Reddit is planning an IPO for the second half of 2023. The popular online discussion forum website first considered going public in 2021 after the meme stock frenzy of 2020 (remember r/wallstreetbets?) catapulted the growth of its user base to over 450 million people. But between subpar macroeconomic conditions and a lackluster IPO market, the plans were soon put back on the shelf.
If you hold shares of Reddit as part of your equity compensation, here’s how you can start planning ahead for a liquidity event.
- How does Reddit make money?
- When will Reddit go public?
- How much is Reddit worth?
- What should Reddit shareholders do?
How does Reddit make money?
Like many social media platforms, Reddit generates its revenues from selling ad space. In 2021, in its first attempt and an IPO, Reddit reported advertising revenues as high as $100 million per quarter, with forecasts of reaching $1 billion per quarter by 2024.
Reddit also makes its money from a paid membership option, Reddit Premium, which offers ad-free browsing and a handful of members-only features for $5.99 per month, or $49.99 per year. In the course of its IPO planning in 2021, Reddit reported having roughly 344,000 Premium users, equating to around $24 million per year in non-advertising revenue.
Though these numbers may seem impressive on their own, Reddit still lags far behind other social platforms like Facebook, Snapchat, Twitter, and others, whose advertising revenues all already surpass $1 billion per quarter. Which begs the question, what has Reddit done since 2021 to make itself more appealing to potential investors?
When will Reddit go public?
As of now, Reddit has yet to announce a date for its initial public offering (IPO), but all signs are pointing to the second half of 2023. Reddit has been working on going public since 2021 when it confidentially filed its Form S-1 with the U.S. Securities and Exchange Commission (SEC). The S-1 is a form that discloses a company’s financial and business details to potential investors and is generally seen as a publicly-available investment prospectus. Typically, an IPO occurs around six to nine months after a company’s S-1 is filed, but certainly, the case is different here. Reddit remains tight-lipped on the details of its IPO and has hired investment banks Goldman Sachs and Morgan Stanley to help with the process.
How much is Reddit worth?
Reddit has its sights set on a $15 billion valuation for its IPO, but achieving that goal may prove challenging. In December 2021, Reddit raised $700 million in a Series F funding round led by Fidelity Investments, which valued the company at $10 billion. However, Fidelity later reduced the valuation to $6.6 billion, a significant drop that could result in less money for shareholders. If Reddit’s goals for its IPO are similar to those of its Series F funding round, the majority of funds raised will likely be invested in the continued development of its advertising business, as well as the continued development of its Premium membership, and new features like Reddit Talk.
What should Reddit shareholders do?
If you are a current or former Reddit employee with options, RSUs, or other grants in the company, there are a number of different scenarios you should consider in preparation for a Reddit IPO. Here are some factors to keep in mind:
Clarify the types of shares you have
The first step in preparing for a possible IPO is to get the specifics of your equity compensation package. Most likely, you will have either Incentive Stock Options (ISOs), Non-qualified Stock Options (NSOs), or Restricted Stock Units (RSUs). Each type of equity has its own tax implications, which we’ll explain below:
- ISOs and NSOs
If you have ISOs or NSOs, exercising your options before the IPO date can provide many tax benefits. Exercising options means that you are buying shares at your strike price, a number set at the time the options were granted. Your strike price may be lower than the IPO price, which could pave the way for a healthy return. However, you will need enough cash on hand to exercise your options in the first place. Depending on how many shares you have, this can be a limitation for many.
Another consideration is that exercising your options will come with capital gains taxes. If you hold your shares for more than one year before selling them, you will be subject to a long-term capital gains tax rate, ranging from 0% to 20%, depending on your income. If you sell the shares within one year of exercising your options, you will be subject to short-term capital gains taxes, which are taxed at the same rate as your ordinary income and can be as high as 37%.
Finally, it’s also worth noting that if you exercise your options but don’t sell the shares immediately, you won’t owe any taxes until you sell your shares, but you may be subject to Alternative Minimum Tax (AMT). AMT is a separate tax calculation that can result in a higher tax bill.
If you have RSUs, your situation is a bit different. Unlike options, RSUs require no exercising or purchasing and are simply shares that have been granted to you. There may be a lockup or holding period that prevents you from selling your stock until 180 days after the IPO, but after that, you’re welcome to sell them at any time just as you would any other stock. Keep in mind that if you sell your RSUs, they will be taxed as ordinary income, not capital gains. One additional piece to keep in mind is whether you have double-trigger RSUs, which aren’t taxed until both vesting completes, and an IPO or other liquidity event takes place.
Consider when to sell your stock
Once you’ve clarified the terms of your equity, it’s time to consider when you might want to sell your stock. There are a few different scenarios to consider:
- Exercise your options before the IPO
If you have ISOs or NSOs, exercising your options before the IPO date can provide many tax benefits. However, an early exercise will require you to have enough cash on hand to pay for the shares. Depending on how many shares you have, this can be a limitation for many.
- Wait until the IPO takes place
If an early exercise of your options is not financially feasible, your next best bet might be to wait until the IPO date to exercise your options and sell your stock all at once, giving you the cash necessary to cover your tax bill. The downside to this strategy, known as a “same-day sale,” is that you will be taxed at the short-term capital gains tax rate, the same rate as what you’d pay on ordinary income (aka, your salary).
- Cash out early with a secondary transaction
If you just can’t wait to cash out, you may be able to sell your shares back to your employer or to a private investor on a secondary market. Reddit hasn’t mentioned doing a tender offer, but employees may be able to sell their pre-IPO shares on secondary stock marketplaces. The benefit of a secondary sale is that the price is set and agreed to in advance, but the downside is that you miss out on any increase in value come IPO day.
Work with a Harness Wealth Advisor
If you hold pre-IPO equity in Reddit or any other companies, Harness Wealth can match you with an experienced tax and financial advisor whose goal is to help you make the most of your equity compensation. Our startup equity tax advisors work with founders and employees from big names in tech, including Amazon, Zoom, Coinbase, Uber, and more. An IPO is a tremendous achievement for any company, and the potential windfall it presents to employees holding equity can be life-changing. Before you rush to any decisions, book an Equity Tax Planning Session today.