leading to exercise prices that go underwater. Instacart is no exception. In its later stages before going public, the company moved in a big way from grants of stock options to grants of RSUs. No stock options were granted at Instacart in 2020, 2022, or the first six months of 2023.

The equity capitalization table from its S-1 shows the following total outstanding grants as of June 30, 2023, for its non-voting common stock:

In a now common practice for later-stage pre-IPO companies, Instacart structured its RSU grants (and some of its stock options) with both the usual service-based vesting plus a second vesting condition that requires a liquidity event for the grant to fully vest:

  1. With service-based vesting, you must work at the company for a specified period after grant. The service-based vesting period for these awards at Instacart typically runs four years, with a cliff vesting for part of the grant at one year of service followed by continued vesting monthly or quarterly.
  2. With vesting based on a liquidity event, vesting conditions are met upon the earlier of (1) a change of control (e.g. a merger or acquisition) or (2) the effective date of a registration statement for an initial public offering of the company’s common stock.

Instacart also has some grants that vest only upon the satisfaction of both service-based vesting conditions and market-based vesting conditions (e.g. the achievement of specified future valuation or capitalization amounts). To make it even more of a puzzle to grasp all their different equity grants, the company made others that vest only upon the satisfaction of service-based, liquidity-event-based, and market-based vesting conditions.

Tax Hits For Employees

Many of Instacart’s employees have grants that met their vesting conditions immediately after the IPO. This will result in a big tax bill for employees when the shares are delivered. In fact, the value of the shares they receive will probably push most employees into the top tax bracket for all of their income in 2023—the one potential downside to the liquidity and wealth the IPO creates for them.

The S-1 registration statement explains that the company assumes a 47% tax-withholding rate for holders of its RSUs and shares of non-voting restricted stock that will vest and settle in connection with this offering. The company will automatically withhold shares from the RSU grants to pay the taxes owed, a practice referred to as “net settlement.” Instacart assumes a 43% tax-withholding rate for holders of its stock options, mostly via net option exercises.

$2.6 Billion Financial Impact

The use of stock compensation and the immediate non-cash accounting expense for the way the grants are designed to vest is so large that Instacart states the following in its registration statement (my bolding for emphasis):

“In the quarter in which this offering is completed, we will recognize approximately $2.6 billion of stock-based compensation expense associated with the satisfaction of the liquidity event-based vesting condition for outstanding RSUs and shares of outstanding restricted stock, for which the service-based and/or market-based vesting conditions have been fully or partially satisfied on or before August 15, 2023. As such, we expect to incur a net loss for the quarter and year in which this offering is completed, primarily as a result of recognition of this stock-based compensation amount.

Amid dilution concerns, the company’s growing cash position enabled it to offer cash alternatives to employees. For example, the registration statement disclosed that in April 2023 it offered employees the choice to elect cash in lieu of a portion of certain equity awards.

Lockup Of Employee Shares With Potential For Earlier Sales

The liquidity for employees that Instacart’s CEO mentioned is not immediate. Instacart did separately register on SEC Form S-8, for employees’ public resale, all of the shares of common stock issuable under its previously granted equity incentive awards, along with those the company will grant in the future under its new equity incentive plan and separate employee stock purchase plan (ESPP).

Employees still will need to wait 180 days to sell their shares under the standard post-IPO lockup provisions. The S-1 registration statement reveals an exception that allows earlier sales during an open trading window should the stock trade at more than 120% of its IPO price for at least five of ten consecutive trading days. One of those days must occur after the company’s first quarterly earnings announcement.

Further Resources

Equity compensation is a key benefit for many employees at private companies, from startup to IPO or M&A stages., an independent educational resource on equity comp, has articles, FAQs, videos, and quizzes that explain all aspects of private company stock compensation, from the basics to tax and financial planning.

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