Once is an incident, twice is a coincidence, three times is a trend. Databricks is reportedly in talks to raise capital at a $55B+ valuation.
Use of proceeds?
At least partially to buy out employee restricted stock units (RSUs) and fund the associated tax obligations.
How is this relevant to a budding trend in private markets?
You should read Cory Weinberg at The Information's piece (link below). He highlights that by providing RSU holders an opportunity to sell before IPO, Databricks is following Stripe's example from 2023.
Why is this a big deal?
It is not typical for private companies to provide liquidity to RSU holders prior to IPO. And yet now 2 super notable pre-IPO companies have done it in short order.
What are RSUs and why aren't they usually sold pre-IPO?
- An RSU gives an employee the right to receive stock after certain restrictions are met. RSUs are not shares.
- For private companies, RSUs typically have a double-trigger structure: vesting plus a liquidity event, meaning actual shares are distributed when the company goes public or is acquired.
- This prevents the creation of immediate tax obligations for both the company and employee when the value of the company's stock increases, protecting private company employees from having to pay taxes on shares they don't yet own & can't sell.
- Allowing RSU holders to sell pre-IPO **could** burst the liquidity trigger for the entire plan, forcing other employees & the company into taxes even if they weren't party to the sale!
That's why RSUs are typically not sold pre-IPO!
So how did Databricks and Stripe manage to get their RSU holders pre-IPO liquidity and preserve their 2-triggers?
Short answer: they probably got an exemption.
A one-time exemption can go a long way. Look what it afforded these companies:
1. Allowed RSU holders who have been at the company since 2019 a chance to realize some value. Caplight has Databricks shares up ~20% YTD, I expect the liquidity event will be well received by all employees.
2. Prevented RSUs from expiring completely worthless. Most RSUs have 7yr expiration windows, no joy when that clock strikes midnight.
3. Allows the company to focus on its core mission instead of being forced to go public when it doesn't want to or isn't ready yet.
There are plenty of Decacorns who issued RSUs 5+ yrs ago who aren't ready to go public.
Have Stripe and Databricks found a new playbook for resetting the clock?
DISCLAIMER: "This is for informational purposes only and does not constitute an offer to buy or sell securities. Any investment in private funds is speculative, carries risk, and is suitable only for those who can bear the loss of their entire investment. Private funds investments are illiquid, and shares will not be redeemable at investor's discretion. Investors should fully understand and be able to assume the risks associated with investing in private funds."
