California anticipated a significant tax windfall from AI IPOs. However, contemporary compensation frameworks may diminish this gain.

      California was optimistic about receiving billions from the IPOs of SpaceX, OpenAI, and Anthropic. However, factors like single-trigger RSUs, tender offers, and loans against shares are decreasing the expected revenue. SpaceX is currently valued at $2.5 trillion, with OpenAI and Anthropic projected to go public later this year at nearly $1 trillion each. Being the home of these firms, California anticipated a record-setting IPO tax influx, but the situation has become more complex.

      Facebook's IPO in 2012 generated $1.3 billion in taxes for California, based on a $104 billion valuation. One might expect that IPOs valued at 10 to 25 times that amount would yield a proportionate increase in tax revenue. However, the compensation methods for tech employees have evolved, alongside the strategies to minimize tax liabilities.

      SpaceX employs a unique stock compensation mechanism compared to other private companies. Many startups utilize dual-trigger RSUs, where shares vest only when two criteria are satisfied: continued employment and a liquidity event like an IPO, resulting in significant tax liabilities on IPO day. Conversely, many SpaceX employees hold single-trigger RSUs, allowing shares to vest solely based on employment, leading them to pay income taxes on those shares over the years and making tax revenue less predictable.

      According to the California Legislative Analyst’s Office, this structure complicates the assessment of SpaceX’s tax contributions. The LAO noted that tax revenue will rely more on the financial choices made by employees and investors with pre-IPO SpaceX shares and stock options. Compared to previous IPOs, taxes from the SpaceX IPO are likely to be delayed and more uncertain.

      Tender offers have further reduced potential tax revenue. OpenAI conducted a $6.6 billion secondary share sale valued at $500 billion and plans another at an $852 billion valuation. Employees of the three companies were given numerous chances to sell their shares prior to the IPO, leading to tax payments on those gains occurring before the IPO rather than on the expected date.

      The “buy, borrow, die” strategy presents a significant structural challenge. Shareholders often take loans against their stock instead of selling and incurring capital gains taxes. This allows them to pay interest while remaining invested and benefiting from future value increases. Elon Musk has frequently employed this strategy, borrowing against his Tesla shares without selling. Now, a growing industry of wealth managers and financial advisors provides these options to regular employees, not just founders.

      Richard Lowry from Cresset pointed out that historically, only wealthy founders had the ability to give away equity in a private company, but now there is a specialized industry facilitating this for others.

      California's Franchise Tax Board is known for its rigorous auditing, as noted by tax analyst Robert Willens. While the state will still garner significant revenue from RSU vesting, the financial windfall will be gradual rather than occurring in one quarter, with more affluent shareholders likely minimizing their tax obligations. Anthropic and OpenAI have both confidentially filed for IPOs, which may still be postponed due to market conditions. For California's budget planners, the anticipated revenue from the AI IPOs is substantial but uncertain, widespread but less concentrated compared to the outcomes seen with Facebook's IPO.