The Private Tech Company That Let Employee Stock Grants Evaporate

“It’s buyer beware, but it’s rough for the ex-employees who devoted years of their life to the company,” said Sam Grossberg, a former engineering director at Foursquare who expects to lose hundreds of thousands of dollars in expiring stock grants.

Over the past decade, a growing number of now-aging startups issued restricted stock units to employees. These were essentially promises for future shares; employees didn’t have to pay to exercise them or pay taxes on them. But to comply with tax rules, companies put expiration dates on the grants—usually about seven years.

While that’s enough time for many companies, it can be a tough deadline to meet when the stock market turns sour, making a public debut impractical, as has been the case in the past 12 months. Instacart, founded in 2012, will face the problem in a couple years, a person familiar with the matter said. It had planned to go public last year but had to postpone because of the market. It hopes to finally make its debut when market conditions improve.

Then there’s Foursquare, whose business has struggled to show enough growth to allow for a public listing. After its original business as a social media app failed to take off, it repositioned itself around 2016 as an enterprise software company that sells geolocation services to the likes of Twitter and Apple. Around that time, investors cut the firm’s valuation nearly in half. Executives gave employees the choice to replace stock options that were underwater—meaning the value of the options was below the strike price—with RSUs of similar value that didn’t require employees to pay up to acquire them.

The RSUs given to employees in early 2016 had a seven-year deadline for the company to go public or get acquired before they expire. Since then, the company has gone from few actual sales to more than $100 million of revenue, representing a turnaround story of sorts. But the story hasn’t been bright enough for Foursquare to test the public markets. The company was valued by Raine at $450 million in 2019, below its 2011 peak of $760 million, according to PitchBook. The value of employees’ common stock has been roughly flat for years, former employees said.

Potential Solutions

Current Foursquare executives said they explored potential solutions before the RSUs expired. They determined the firm couldn’t issue new stock to employees without putting the company’s equity plan at risk and running afoul of securities laws.

They said they didn’t believe fundraising would solve the problem, either. “The short answer is we explored everything,” said Marc Ellenbogen, Foursquare’s chief legal and human resources officer. The company is still evaluating how it can solve the problem for employees who stayed at the firm.

Executives at other tech firms, as well as venture capitalists, are calling Foursquare saying they are up against similar problems in their own businesses, Ellenbogen said. “We have an industrywide problem. It’s not a unique-to-Foursquare problem,” he said.

That’s cold comfort for former Foursquare employees, who are some of the first to experience this problem. Grossberg said more employees at late-stage startups should be wary that their RSUs will expire before their firms go public or get acquired.

Figuring out a way around this without an initial public offering or a sale is challenging. Companies can’t merely reissue shares to former employees without risking that they are running into tax laws, lawyers say. And Foursquare’s bumpy history means it likely can’t go down the same path as Stripe—a blue-chip, fast-growing private tech firm still relatively hot with investors. Stripe is raising billions of dollars so it can modify the RSUs to allow employees to take ownership over them without an IPO—a move that triggers a huge tax bill.

“I look at what Stripe’s doing and I hope that becomes the industry norm,” Grossberg said.

Foursquare’s example could cause tech employees to view RSUs with more skepticism, said David Thomas, a partner in Wilson Sonsini Goodrich & Rosati’s compensation and benefits practice.

RSUs became a popular alternative to stock options for late-stage startups, seen as less risky because employees wouldn’t have to pay to exercise them and the units would never be underwater. Thus, companies could issue employees fewer RSUs for equivalent value as options, Thomas said. In the future, companies may need to issue employees more RSUs to better account for the risk of expiration.

The situation raises the question of what companies owe their former employees “if their efforts were the foundation to the ultimate value at exit,” said Thomas. “Is it fair to cut them off from an ultimate reward?”