Startup Workers Face Dilemma on Options

"Startup workers looking to cash in their stock options are being forced to make tough choices: Hawk their shares at a sharp discount on secondary markets, press their multibillion-dollar employers to go public in a rocky market, or hold on and hope the market will recover.

Amber Atherton, a partner at venture firm Patron, says she and others in Silicon Valley who own startup shares as current or former employees of startups aren't responding to bids from buyers in secondary marketplaces.

"They bid a price -- it's very low right now," Ms. Atherton said, adding that she isn't selling. "There's a lot of inbound activity on secondary sales, but I imagine they are not getting a lot of interest."

The issue is coming to a head as late-stage ventures once primed for initial public offerings are instead opting to stay private indefinitely, citing unfavorable conditions. Meanwhile, an ongoing reset of private-market valuations has startup founders reluctant to sell their businesses any time soon.

The windfall for startup shareholders typically comes with either an IPO or acquisition.

New, cash-strapped ventures offer shares in the startup as a recruiting incentive in lieu of higher paychecks. But that perk is far less meaningful when stock prices are sinking.

Facing pressure from workers, Stripe Inc., a 13-year-old payments startup, last month set a goal of either taking the company public or allowing workers to sell shares in secondary markets within the next 12 months. Stripe has since reduced its internal valuation to $63 billion, a far cry from the $95 billion set in a March 2021 funding round, The Wall Street Journal previously reported.

In October, grocery-delivery startup Instacart Inc. scrapped a planned fourth-quarter IPO, citing turbulent markets. Earlier in the year, Instacart executives told investors the IPO was specifically aimed at allowing workers to sell their long-held shares, the Journal previously reported.

The standstill is especially vexing to workers with the tech sector aggressively laying off employees, said Vieje Piauwasdy, senior director of equity strategy at Secfi Inc., a San Francisco-based firm that provides financing for startup workers to exercise stock options.

"Everyone is pretty frustrated about the whole situation," Mr. Piauwasdy said. "The last thing you want to do is screw over your employees that have been with you from the start."

At the same time, the leverage workers have over their employers is very diminished in the current job market.

"This isn't a time for companies to be thinking about liquidity for employees. Employees are happy to have jobs, given the layoffs in the tech sector," said Frank Rotman, co-founder, partner and chief investment officer at venture firm QED Investors.

The median age of startups when they go public has been creeping up for decades. It was six years between 1980 and 1989, and rose to 11 years between 2001 and 2022, according to an analysis by University of Florida researcher Jay Ritter. Troubled markets over the past year are prolonging the wait even further, analysts said.

Only 76 venture-backed startups in the U.S. went public last year, down from 303 in 2021, and the lowest number in over a decade, according to a joint report by market analytics firm PitchBook Data Inc. and the National Venture Capital Association, an industry group. Over the same period, 869 U.S. startups were acquired, down from 1,258, the report said.

Taken together, exit value last year across the U.S. startup sector fell more than 90% from 2021 to $71.4 billion, the report said.

"Imagine joining a growing startup in 2021, being pitched on a 2023 IPO, and taking a massive pay cut but lots of stock options," said Phil Haslett, co-founder and chief strategy officer at EquityZen, an online marketplace for trading employee shares in privately held companies. "Then you're told that the company is delaying their IPO for, roughly, forever," he continued. "That's a recipe for shareholder animosity."

Mr. Haslett said as many as 300 private-company shareholders are signing up for the company's trading platform every week, including workers at unicorn startups -- private ventures valued at or above $1 billion. That is a sharp increase in new users from the previous quarter, he said. "Clearly there's a sense of urgency to get some cash in the bank. Stock options don't pay the bills," he added.

Yet selling private-company stock options -- if vesting conditions allow for pre-IPO sales -- can come with steep discounts, especially in wavering markets. EquityZen saw discounts on its platform over the December-January period average roughly 40% of share prices set at a startup's previous funding round, Mr. Haslett said.

As they grow more impatient, workers often pressure startup founders to accelerate exit plans, investment bankers and venture-capital market lawyers said. There are also costly tax implications for startups as worker stock options mature or expire, they said.

Whether a company responds to employee dismay depends on the situation, said Larry P. Naughton, an attorney who works with startups and venture firms at the law firm of Mintz Levin Cohn Ferris Glovsky & Popeo PC.

"For the shareholders who are not employees, it is not really an issue if the employee shareholders aren't getting the price they had hoped to get for their shares," he said.

"One definite impact it does have, however, is on the morale of the employees. If they've concluded that their equity isn't worth what they thought it was worth 12 months ago, then that is discouraging," he said, adding that companies are more likely to lose valuable workers in such a scenario.

As they extend the runway to an exit, some late-stage startups are taking steps to provide workers with other financial options. For instance, after postponing its IPO, Instacart offered companywide bonuses to employees.” [1]

1.  Startup Workers Face Dilemma on Options
Loten, Angus; Chernova, Yuliya.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 14 Feb 2023: B.11.