California IPO tax hopes face timing and stock-pay questions
SpaceX’s public debut and possible OpenAI and Anthropic listings could lift state revenue, but advisers say the tax haul may arrive unevenly.
By Maya Lindqvist · Senior Technology Correspondent
4 min read
California could collect new tax revenue from SpaceX’s public offering and possible listings by OpenAI and Anthropic, CNBC reported. The size and timing of that money are uncertain because employee stock awards, private share sales and tax planning have changed since earlier Silicon Valley IPOs.
SpaceX began trading last week with a valuation of $2.5 trillion, creating paper wealth for many employees based near its Hawthorne, California, offices, according to CNBC. OpenAI and Anthropic, both based in California, are expected to pursue public offerings later this year at valuations that could approach $1 trillion, CNBC reported.
The potential payday has drawn comparisons with Facebook’s 2012 IPO. The California Department of Finance estimated that Menlo Park-based Facebook generated $1.3 billion in state taxes after going public at a valuation of $104 billion, CNBC reported.
Advisers and tax specialists told CNBC that the new offerings may not produce revenue in the same pattern, even with far larger valuations. They pointed to newer compensation structures and more widely available strategies for employees who hold valuable private-company stock.
Stock awards may change the timing
State tax receipts from IPOs usually come from income taxes on restricted stock units when they vest and capital gains taxes when shareholders sell stock that has increased in value, CNBC reported. In many private companies, restricted stock units vest only after an employee remains at the company and a liquidity event, such as an IPO or acquisition, takes place.
That structure can create a large taxable event on the first day of trading. CNBC reported that SpaceX used a different arrangement for many workers, with vesting tied to continued employment rather than a liquidity event, meaning some employees have already paid income taxes on shares over several years.
The California Legislative Analyst’s Office told CNBC that SpaceX’s structure makes the fiscal effect harder to estimate. “Revenue totals will depend more on financial decisions made by employees and investors who hold pre-IPO SpaceX shares and stock options,” the office said, adding that tax revenue from SpaceX is likely to be “less immediate and more unpredictable” than in past IPOs.
The LAO, which advises state lawmakers on budget matters, has not released revenue projections for SpaceX, Anthropic or OpenAI, CNBC reported. The office said past major tech IPOs have brought in significant income-tax revenue and that the coming offerings could do so as well.
Private sales and tax planning complicate forecasts
The California Department of Finance also has not published estimates for the three companies, citing the possibility that market weakness could delay IPOs, CNBC reported. OpenAI and Anthropic have filed confidential S-1 registration documents in recent weeks, according to CNBC.
The department has seen forecasts change before. CNBC reported that it cut its Facebook IPO revenue estimate from $1.9 billion to $1.3 billion after Facebook’s stock declined.
Private share sales could also reduce the amount of stock taxed around an IPO. CNBC reported that OpenAI completed a $6.6 billion secondary share sale in October that allowed current and former employees to sell stock at a $500 billion valuation, and that the company plans a tender offer at an $852 billion post-money valuation.
Hamza Shad, insights manager at Carta, told CNBC that tender offers have become more common as startups stay private longer. Those sales are still taxable, but Shad said they can shift revenue earlier and make it harder for state officials to predict.
Other strategies may lower taxable sales after an IPO. Will Gornall, an associate professor of finance at the University of British Columbia, told CNBC that some shareholders may borrow against their stock rather than sell it, allowing them to pay interest instead of capital gains taxes while keeping exposure to future gains.
Richard Lowry, managing director and head of tax strategy at Cresset, told CNBC that some startup employees can now donate private shares to donor-advised funds, a tactic once more common among founders with private foundations. Robert Willens, a tax and accounting analyst, told CNBC that California’s Franchise Tax Board has strong audit tools and that California residents owe tax when shares are earned.
Michael Ewens, a Columbia Business School finance professor, told CNBC that large state tax bills could influence where newly wealthy employees choose to live and build companies. He said that does not mean California should lower taxes, but that policymakers should consider longer-term effects on entrepreneurship.
This story draws on original reporting from CNBC.