When does it become probable that a start-up will go public? This seemingly arcane question has serious implications for investors. Over the past decade, Wall Street and accounting firms have converged on a surprising answer: an IPO isn't probable until the moment it actually occurs. This conservative definition has allowed companies like Uber and Robinhood to defer booking billions in expenses until after their public offering.

This practice may hurt retail investors. The center of the debate is a type of stock-based compensation known as a double-trigger restricted stock unit. Shares are not issued to employees until after a liquidity event, such as a public offering, and they are not required to appear on income statements until that event becomes probable.

A significant proportion of large start-ups now grant employees at least some double trigger R. S. U.s.

When companies take the stance that the IPO isn't probable until it happens, their compensation expenses may look very different as a public company than when private. In the quarter they have their IPOs, companies sometimes post billions of dollars in catch-up expenses. These routine spikes in expenses are associated with stock price declines, according to new research.

Sven Riethmueller, a professor at Yale Law School, argues that companies have exploited accounting rules around stock-based compensation to present artificially rosy financials before they go public. He suggests that current disclosures about upcoming charges may be routinely breaking securities law. As investors brace for a string of mega IPOs at start-ups like Anthropic and OpenAI, how regulators handle this question could have big consequences.

Anthropic and OpenAI did not respond to requests for comment about their use of double trigger R. S. U.s.