Anthropic is an opportunity to rethink IPO rules

The writer is a clinical associate professor of law at Yale Law School

As Anthropic prepares to go public, setting in motion an unprecedented race for capital to finance the AI revolution, investors who are considering buying a stake in this enormous venture should take a moment to think about the scale of rewards that are being handed out to employees and executives.

Most highly valued tech start-ups incur substantial expenses from these payments. Many defer those expenses until after they have joined the stock market.

When Anthropic released its amended listing document on Monday, it projected total unrecognised stock-based compensation expenses of approximately $32bn — an unprecedented figure.

These massive projected stock-based expenses will probably climb higher. Anthropic disclosed that it has approved additional pre-IPO awards but has not specified the amount.

The scale here is unusual but the behaviour is not. My research shows that US unicorns — venture capital-backed start-ups valued at over $1bn — that went public between 2014 and 2024 largely deferred recognition of sizeable stock-based compensation expenses until after their IPO. By doing so, they risked catching investors off guard when they released earnings for the quarter in which they went public. If the previously deferred compensation costs were significant, there was a greater risk that the stock market would react negatively.

Look at Uber. After the San Francisco ride-hailing company went public in May 2019, it reported $3.6bn of previously deferred stock-based compensation expenses — something that contributed to a $5.2bn net loss for the period. The company’s share price fell after the earnings announcement.

Anthropic, like Uber, uses a type of equity award called double-trigger restricted stock units (RSUs) to attract and retain talented employees. These are equity awards that provide company shares to executives and employees once certain conditions are met, such as an IPO. Instead of receiving a large salary immediately, employees have the chance for an outsized payday if the start-up goes public or is acquired.

The liquidity-based trigger allows these companies to defer the compensation expenses until the IPO becomes probable. Companies typically justify deferral by saying that the IPO was not probable for any prior reporting period.

This is why Anthropic did not include the accumulated $8.2bn in stock-based compensation expenses in its reported $1.26bn operating loss for the nine months to 30 September.

For investors who buy into a company’s publicly traded stock before heavy equity award expenses are reported as part of operating expenses, these under-reporting practices can be costly. My research shows that deferring stock-based compensation expenses of $107mn or more (adjusted for inflation) until after an IPO is associated with a high risk of stock price decline relative to the market.

Expenses do not stop after the IPO either. Companies often intensify employee award activity ahead of a listing, meaning substantial compensation expenses will continue to impact financial results.

Investors in Anthropic stock need to be aware that the company will report massive operating expenses from its pre-IPO award activity this year and, in all likelihood, next year too.

Serious consideration should be given to reforming the accounting rules that permit deferral of stock-based compensation expenses until after an IPO. In order to afford greater protections to investors, start-ups should be pushed to be more transparent about the expenses they expect to report once they become public companies.