ESO's Monthly Start-Up

February 2023

Oh, how the tables have turned

If you've been following the VC industry at all during this economic downturn, there's probably one word you have heard over and over again: "dry powder." Dry powder is the amount of unspent cash reserve a firm has yet to invest. It's been a big topic lately because VC seems to be sitting on a record amount of capital, but aren't deploying it.

What led to this record capital? Despite the lackluster exit environment in 2022, VC's had a huge fundraising year, raising a record $162.6 billion across 767 funds. Most of this raise is likely due to the extremely profitable years and eye-popping returns VC had posted during the bull market. However, with the party coming to an end (at least for a little while), VC's are having to be more thorough in their diligence process rather than throwing money at anything that has ".io" or "AI" in it. This has led to an issue where start-ups are finding themselves unable to access VC cash.

Pitchbook recently reported that in Q4 2022, the estimated amount of capital demanded by US startups outpaced the capital supplied by $42.8 billion, or 2.1x more capital demanded than supplied. Additionally, this imbalance has hit all three stages of the US venture market, with their estimations indicating that capital demand is outpacing supply by 50.5% for the early stage, 148.5% for the late stage, and 67.1% for venture growth.

Why this matters: Expect to see more down rounds, structured financing, and better deal terms for investors relative to 2021 as this shift in supply and demand of capital plays out. VC money is definitely still out there, but its going to be much more difficult for start-ups to access. Simply put: in 2021 companies had immense leverage in fundraising situations. In 2023, the leverage is firmly in the hands of the investors.

Tips of the trade

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

How to calculate Alternative Minimum Tax?

Alternative Minimum Tax or AMT as we call it was initially created to ensure wealthy Americans paid their fair share of taxes. AMT is important to ESO however because it can be triggered if you exercise Incentive Stock Options aka ISOs. Below we will quickly walk through how AMT Tax works!

The basic premise of AMT is that there are 2 ways to calculate your taxes: 1) the normal way with standard deduction and different income brackets etc & 2) the Alternative Minimum Tax way.

It's in the name: "Alternative Minimum Tax" literally means that if your taxes calculated the AMT way are higher than your taxes calculated normally, you pay you Alternative Minimum Tax.

For ISOs here is how that works:

First calculate your taxes as normal without the ISO exercise involved. Note that number.

Next you will calculate your AMT:

  1. Take your total income for the year and add to it the "income" from your ISO exercise to yield your AMT Income or AMTI. This "income" will be the current Fair Market Value (FMV) minus your strike price times the total number of shares ie (FMV-Strike) * numShares

  2. Subtract the AMT Exemption amount from your AMTI (for 2022 taxes individuals can exempt $75,900.00).

  3. Multiply the above number by either 26% or 28% depending on your income level.

Finally, you compare the tax number from the beginning to your newly found AMT number. Unfortunately you will pay the higher number of the two. If your normal tax number is higher, your ISO exercise did not trigger AMT. If your AMT number is higher, the difference between the two numbers is the AMT associated with your ISO exercise.

This fairly simple calculation is important to understand as an ISO holder not only because it will affect you when you exercise, but you can also use it to determine how many options you can exercise without owing AMT (which we have covered in the past!).

For more on calculating AMT please check out our very own AMT Calculator.

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.

Large tech players led January layoffs

The relative December holiday from layoffs ended with four rounds of mega layoffs coming in January. These layoffs were led by Google who let go of 12,000 employees, followed by Meta and Microsoft at 11,000 and 10,000 employees, respectively. Amazon hit their work force with a second round of layoffs as well, bringing their total laid off in the past two months to 18,000.

Why this matters: Large rounds of layoffs for these big time tech players means a larger pool of talent for startups to try and snag. While not able to offer the same salary and benefits that Amazon and Google may be able to, they are able to offer equity packages that, if the company performs well, may end up being much more fruitful in the long term. If you have recently been impacted by layoffs, check the bottom of the newsletter for startups that are currently hiring.

Brought to you via layoffs.fyi

Brought to you via layoffs.fyi

Secondary Market Sentiment: a local max?

The graph below displays the ratio of buyers vs sellers for a given month on the private secondary market. Months with more buyers than sellers are displayed in green while months with more sellers than buyers are displayed in red. All data pulled from Zanbato, the below list does not imply completed transactions, simply intent to either buy or sell shares.

Will we get a green bar before May 2023? January marked the 20th consecutive month of negative sentiment on our Secondary Market Oscillator. With the S&P 500 up 7.5% as of Monday night (2/6/23) there is some hope the private markets will rebound somewhat. The good news here is that January 2023 marked the most active month on Zanbato since we began tracking the data in March of 2020. January also marked the 2nd most bids on the platform since September 2021 (only trailing November 2022).

Below are the most active companies on the secondary market per Caplight.

Why this matters: We don't believe the private markets will turn around until after the public markets do and many companies still must adjust their pricing to meet the new norms. The uptick in activity (and especially more bids) could show that we are on our way out of the quasi-hibernation period we were in for most of 2022. For this graphs sake, we are just hoping for one green bar before the April 2021 data falls out of our 25 month range...

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

Declines in multiples have begun to soften as we move out of comparing current state to 2021 during the startup boom. We expect to see this trend continue into next month, and as the year progresses we believe that multiple stabilization will lead to a better comparison of where the market currently is. That being said, if the Fed fails to achieve a "soft landing" on mitigating the current inflationary issues, then expect multiples to contract further.

Why this matters: Cryptocurrency is continuing to get pummeled, as they are suffering from by far the largest multiple contraction across the industries we are tracking. Continued multiple declines from last year across the board support our dry powder analysis of start-ups going into a more competitive fundraising environment. Later stage start-ups will be under the most pressure, as maintaining the valuations they raised at in 2021 is going to be extremely difficult in this environment. Keep an eye out for more debt financing, structured financing, and down rounds as we get further into 2023.

January's Top Ten:

  1. We couldn't start the top 10 without mentioning Stripe. Stripe made headlines at the beginning of the month with reports that it cut its internal value of shares by 11%, implying a valuation of $63 billion. This announcement was small chickens compared to the news dropping this past week that Stripe is in talks for its public debut, followed by news less than a week later that they are planning to raise as much as $3 billion from existing investors that would be used to help employees achieve some liquidity on their stock options if the IPO is pushed further. This will definitely be one to closely watch over the next few months.

  2. Fanatics sold its 60% stake in Candy Digital to Galaxy digital, a crypto merchant bank led by Mike Novogratz. The move is in the midst of a "crypto winter" that has the value of almost all digital assets decline.

  3. Open AI, the creator of ChatGPT, is in the midst of speaking to investors about selling shares at a $29 billion valuation. If they are able to raise at that valuation, it would make the company one of the most valuable U.S. startups despite generating little revenue. (For perspective, Fortune reported OpenAI generated $35 million in revenue in 2022. A $29 billion valuation is an over 800x revenue multiple). Microsoft seems sold, and a multiyear, multibillion dollar investment in the company was announced end of January.

  4. Discord acquired Gas, a compliments-based social media app for teens, this month for an undisclosed amount. While messaging platforms tend to get a bad wrap for being bully hotbeds, Gas is trying to change that narrative.

  5. If you have been using CircleCi, it probably would be a good time to rotate your info. The company reported a data breach at the beginning of this past month, with the culprit identified as an infostealer that got access to an employee's laptop. This is coming on the heels of the LastPass hack that occurred in December.

  6. Taking bets on how many months it will be until Elon Musk gets kicked out of our top 10. SpaceX just closed a $750 million funding round, valuing the company at around $137 billion. The latest funding round puts their total raised in 2022 at over $2 billion.

  7. Fidelity made its first acquisition in 7 years with the purchase of fintech Shoobx for an undisclosed amount. Shoobx is a provider of automated equity management operations and financing software to private companies.

  8. Netskope had the second largest funding round of January with a $401 million raise. The cybersecurity company raised the amount through convertible notes, and the round was led by Morgan Stanley Tactical Value (alongside their existing investors).

  9. Nashville the new Silicone Valley? The third largest rounds for January came from Music City based companies. Monogram Health, a specialty provider of in-home care for patients living with polychronic conditions, raised $375 million from strategic investors such as CVS Health and Cigna Ventures.

  10. Silicon Ranch Corp., a provider of customizable renewable energy, carbon, and battery storage solutions also based in Nashville, raised $375 million this month, with another $225 million expected to fund in early 2023.

Why this matters: All of the Stripe news stole the show for January, and their efforts to stay private could point to a trend of hot private companies staying private but offering their employees liquidity options. Other private companies such as SpaceX, Cruise, and Carta all already have programs for their employees to achieve liquidity on their options while avoiding going public. As we enter another year rife with market uncertainty, we may see more companies following in their footsteps.

Startups that are still hiring!

Open positions are per the company's website.