Use of proceeds
Lyft intends to use the IPO proceeds, which have currently been set to a maximum $100m, to satisfy its anticipated tax withholding and remittance obligations related to the RSU Settlement (RSU stands for restricted stock units).
The S-1 filing does not state what the RSU Settlement actually is, but RSUs are basically non-cash compensation vehicles used by start-ups to grant company shares to employees. This compensation scheme has two benefits. First, it gives companies an opportunity to attract talent early stage; second, it improves cash flow generation and the accounting metrics as we alluded to in our recent critique of stock-based compensation
back in December.
The RSU often converts into shares (vesting) during a liquidity event such as an IPO. In this case, employees are taxed on their gains. In many cases, employees are not able to keep all the shares while paying taxes. Most cannot take out a loan to pay the taxes, so most employees are forced to sell some of their shares after the IPO to pay the capital gains taxes on all the shares granted. Companies can choose to pay taxes at vesting or use a single mandatory method. The most common practice is for employees to surrender their shares back to the company which then holds these shares and covers the taxes under a net-settlement process. When the employee later sells the shares, capital gains tax is paid on any appreciation over the market price of the shares on the vesting date.
It is our best estimate that the RSU Settlement covers this arrangement. But the bottom line is that Lyft does not really need capital from the IPO but will use it to create a “liquidity event
” for employees holding shares.