Tech Layoffs May Have More to Do with the Cost of RSUs Than AI
The world’s largest technology companies—Alphabet, Microsoft, Amazon, along with Meta Platforms—are widely perceived to be spending at unprecedented levels to secure their positions in what many believe will be the defining technological shift of the next decade. Nevertheless, there is a narrative forming around the artificial intelligence (AI) arms race that seems incomplete.
The assumption—reinforced almost daily by headlines and prepared statements on quarterly earnings calls—is that nearly all this capital is being funneled into the infrastructure needed to power increasingly complex AI workloads. But buried within the financial statements is the sobering reality that a meaningful portion of the capital currently being raised isn’t going toward AI infrastructure at all. Instead, it’s going to the IRS.
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For years, equity compensation and restricted stock units (RSUs), in particular, have been framed as an elegant solution for high-growth companies. It aligns employee incentives with shareholder outcomes, preserves cash, and creates a culture of ownership. Yet, the notion that stock-based compensation is “non-cash” is only partially true.
When RSUs vest, they are taxed as ordinary income based on the present value of the shares. In practice, most companies withhold a portion of those shares and remit the equivalent cash value to the IRS on behalf of the employee. From the employee’s perspective, this simplifies the tax withholding process. From the company’s perspective, however, it creates a very real and often volatile cash obligation.
The irony is that soaring stock prices can actually create a growing cash crunch for companies that rely heavily on equity compensation. Since RSUs are taxed based on their value at vesting, every increase in a company's share price raises the amount of cash that must be remitted to the IRS on behalf of its employees. In other words, the more investors buy into the promise of AI, the larger the company's tax-withholding obligations grow.
For proof of this phenomenon, look no further than Alphabet’s recent announcement that it plans to raise $80 billion through a stock offering. And while the headline explanation centered around the company’s need to secure funding for AI infrastructure, data centers, and compute capacity, the more revealing detail was buried deeper in the offering documents. Roughly $30 billion—or close to 40%—of the proceeds is expected to be used to satisfy tax withholding obligations associated with employee equity awards.
That figure is striking; not only because of its size, but because it illustrates how quickly these obligations can grow when a company's stock price appreciates. As Alphabet's shares have climbed toward record highs, the value of the RSUs vesting for employees has also increased. Consequently, the amount of cash the company must send to the IRS on behalf of those employees has surged, effectively creating a second capital requirement that exists alongside the billions being invested in AI infrastructure.
And Alphabet is not alone. Across the largest technology companies, years of rising stock prices have created an environment where equity compensation is both one of the most effective tools for attracting talent and one of the largest drains on free cash flow. Investors tend to focus on capital expenditures because they are visible and easy to measure, and the cash required to administer massive stock compensation programs is far less obvious or exciting.
Viewed through that lens, the wave of layoffs that has swept through the tech sector over the past two years may be worth a second look. The prevailing narrative has been that advanced AI models are replacing workers and making portions of the workforce redundant or obsolete. And while the efficiencies and cost savings brought on by AI are certainly encouraging, they may not tell the whole story.
When an employee leaves a company before their RSUs vest, those shares are typically forfeited. No vesting event means no tax-withholding obligation. Therefore, reducing headcount does more than reduce expenses related to a worker’s salary and benefits. It can also materially reduce future equity compensation costs and the cash obligations that accompany them.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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