ESO's Monthly Start-Up

February 2024

The IPO Second Movers

As we have discussed in previous newsletters, there is a clear divide forming between the recent performance of public equities and the continued lag of venture backed startups.

The main issue of concern is the bottleneck that has formed for late stage companies. Many are still weary of how they will be accepted by the public market and haunted by the ghosts of their 2021 and 2020 valuations. While some finally took the plunge, their performance has been somewhat disappointing. Instacart as of the time this was written is trading at around 20% below its $30 a share IPO price, and Klaviyo is 7% below its IPO price. However, the underperformance of Instacart and Klaviyo has not deterred all later stage companies. In this month’s newsletter intro, we are going to look at the 3 candidates that are looking to IPO in the next couple of months.

Of the three companies we are going to discuss today, Reddit is likely at the top of everyone’s watch list for how they fair in the public market. The social media platform would be the first IPO of a major social media company since Pinterest in 2019. The company is planning to make its public filing in late February, followed by a roadshow early March, meaning they ideally IPO by the end of March. However, like Instacart, their valuation is taking a hit from the heights of the venture boom. According to the press, the company has been advised to target a valuation of at least $5 billion, about half of the $10 billion valuation the company raised at in 2021.

Another notable IPO contender for the near term is Rubrik, who recently announced that they are planning to go public as early as April. The holdup? Handling a U.S. fraud investigation into one of their employees. The cybersecurity software startup is backed by Microsoft and was valued at $4 billion in 2021. The company is likely going to be looking for a valuation close to that $4 billion of their last raise, and they are expected to try to raise roughly $500 million in the IPO.

Astera Labs is probably the least well-known of these three companies, but its aiming to be one of the first firms to go public off of the boom in artificial intelligence. The company, which is backed by Sutter Hill Ventures and Intel, sells crucial data center components to customers like Amazon Web Services and Microsoft. Astera expects it will generate between $250 million and $300 million in revenue this year. The company was profitable last year, and has just over 200 employees as of October. The company has been meeting with prospective investors ahead of a potential March IPO, and could be valued at as much as $4 billion if investors value it at the same multiple they used for Credo, a similar publicly traded data infrastructure company.

Why this matters: The IPO backlog is long overdue to go out. With continued improving market conditions, and indications from the Fed that they will be lowering interest rates in the next year, the environment could be the best one we have seen in a hot minute for companies looking to hit the private markets.

For employees at companies that are expecting a near-term IPO, knowing what to do with your stock options can be a challenge. Check out ESO’s commentary in Fortune for advice to employees going through this process!

Tips of the trade

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

What are RSUs?

Many late-stage startups and public companies provide equity compensation in the form of Restricted Stock Units, rather than stock options. Why do they do this? Below we’ll walk through the differences and advantages of RSUs compared to stock options.

When a company’s strike price is low, exercising stock options may not be a huge cost, but as a company grows in value they get more and more expensive.

Late stage companies often turn to RSUs because they do not need to be purchased. Similar to options, RSUs will vest as an employee completes time-based milestones (ie 25% vest after one full year). Private company RSUs however also typically come with “double-trigger” vesting. This means not only is time-based vesting required, but the company must exit (IPO or M&A) before the RSUs fully vest. When RSUs fully vest, they turn into shares and the employee is taxed based on the current price of the company’s stock.

The advantage of this “double-trigger” vesting schedule is that employees will never have to pay for RSUs until they are liquid. As opposed to options, where departed employees are forced to make the tough decision of whether to exercise, RSUs simply vest if the company exits. If they never exit, the RSUs never flip into shares and the employee is never taxed.

So why doesn’t everyone want RSUs? The 2 main downsides of RSUs are as follows:

1) RSUs are taxed as regular income at vesting, meaning employees must pay income tax on the exit price. With options, ideally the higher taxes are paid at exercise and long-term capital gains are achieved on the final sale. RSUs can achieve LTCG when sold, but employees are guaranteed to be taxed at the normal income rate when they fully vest.

2) RSUs can expire if the company doesn’t exit in time. RSUs typically expire 10 years after their grant date. If the company stays private longer than anticipated, this could create an issue for RSU holders. For example, Stripe raised $6.5B in March of 2023, predominantly to offer liquidity to employees with imminently expiring RSUs.

Check out our Stock Options vs RSUs page for more!

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"

Equity markets moved higher to start the year, with all three indices ending January in the green, and during the month, consumer spending has been robust, unemployment has remained low, and the S&P recorded record highs. The problem? The Fed looks like its keeping rates where they are for the time being. Ultimately, the month proved to be same song as the previous one. Compared to last year, multiples across all sectors we follow are down year over year, with the exception of real estate.

Why this matters: We sound like a broken record at this point, but all eyes continue to be on the Fed. While the economy has continued to show strength even as the Fed has kept interest rates stable, rate cuts will help to boost performance further and will likely encourage more later state private companies to hit the public market.

January's Top Ten:

  1. Following in the footsteps of companies such as Canva, Stripe, and SpaceX, Databricks is giving some employees the chance to cash out. The company, which was valued last year at $43 billion, has lined up investors to buy some early staffer’s stock. Only employees who have been granted stock options, largely those who joined before 2019, would be eligible for the tender offer, the company told employees. 

  2. Carta has exited the secondary trading business after a prominent startup customer complained that it was misusing information. The exit comes as the company was trying to evolve into a “private stock market for companies”, so its unclear at this time what impact the exit will have on the company’s valuation.

  3. Neuralink hit a milestone this past month after announcing that the first human has received a brain implant from the company. The company got Food and Drug Administration approval for the trial last May, saying it wanted to enlist people ages 22 and above who are living with quadriplegia due to a spinal cord injury or ALS.

  4. Cybersecurity startups Snyk and Cato are both preparing for potential 2024 IPOs. Snyk ranks among the top-valued cybersecurity unicorns with a valuation of $7.4 billion as of a late 2022 funding round. Meanwhile, SASE vendor Cato Networks disclosed that its valuation surpassed $3 billion in connection with its $238 million funding round in September 2023. For the cybersecurity industry, it’s been more than two years since a pure-play security vendor went public, even as numerous publicly traded cybersecurity vendors have been taken private.

  5. Several Tiger Global Management employees focused on raising capital have taken buyout offers after the firm has struggled to raise money for its latest venture capital fund. As of the second quarter of 2023, a $12.7 billion fund that Tiger started making investments from in October 2021 had a paper loss of 18%, and is currently bottom quartile of funds that started that year.

  6. Flexport is raising $260 million from e-commerce software giant Shopify, one of its biggest shareholders, according to two people with direct knowledge, giving the struggling logistics startup more breathing room after it burned through cash last year. The company has had three rounds of major layoffs since December 2022 with the most recent 15% cut as of this past month.

  7.  Expense management startup Brex, which was valued at $12.3 billion two years ago, laid off 282 people, or about 20% of its staff during January. The company has stated that the reduction in force will put the company on a path to profitability.

  8. Vetamer Capital, an investor in public and private tech companies started by a Lone Pine Capital veteran just three years ago with $350 million to invest, has shut down its public-equities hedge fund and returned capital to investors. The hedge fund struggled to perform in the negative fintech landscape.

  9. TikTok is looking to up its e-commerce business as it starts to increase seller’s fees. Commission from sellers is increasing from 2% to 8%, in addition to charging 30 cents per transaction. TikTok shop debuted in September of last year and has already established a $3 billion run rate in the US since its debut.

  10.  Open AI is being stingy with its offers to publishers, and may make it difficult for the company to strike deals. According to the Information, OpenAI has offered some media firms for as little as $1 million annually to license their news articles for use in training its large language models.

Why this matters: While they aren’t at the same level as they were last year, layoffs are still very much an issue, especially for VC-backed companies looking to preserve capital and avoid a down round. As we move into this next year, we continue to see weaker companies struggle in the face of continued constrained access to capital.

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!-