ESO's Monthly Start-Up

October 2024

Private Companies, Staying Private — How this Impacts Employee Equity

In recent years, private companies are staying private for much longer, and growing much larger before entering the public market. As of May 2024, there were more than 1,200 private companies valued above $1B (aka unicorns) around the world, per CB Insights.

Starting with notable companies like Google (2004 IPO) and Facebook (2012 IPO) the trend of staying private longer has expanded beyond just high-profile, best-in-class companies, and now influences a broader range of startups. According to Hamilton Lane, in January of 2022, 87% of US companies with >$100M in revenue were private. They also note that in 2000, the typical company went public after 4.5 years, while by 2020, the average time to IPO had extended to over 12 years.

A major driver of this lengthening of the IPO timeline has been the influx of venture capital since the early 2000s. In earlier years, they would have needed to go public to secure funding at such high valuations. This trend allows businesses to focus on scaling and maintaining control without the pressures of public markets, but it also leaves employees with stock options in a difficult position—holding valuable, yet illiquid, equity.

To address this, many startups have begun offering tender offers to provide liquidity for employees. Examples like Stripe, which announced a $6.5 billion tender offer in February 2024, and Rippling’s Series F round in April 2023, where it raised $500 million and offered a tender option for its employees, illustrate how leading private companies are responding to this challenge. While companies aren't obligated to provide liquidity options for employees, they must address morale and fulfill the implicit promise of delivering value through equity.

These types of transactions allow employees to sell portions of their equity either back to the company or to investors, giving them access to much-needed cash well before a potential IPO. The rise of these liquidity events underscores the changing landscape in the tech and startup sectors, where prolonged private funding rounds are becoming the new normal. Over the past two years, with IPO activity nearly at a standstill, the path to traditional liquidity has been extended even further.

Why this matters: The extended timeline to IPO can significantly delay employees from unlocking the financial benefits of their equity. This increases the risks of exercising and holding stock options, especially when personal financial needs arise. However, the rise of company-sponsored tender offers and third-party secondary sales gives employees a chance to sell shares early, providing liquidity without waiting for an uncertain IPO. Whether it's for life changes like purchasing a home or funding education, these options offer more financial flexibility for employees of strong companies.

Tips of the trade

A section where we provide helpful tips for anyone with stock options or shares at private companies.

Evaluating a Pre-IPO Sale.

As a startup employee, deciding whether to participate in pre-IPO sales—whether through secondary markets or company tender offers—can be a complex yet significant choice. Here are key factors to consider:

Understanding the Price Being Offered
When evaluating a pre-IPO sale, it’s essential to compare the offered price against the Fair Market Value (FMV) and the latest preferred price. This analysis helps you gauge if the sale price aligns with the company’s current valuation and future prospects. Ultimately, you want to ensure you're receiving a fair price for your stock.

Opportunity Cost and Time Horizon
Reflect on the opportunity cost of selling your shares now versus holding onto them. Look into safer alternative investments and evaluate their potential returns against your company’s projected growth. Additionally, consider how long you might need to wait for a liquidity event like an IPO or acquisition. This timeframe is vital for financial planning, helping you decide whether to sell part of your shares or retain them for future gains.

Selling a Portion vs. 100% of Shares
Think about selling just a portion of your shares instead of all of them. This strategy allows you to realize immediate financial benefits while still maintaining an interest in the company’s future upside. Diversifying your holdings can help balance risk and reward, providing both financial flexibility and peace of mind.

Identifying and Understanding the Buyer
Knowing who the buyer is can shed light on their motivations and the fairness of the offered price. An informed inside investor may pay a premium for your shares, reflecting their confidence in the company’s trajectory. On the other hand, an individual outside buyer might lack the same understanding or commitment, which can affect their offer and reliability. Consider whether the buyer is front running a potential funding event that could raise the company’s valuation in the near-term, or if they’re basing their offer on recent positive momentum.

By thoughtfully weighing these factors, startup employees can make informed decisions about pre-IPO sales, balancing immediate financial needs with potential long-term benefits. Each situation is unique, so thorough research and professional advice are essential before proceeding with any transactions.

Financing your option exercise can be expensive and a require a large capital outlay. Feel free to reach out to us to discuss your options for partnering with ESO to exercise your options risk-free.

The ESO Fund does not provide legal, financial, or tax advice.

Public Multiples Check-in: "Yesterday's Price is not Today's Price"

While September has historically been a tough month for the stock market, the month ended up being great for all 3 major indices. The S&P500, DJIA, and NASDAQ had gains of 5.4%, 8.2%, and nearly 3%, respectively. Of the industries we track, Healthtech showed the largest year over year multiple decline at 16%, while Real Estate multiple expansion was the largest at 43%. 

Why this matters: This past month had a huge event with the Fed’s surprise jumbo rate cut. The cut, along with signs of resiliency in the US economy, have bolstered investor confidence. While the election is likely to add some volatility to the market over the next couple of months in the lead up to that, the general sentiment for the market outlook seems to be positive.

September's Top Ten:

  1. The biggest news this month is the massive OpenAI raise. OpenAI is expected raise around $6.5 billion at a $150 billion pre-money valuation, while also turning down billions of oversubscribed dollars. This would be the largest venture capital round of all time, topping the $6 billion raised earlier this year by Elon Musk's xAI.

  2. Anthropic, OpenAI's largest competitor, is in talks with investors to raise funds, potentially valuing the startup between $30 billion and $40 billion. This would nearly double its valuation from earlier this year, according to an existing investor.

  3. The IPO backlog is continuing to thaw, with Fintech banking startup Chime hiring Morgan Stanley to lead its planned IPO next year. The real question here is going to be valuation. The company was last valued at $25 billion in 2021, at a time when fintech valuations soared amid low interest rates.

  4. MNTN, a connected advertising platform with Ryan Reynolds as its Chief Creative Officer, is reportedly also in talks with Morgan Stanley to lead its IPO. The company could go public as soon as 2025.

  5. Hinge Health plans to go public next year after raising $300 million from investors led by Coatue Management and Tiger Global Management at a valuation of $3 billion. The latest funding round came after the digital physical therapy platform quadrupled its revenue in 2020, as more consumers accessed the healthcare system from home during the COVID-19 pandemic.

  6. ByteDance has raised its share price in the latest employee buyback, aligning with secondary market trades that have increased its valuation to nearly $230 billion. The TikTok parent company set the price for the upcoming employee share buyback at about $181 per share and will offer former employees around $154 per share.

  7. Safe Superintelligence (SSI), co-founded by OpenAI's former chief scientist Ilya Sutskever, has secured $1 billion to develop advanced AI systems. With a team of 10 employees, SSI intends to use the funds for computing resources and hiring talent.

  8.  The election is right around the corner, and some start-ups are taking advantage. Polymarket, the largest online prediction market and crypto-based political betting site, is in talks to raise $50 million.

  9. Blackstone and Vista planning to take Smartsheet private $8.4 billion in cash, in what would be one of the largest tech acquisitions of the year. The purchase price of $56.50 per share represents a 41% premium over a volume-weighted average of Smartsheet’s recent share price.

  10. WordPress and WP Engine have been duking it out this past month, with WordPress co-founder Matt Mullenweg this past week calling WP Engine “Cancer to Wordpress”. Various back and forths have occurred since then with cease-and-desists, trademark infringement claims, and blocked service. This story is ongoing.

Why this matters: While AI is still dominating the headlines with some huge funding rounds, there’s starting to be some movement with older start-ups in less “hot” industries such as fintech and healthtech filing to go public. With the recent interest rate cute and indications that there may be more to come, lower overall cost of capital is going to provide a more favorable ecosystem for VC-backed companies going forward.

Hot startups that are still hiring!

Open positions are per the company's website.

About ESO Fund

ESO Fund empowers startup employees to turn their stock options into reality. Since our inception in 2012, we've been dedicated to providing risk-free funding for the exercise of stock options, ensuring that individuals can seize the opportunities embedded in their equity.

Our mission is simple: to make equity compensation accessible and understandable. Through our innovative solutions, we've assisted countless individuals at 650+ companies in realizing the full value of their stock options, contributing to the success stories of numerous startup employees.

For more information on ESO Fund and how we can help fund your option exercise, please refer to our website at www.esofund.com!