ESO's Monthly Start-Up

April 2024

Winners and Losers of the Reddit IPO

We’ve talked prior months about how the IPO market affects the Venture Capital and Startup landscape as a whole. Most people, ESO included, agree a more robust IPO pipeline would increase the number VC funding rounds and further open up private market liquidity through secondary sales, M&A, and of course, more IPOs.

Given Reddit’s recent IPO, we thought it would be interesting to look back at the numbers, and more specifically, how did Reddit’s employees and VC investors do?

Below is a graph of Reddit’s private stock price over time, for both Preferred and Common stock (all price data from Reddit’s Form S-1). One caveat: any pre-IPO Reddit shareholder (employee or investor) is subject to their IPO Lockup Period, which prohibits selling until at least August 2024. All the numbers here are strictly “on-paper” using the closing price of $45.97 on April 1st, 2024.

Reddit was technically founded in 2005, but our graph doesn’t start until their first priced round in 2012 (Series A). We can assume that anyone with stock prior to 2012 was part of the early team and did great in the IPO.

As of market close on Monday 4/1, all Series A through E investors are “in-the-money”, even though Series E investors were technically below their $42.47 issue price at the original IPO price. Only Series F investors and employees hired in 2022 are “underwater” at this price. So how well did they all do? Let's start with the VCs.

Series A (17.22x), Series A-1 (7.75x), and Series B (7.34x) investors all knocked it out of the park. The investment took over a decade to reach liquidity, but these massive return multiples are huge hits for those funds. Not too much to cover here: early stage investing is a very high risk, high reward business.

Series C (2.92x) and Series D (2.12x) is where it gets interesting. Despite generating more than a 2x return on their capital, these investments took more than 5 years to materialize. In that same time period, the S&P 500 generated a 2.12x and 1.97x return respectively. Overall, the Series C investors will take their 37% better return than the S&P. The Series D investors, however, only beat the S&P by 8%.

Finally, the Series E (1.08x) investors are barely sitting above their cost basis, while Series F (0.74x) investors are down 25% (both losing to the S&P over their respective time periods).

Now to the employees! Below is a table of employees who started at each funding round. This includes their strike price, the cost to exercise 1,000 shares, and what those shares are worth today. All exercise costs assume $0 in taxes, which is unfortunately rarely the case, but this allows us to compare these apples to apples - as if they are being exercised and sold today.

As you can see, employee returns followed a similar pattern to those of the VCs. If you were in early, you did great. If you got in at the highs, you did not.

Why this matters: Without going line by line, three things stand out.

  1. Employee pricing rules! Employees get in at cheaper prices than VCs, so they stand to gain even more in an IPO. VCs pay a premium for certain rights associated with preferred stock, but if your company is on the IPO track, it’s great to own common. This is most notable for the Series F employees who are only $5 below their strike price, compared to the VCs who are $15 in the hole.

  2. Recent Reddit hires did okay. We’ve established the most recent investors are down around 25%, but per the S-1, anyone hired after June 2022 is in the money! Since the FMV of Reddit’s common stock dropped alongside the rest of the market in 2022, they were able to grant cheaper options during that time period that are up 67%. Hopefully, anyone with a $49.59 strike price was able to reprice their options to a lower value when the FMV dropped. This is a common courtesy extended by companies to employees, not a guarantee.

  3. Yesterday’s price is not today’s price. We hit on this slogan numerous times in 2023, but this graph does a great job of showing it. The market got a bit too hot in 2021 when Reddit raised at a $10B valuation. Within a year of their funding round, their FMV dropped more than 30% (as much as 45%). They priced the IPO at 45% below the Series F preferred price and even at Monday’s close, it sits almost 37% lower than common’s all time high. This paints a perfect picture of why companies are struggling to raise money in today’s market. If a titan like Reddit is worth almost 40% less than its most recent private valuation, you can imagine many others are in the same boat (or worse). Reddit is fortunate enough to have a strong enough brand and business to be publicly traded. Other smaller companies. not yet ready for an IPO, must raise additional funding prior to any exit. The issue is they don’t want to raise at lower valuations so must grow efficiently until the market is ready to pay them the price they are looking for.

Overall, Reddit is a great case study for startups as a whole. It shows the full story of a meteoric rise that ran into a market reset. Preferred pricing got ahead of itself, but the FMV ended up being a close representative of the company’s value. With many companies currently trading close to their FMVs in the secondary market, this IPO does add to the fact that shareholders need to be comfortable with lower prices if they want to get liquid any time soon.

Tips of the trade

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

Stock Options during Tax Season

Tax season is upon us! Given the lengthy intro, we’ll keep this section quick. If you have stock options in a private company, how does that impact your tax filings?

When you’re granted stock options there are no taxes, so nothing to worry about! You do, however, owe taxes when you exercise and sell.

For ISOs, you owe AMT at exercise. In January of the year following your exercise you will receive a Tax Form-3921, which will contain the number of options, strike price, and FMV for your exercise. Using this form with any Tax Software or CPA should be pretty straight forward. The nuanced aspect of ISOs is the AMT Credit system, where you get your AMT back over time (no time to cover in full).

For NSOs, you are taxed by your company when you exercise. Just like with your paychecks, your company will withhold taxes when you exercise NSOs, and their number is not always correct. When filing taxes, the NSO income and taxes withheld will be included in your W-2, so it is trivial to process.

When you eventually sell shares, like many Reddit employees may do this fall, you pay taxes on the profits either via Short-Term or Long-Term Capital Gains.

Overall, the taxation of stock options isn’t too complex. It is, however, important to know ahead of time how much you will owe for any ISO exercise or stock sale as you should ideally set that money aside until it is due. NSO exercises are less tricky as the company hopefully gets their withholding numbers close to the truth.

Funding your option exercise and taxes can be expensive and 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

March was a huge month for the market as we saw all three major indices hit all time highs. The DJIA, NASDAQ, and S&P 500 were all up 5.03%, 9.11%, and 10.16%, respectively, posting the fifth month in a row of gains. Multiples for the sectors we cover have also been trending higher, with all besides Enterprise SaaS and Cryptocurrency being in the green. Enterprise SaaS and Cryptocurrency multiples have seen declines of 16% and 7% year over year, respectively.

Why this matters: Market conditions continue to look really good, and with the strong showing from Reddit and Astera Lab IPOs this past month, there is really no good excuse for late stage companies to continue to delay a public debut. We expect to see the number of IPO filings to continue to trend higher as we move through the year.

March's Top Ten:

  1. The Reddit and Astera Labs IPOs take the cake for biggest news stories of the month, as they may be a bellwether for sunnier forecasts for other companies looking to exit.

  2. Denver-based Ibotta is hoping to follow in Reddit and Astera Labs footsteps, filing with the SEC this month to go public. The consumer rebate platform generated $320 million in revenues last year and is profitable. The company was last publicly valued at $1 billion in 2022. Healthcare startup Tempus is also making plans, having hired Morgan Stanley to run an initial public offering in the coming months. Tempus is a medical lab testing and data company, and has raised more than $1.3 billion in private funding.

  3. Funding drought where? Andreessen Horowitz is moving closer to raising $7 billion for multiples funds for growth and sector focused funds. The fundraising efforts are expected to close in early April, and half of the total target will be from committed capital to its fourth growth fund.

  4. ScaleAI, a San-Francisco based company that provides training data to companies like OpenAI, is in talks with Accel to raise a new funding round at a valuation of $13 billion. This would be an 80% increase from their previous valuation.

  5. Cohere, a large language model developer for the enterprise market, is also looking to raise soon. The company is seeking to raise at least $500 million from investors at a valuation close to $5 billion.

  6. Cameo, the celebrity video shoutout app, authorized a $28 million round of funding in March led by Valor Equity Partners for less than $100 million valuation. The round would mean at least a 90% drop from its previous valuation in March 2021, when the pandemic was fueling much of the company’s success.

  7. We are coming to the conclusion of the FTX and Sam Bankman-Fried story (which is a little sentimental since we featured it in our first edition of the newsletter). SBF was sentenced to 25 years in prison this past month for fraud.

  8. Bolt is continuing to take L’s, being featured in the news twice during March, but not for anything good. First, Maju Kuruvilla was ousted as CEO from the company a couple of weeks ago in favor of Justin Grooms after the board voted him out. Secondly, the Information dropped an article last week about another legal battle for the one-click check out company as Fanatics has filed lawsuit against them for improperly reneging on its contract.

  9. Canva, the web-based design platform, acquired the Affinity creative software suite on the 25th for an undisclosed amount. The acquisition is notable because it means some serious competition for Adobe’s dominance over design software.

  10. OpenAI and Microsoft are continuing their partnerships, this time, with Stargate, a new AI super-computer datacenter. The cost of the project could be upwards of $115 billion and is planned for launch in 2028.

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!