The Tax Question Facing Snap in IPO

If Snapchat’s parent company Snap Inc. goes public this year as expected, some employees will find themselves holding stock worth millions of dollars. But much of their newfound wealth will quickly vanish—in many cases, nearly half of it will be owed in taxes.

Companywide, that could add up to tens if not hundreds of millions of dollars in cash owed, all around the same time. That’s because Snap has been awarding its employees “restricted stock units,” a type of stock award that has become widespread at the largest private tech companies, and which can trigger big tax bills for recipients in an IPO.

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There are also benefits to RSUs for a company going public. The compensation expense recorded by the company when the RSUs vest can become a tax deduction. And the deduction could be larger than with other kinds of stock awards, such as options.

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Facebook helped pioneer the widespread granting of restricted stock units in private tech.