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That unicorn you’re buying into might be carrying a few billion dollars in hidden baggage. A new working paper from Yale Law School professor Sven Riethmueller reveals that pre-IPO companies have been systematically gaming US accounting rules to defer massive stock-based compensation costs, making their financials look far healthier than they actually are right up until the moment retail investors start buying shares.
The paper, titled “Beetles with Ballooning Burdens: Pushing out Pre-IPO Compensation Costs until the RSU Reckoning,” examines 91 US unicorns that went public between 2014 and 2024. The findings paint a picture of a compensation system designed to flatter the numbers when it matters most, and quietly dump the costs on public shareholders when it matters least to insiders.
The $358 million magic trick
Riethmueller’s analysis found that 60 of the 91 unicorns studied recognized an average of $358 million in deferred stock-based compensation expenses, adjusted for inflation, at the time of their IPOs. Eight firms went even further, each deferring more than $1 billion in pre-IPO compensation costs. The mechanism is straightforward: companies grant restricted stock units to employees and executives before going public, but under current accounting rules, they can delay recognizing the expense until the IPO quarter. The effect is that pre-IPO financial statements look cleaner, margins look wider, and valuations look more justified.
The unicorns in question carried median pre-money valuations of $11.4 billion, adjusted for inflation. At least 30 US unicorns in the dataset held post-money valuations of $11 billion or more.
The post-IPO reckoning
Riethmueller found that unicorns with deferred stock-based compensation expenses of $107 million or more faced an 83% probability of experiencing stock-price declines after reporting their IPO-quarter results.
A company goes public with clean-looking financials. Investors buy in based on those numbers. Then the first quarterly report as a public company arrives, suddenly loaded with hundreds of millions in stock-based compensation expenses that were always going to show up but were never visible to pre-IPO investors evaluating the deal. Operating margins crater, the stock drops, and retail investors who bought at or near the IPO price absorb the loss.
Discounted options compound the problem
Riethmueller’s earlier research from 2024 examined how pre-IPO firms granted deeply discounted stock options to executives and employees during the run-up to listing. He identified 147 discounted stock options granted during IPO preparation periods, with median discounts of 48% relative to the eventual IPO price. Half of those options were granted within 45 days of the start of trading. Insiders captured an average potential windfall of $4.2 million per firm through these discounted grants.
The combination creates a two-sided disadvantage for retail investors: they’re evaluating companies based on financials that don’t reflect the true cost of compensation, and the insiders they’re effectively subsidizing got their shares at steep discounts.
What this means for the IPO market
The 83% correlation between large deferred expenses and post-IPO price declines is the kind of statistic that should change behavior. For institutional investors with the resources to dig into S-1 filings and identify deferred RSU expenses, it’s a useful screening tool. For retail investors who are typically working with less information and less time, it’s a warning that the numbers in a company’s IPO roadshow may not reflect what the first quarterly earnings report will look like.
Current accounting standards permit the deferral of RSU expense recognition in ways that systematically benefit issuers and insiders at the expense of public shareholders. For anyone evaluating an IPO, the practical takeaway is simple: look at the stock-based compensation footnotes, not just the headline revenue and margin numbers.
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English (US) ·