The timing of when a start-up’s initial public offering (I.P.O.) becomes “probable” is at the center of a contentious accounting debate with significant implications for investors. Companies including high-profile tech firms such as Uber and Robinhood have increasingly adopted a conservative approach, treating their I.P.O. as not probable until the actual moment it takes place. This practice enables firms to defer recognizing billions of dollars in stock-based compensation expenses until after they go public.

At issue is a compensation method called double-trigger restricted stock units (R.S.U.s), which grant employees shares only upon meeting two conditions: continued employment over a period and the occurrence of a liquidity event, typically an I.P.O. Unlike traditional stock options, these units do not appear as expenses on company income statements until the I.P.O. is considered probable. By defining the I.P.O. as “probable” only at closing, companies defer substantial expenses, sometimes resulting in sudden, large “catch-up” charges in their public financial reports.

For example, Robinhood reported average pre-I.P.O. stock-based compensation expenses of about $6 million per quarter but recorded a $1 billion catch-up expense in the quarter of its I.P.O. Similarly, Pinterest’s quarterly expenses rose from $3.7 million before going public to nearly $975 million in catch-up charges at the time of its I.P.O. Such deferred expenses often continue to be recognized in subsequent quarters on an accelerated schedule. Both companies declined to comment on this accounting approach.

A recent analysis by Sven Riethmueller, a Yale Law School professor, examines the impact of these deferred expenses on stock performance. Reviewing 91 so-called “unicorns” that went public between 2014 and 2024, Riethmueller found that companies with catch-up expenses exceeding $107 million experienced average stock price declines of approximately 10.1% around their I.P.O. dates, adjusted for Nasdaq market trends. Firms with smaller catch-up expenses underperformed the market by a lesser margin. Although causality is difficult to establish, Riethmueller suggests that the deferred recognition of compensation costs contributes to unexpected financial restatements, adversely affecting investor confidence.

Disclosure requirements related to these expenses have also been questioned. Many companies omit clear assessments of the operational impact of catch-up charges in their S-1 filings or fail to detail the timing and magnitude of future costs derived from pre-I.P.O. R.S.U. grants. Cybersecurity firm Rubrik, for instance, disclosed over $600 million in catch-up expenses prior to its I.P.O. but did not quantify nearly $475 million in additional costs resulting from unvested grants until after going public. Rubrik did not respond to requests for comment.

The prevailing accounting treatment is supported by the “Big Four” auditing firms—Deloitte, EY, KPMG, and PwC—who audit the majority of companies with significant deferred expenses. These firms argue that I.P.O.s involve inherent uncertainty and external factors beyond company control, justifying the delayed expense recognition. The Securities and Exchange Commission (SEC) has thus far accepted this interpretation without enforcing changes, even as critiques arise advocating for more prompt expense recognition or enhanced risk disclosures.

Accounting experts note the tension with the principle of conservatism, which typically favors recognizing expenses as early as possible to avoid overstating earnings. Some industry voices suggest that additional transparency about these deferred costs could better inform investors without fundamentally altering accounting standards.

As several large start-ups, including Anthropic and OpenAI, prepare for public listings, the handling of double-trigger R.S.U. expenses remains an unresolved issue. Critics warn that regulatory decisions—such as the SEC’s proposal to allow semiannual financial reporting—may delay investor visibility into these significant compensation expenses, potentially exacerbating risks for shareholders. Both Anthropic and OpenAI did not respond to inquiries regarding their use of this accounting practice.