The Brutal Truth About Klarna’s RSUs: Tax Nightmares And IPO Heartbreak

Let's kick this Klarna IPO series off with the fundamentals. Otherwise little to nothing of the number crunching I'm about to do, will make sense for a lot of people. So bare with me.

First, Restricted Stock Units (RSUs) are not stock options, and they're definitely not Qualified Employee Stock Options (QESO). So any number crunching or conclusions drawn from the Klarna RSU program does not apply to stock options or QESO programs.

So, what are RSUs? They are a promise from your employer to, at some point in the future, grant you a certain number of shares.

The key feature of RSUs is the vesting period. At Klarna it was 4 years with a 1 year cliff vest. In other words after the first year 25% of the totalt grant (the amount of RSUs "promised to you") vested. After that 1/4 of the yearly 25% vested every quarter. So if you quit before the 1 year cliff vest you were robbed of it all.

Now, in Sweden RSUs that vest (effectively becoming yours) are taxable as employment income. Meaning, in the Klarna case, that you were taxed according to the Fair Market Value (FMV) of Klarna stock at the time. This is where most employees got swindled since being taxed on RSUs when the FMV of Klarna was $45bn meant having to give up pretty much your whole paycheck 4 times a year to cover the tax.

There is also "withhold to cover" (which you actually couldn't do initially). It means the employer gives you less RSUs in order to cover the tax. This can be both good and bad obv depending on where you think the FMV is heading. Up or down?

And then we've got the 2nd taxable event. Which is now, at the Klarna IPO, when there's an opportunity to sell the actual $KLAR shares (once the Larkan shares have converted) and those are then taxed as capital gains (ie ~30% on the revenue increase - if there was one).

For a lot of Klarna RSU holders they'll actually be selling at a huge loss since their RSUs vested when the FMV was $45bn and Klarna IPO:d at $14bn. So they won't actually have to pay any tax when selling those shares. Which is a small comfort considering the humongous tax bill they were forced to cover back when vesting.

So there you have it. Part 1 of crunching the numbers and making sense of it all 🙏