ESO Monthly Start-Up

August 2024

The Wait for the Next Startup Party - An Option Exercise Story

Ah 2020 and 2021, the good ole days. When you could wake up, drop a couple hundred bucks on a meme coin or junk NFT and flip it for 100% profit the next day. Life was good.

While not as extreme, for tech workers, you could basically throw a dart at any tech start up and there was a decent chance they'd IPO. In turn, confidence in option exercise was high. However, as the party ended and it became clear that not every tech worker would become a millionaire, sentiment on option packages and exercising your options dimmed as well.

As seen in the graph below from Carta’s H1 2024 State of Startup Compensation, employees are more focused on their salary packages than their equity. Salaries have remained relatively stable over the past two years, while equity packages have seen a decline of 36%. With high inflationary pressures and stall in exit activity over the past couple of years, employees are likely putting more emphasis on money in the bank than a riskier benefit like equity.

Additionally, for that equity that has been granted, employees aren’t spending their funds to exercise, thus allowing their options to expire. As the graph below points out, option exercise rates are at some of the lowest levels they have been in quite some time, having dropped from a high of 54.7% in 2021 to a low of 32.8% in the second quarter of 2024.

Why this matters: It’s unsurprising employees are bearish on option packages in 2024 given the state of startup equity. However, with the VC landscape expected to see some positive tailwinds in the near future with the Fed lowering interest rates and a robust pipeline of late stage companies expecting to IPO, employees may begin to feel more confident in their option packages as people start making some serious money from their equity again. Until then, the wait for the next party continues…

Tips of the trade

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

Fair Market Value (FMV)

For employees in private companies, understanding FMV is essential. Unlike public companies, where stock prices are readily available, private companies rely on independent appraisals to determine the FMV of their common stock. This value reflects what the stock would be worth in an open market and is pivotal for two main reasons:

  1. Option Pricing: The FMV sets the price for new employee stock options. If you’re granted options when the FMV is $1.00, that’s your cost per share to buy in.

  2. Tax Calculations: When exercising options, taxes are based on the difference between the FMV and your option’s strike price.

Why It Matters?

Knowing the FMV helps you make informed decisions about accepting job offers and exercising options. It’s the difference between buying stock blindly and making a strategic investment in your future.

409a Valuations

The FMV is determined by a 409a Valuation, legally required to be updated annually or after significant company events like funding rounds. This valuation, which can be internal or by an independent firm, compares your company to similar public entities, cash flows, and assets.

The 409a Impact

Post-Enron, the IRS introduced Section 409a to ensure fair pricing by mandating independent valuations. This prevents undervaluation for personal gain and is a safeguard against IRS penalties.

Finding Your Company’s FMV

Most companies use equity portals like Carta or Shareworks, where the FMV is listed. If not, contact your equity manager or HR to get the current 409a price before exercising options to understand your tax obligations.

Funding 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"

July equity markets were more volatile than they have been the previous few months, but for the most part finished higher due to gains in the first half of the month. While the Dow and the S&P500 rose 4.5% and 1.2%, respectively, the NASDAQ slipped 0.7%. Notably, small caps outperformed in July, with the small-cap Russell 2000 index surging 10.2%. While the Technology sector has been a strong performer this year, it was only one out of eleven sectors to finish in the red. The sectors we track saw mixed performance the past month. Consumer, Industrials, Cryptocurrency, and Real Estate all saw multiples increases, while FinTech, Enterprise SaaS, and HealthTech trailed lower.

Why this matters: We are starting to see some signs that there’s a market correction incoming, and we expect things to continue to be volatile in the upcoming months. With a high likelihood of the Fed cutting interest rates in September (markets are nearing a 100% probability), this move should alleviate some pressure, and could be the catalyst needed for some additional IPO activity before year end.

July's Top Ten:

  1. The biggest news of the month was Google’s bid to acquire Wiz for $23B, and their ultimate rejection of that deal. It was a huge number to turn down, especially given that it would have been the most lucrative deal ever proposed for a startup. The company has indicated they are going to be instead pursuing the milestones of $1 billion in ARR and an IPO.

  2. Cohere, a generative AI startup, has raised $500M this past month at a $5.5B valuation. The round was led by PSP Investments, a Canada-based pension investment manager.

  3. Groq, a leader in fast AI inference,  just announced that they have secured a $640 million Series D round at a $2.8 billion valuation led by Blackrock. The deal is a major win for the company as they were originally looking to raise $300 million at a slightly lower ($2.5 billion) valuation. The money will help the company challenge its competitor, Nvidia.

  4.  AI-video maker Runway is in talks with investors including General Atlantic to raise $450 million at a valuation of $4 billion valuation. The company was last valued at $1.5 billion after it raised $141 million from investors last year.

  5. Andreessen is reportedly  building a stash of more than 20,000 GPUs to win AI deals. This program is highlighting A16z’s aggressive moves into generative AI investing in the last two years.

  6. Sequoia has offered to buy $861 million worth of Stripe shares from some of the venture firm’s investors. The price implies a $70 billion valuation for the payments provider.

  7. AI startups have been the hot commodity the past two years, with investors clamoring to invest. This is good news for these companies as it has been taking some serious cash burn to keep them running. Anthropic, an OpenAI rival, is projected to burn more than $2.7 billion in cash this year as it developed new conversational artificial intelligence.

  8.  Canva acquired Leonardo.ai this past month to boost its generative AI efforts. The move comes as the company is increasingly making strides to keep up with Adobe.

  9. Skims is reportedly preparing to interview banks to lead an initial public offering that could come as soon as the first half of 2025. The company last raised at a $4 billion valuation last year.

  10. Stubhub is dragging its feet on its IPO however. The company had been initially aiming for an IPO this summer in line with the $16.5 billion valuation it raised at 3 years ago, but investors have had some questions about the companies growth forecast. The listing likely now won’t happen until next year.

Why this matters: Even though the Google’s Wiz deal didn’t go through, the increased acquisition interest is a great sign for an industry that hasn’t seen a ton of activity in the past couple of years. We expect to see a continued uptick in activity as the economy improves and the Fed decreases interest rates.

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!