A working paper by Yale Law School professor Sven Riethmueller analyzes 91 US unicorns that held IPOs between 2014 and 2024. The study highlights a practice where companies defer stock-based compensation expenses until the IPO quarter, which improves their pre-IPO financial appearance.
Data shows that 60 of the studied firms recognized an average of $358 million in deferred compensation expenses at the time of their IPO. Eight companies deferred more than $1 billion each. These unicorns had a median pre-money valuation of $11.4 billion.
The research indicates an 83% probability of stock-price declines for companies that report deferred compensation expenses of $107 million or more following their first public quarterly results. This trend often results in losses for retail investors who purchase shares based on initial, cleaner financial statements.
Additional 2024 research by Riethmueller identified 147 instances of discounted stock options granted to insiders during IPO preparation. These options had a median discount of 48% relative to the IPO price, with half granted within 45 days of trading, providing insiders an average potential gain of $4.2 million per firm.
