Not Your Average Clickbait IPO Story

As we move toward the end of the first quarter of 2023, the stalemate between late stage VC-backed companies continues. No one wants to move first and take a shot at an IPO in this market. It's not without good reason. Valuations for tech companies have plummeted over the past year, creating an adverse environment for all companies thinking of an exit. Silicon-valley darling Stripe has been the most recent victim after punting on an IPO attempt in exchange for a fundraising round that left a lot to be desired (see our top 10 for more info on this one).

There are a couple of different factors contributing to the IPO ghost-town right now. From a macroeconomic standpoint, there is a lot of volatility in the markets between inflation, geopolitical tensions, and a potential recession that continues to loom over founder's heads. This volatility has impacted multiples and valuations, as there is disconnect between what buyers will pay and what sellers think they deserve. Late-stage VC backed companies are not too keen to exit in a buyer's market where they might not get what they consider an adequate price on the stock of their company.

So what now? Who will be the first VC-backed tech startup to IPO this year? While there are many reasons to not IPO in this environment, there are a couple of unique scenarios where it might make sense for a company to go ahead and make the move public. If you google around, you'll find a lot of clickbaity articles throwing around names that we have seen over and over again (Reddit, Databricks, etc). So, instead of giving you all another list, we decided it might be more interesting to look at some different scenarios that would lead a company to IPO.

1. To avoid further dilution without a liquidity option - Example: Zapier

   1. Zapier has made a name for itself in the VC space for not only having a successful business (The company had a valuation of $5 billion in March of 2021 with over $140 million in ARR), but doing so with almost zero dilution (they have only raised $1.4 million to date). A company like Zapier who wants to avoid dilutive fundraising may be a good candidate to IPO in the current market. In Zapier's case however, they might delay for a bit longer since they don't need the cash

2. To big to be acquired: Example: Plaid, Figma

   1. While Plaid does not have the same anti-dilution viewpoints as Zapier (the company has raised $734 million to date), they are facing a different issue: Anti-Trust. Plaid's exit story was almost completed in 2020 when Visa agreed to buy the company for $5.3 billion. However, due to a civil antitrust lawsuit that was filed by the Department of Justice, these acquisition plans were abandoned. Now, for Plaid to achieve an exit, they will most likely have to exit via going public. We are seeing a similar situation play out with Adobe's acquisition of Figma. If the deal is blocked, Figma will most likely be in the same boat as Plaid.

3. To give employees liquidity on their stock options: Example: Instacart 

   1. Instacart has been a name thrown around in the IPO discussion regularly, but their reasoning for needing to IPO is one that other companies will surely be grappling with as well: providing liquidity to their employees. For many employees working at a start-up, a large percentage of their total compensation package can include stock options. By delaying an exit, this can cause morale issues among employees and potentially cause them to go elsewhere.

4. They are struggling and need to exit: Example: Coursehero

   1. Coursehero was a Covid-19 boom baby, but has faltered recently as multiples have declined and they have struggled to keep up growth. A company like Coursehero may seek an IPO in a less favorable market in order to gain some additional capital and keep the ship afloat.

Why this matters: While the IPO market remains shuttered for the time being, there are many different circumstances that could encourage a company to be the first one out of the gate. Like the market cycles that have come before, this period of stagnancy too will end, and its a matter of when, not if. While it may be disheartening for employees with stock options to see the current venture landscape, these options are still valuable, and it's important to remember that the current situation won't last forever. If anything, this could provide a unique opportunity to exercise at potentially lower valuations, and gain access to your equity. If you or someone you know needs assistance in exercising stock options, feel free to reach out!

Tips of the trade

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

The most frustrating aspect of AMT is that you are paying taxes on a paper gain and unlike NSO taxes, paying AMT does not step up your cost basis when you sell. What that means is for ISOs you pay the total difference between the sales price and strike price when you finally sell your stock (with NSOs you pay the difference between sale price and FMV at exercise).

So if you are paying AMT on the paper gain and still owe taxes on the full gain when sold, is AMT double-taxing you?

Well yes, but that "double-taxation" is accounted for via AMT Credits. You pay AMT in any year that your AMT exceeds your ordinary tax bill (for example a year that you exercise ISOs). Any additional tax paid due to AMT can be recouped as a credit in years where AMT is smaller than your ordinary tax bill.

For example, let's say in 2022 you exercised ISOs and owed $50,000 on top of your ordinary taxes because of AMT. You would carry $50,000 of AMT Credit indefinitely into future tax years. Now in 2023 if your ordinary tax bill is $100,000 and your AMT is $75,000, rather than paying the full $100,000 of taxes like you typically would, you can claim $25,000 of your AMT credit and only owe $75,000 in taxes. You would then have $25,000 in AMT Credit rolling forward. In 2022, the max you can claim in AMT Credit is $95,200.

So fret not, while AMT can be a major headache for startup employees, once paid it provides tax relief in future filing years!

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.

February layoffs trail January, but still top the charts.

Layoffs do not seem to be slowing down, with February posting the 3rd highest number of layoffs in the tech space, trailing only to last month and to November of last year. Ericsson layoffs of 8,500, Dell layoffs of 6,650, and Twilio layoffs of 1,500 topped the charts for the top 3 across the board for the month.

Why this matters: While large round layoffs from tech giants such as Google and Amazon have slowed moving into February, the continued heightened number of companies with layoffs indicates that we probably can expect further layoffs from startups as they try to stay afloat during the current economic cycle. 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

Secondary Market Sentiment

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.

It appears the low-ball buyers have been weeded out, and some more serious secondary discussions have gotten underway. Per the graph above, we are still definitely in a buyer's market, but with volume and prices picking up, we may have found a bottom where people can transact (at least for the time being).

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

Multiples for February 2023 continue to trail this time last year across all sectors. However, as we mentioned last issue, declines in multiples have begun to soften as we move out of comparing current state to 2021 during the startup boom. We expect to continue to see a trend of multiple stabilization over the course of 2023 if the US economy is able to avoid a recession. Additionally, the opening up of the IPO market may ultimately be a positive signal for the technology sector and push multiples higher. However, with the current market volatility and the possibility of a recession still looming, the outlook is still very uncertain.

Why this matters: There's a lot riding on the opening of the IPO market in terms of influencing where multiples are going to land. The return of tech IPOs may signal to investors that the industry can survive a downturn, and things might be back on their way up.

February's Top Ten:

1. Stripe has dashed the hopes that it will be the first of the Silicon Valley startup to open the IPO market. Instead, the company is raising roughly $4 billion to cash out veteran employees RSU's. The raise isn't going great, however, and Goldman is offering some of their richest clients the opportunity to fill out the round. Stripe had to cut its valuation to $50 million during the fundraise due to struggles with closing.

2. Cloud security firm Wiz hits a $10 billion valuation after closing a $300M Series D. The latest raise was led by Lightspeed Venture Partners and brings the total raised by the company to $900 million.

3. The Department of Justice is prepping an antitrust suit to block Adobe’s $20 Billion acquisition of start-up Figma. The move comes on the heels of regulators exercising more scrutiny in large transactions that they believe may stifle competition.

4. Altria is in talks to buy vaping startup Njoy for roughly $2.75 billion. The deal comes on the heels of the company exercising their option to be released from its non-compete deal with Juul Labs. Atria purchased a 35% stake in Juul four years ago at a valuation of $38 billion. Since then, they have marked the valuation down to $714 million.

5. Fundraising by venture capital funds hit a nine-year low in Q4 2022, data released in February shows. Venture firms raised $20.6 billion in new funds in the fourth quarter. That amount is a 65% drop from the year earlier quarter and lowest fourth quarter amount since 2013.

6. The decline of Covid's at home fitness phase is starting to see some casualties. Tonal, a home fitness start-up that garnered a $1.6 billion valuation in 2021, is exploring options for a sale. Don't expect a sale in the realm of that 2021 valuation, however. Secondary market data has shown shares of Tonal being offered at a valuation of $350 million in January, a discount of nearly 80%.

7. Sandbox AQ, a start up spun off of Google, raised $500M from investors including Breyer Capital, T. Rowe Price funds, and TIME Ventures. The company will be using the money from the raise for cyber security and other quantum computing work.

8. Our Next Energy (ONE), a Michigan-based energy storage technology company, raised $300M in Series B capital. The round was led by Fifth Wall and Franklin Templeton, and values the company at over $1 billion.

9. While Adobe is currently starting it's process against regulators, Meta has finally been able to officially close the deal to acquire Within, maker of the popular VR app Supernatural. The FTC sued to stop the acquisition in July of 2022, but ultimately, a California judge is allowing the $400 million deal go through.

10. Demandbase, a B2B GTM firm, raised $175 million in financing from Vista credit partners. The company has indicated the funds will be used to support their next wave of platform innovation.

Why this matters: The Stripe news is continuing to hammer the point that fundraising, even for top startups, is becoming increasingly difficult. The company's decision to forgo an IPO exit and go through a difficult fundraising environment at a cut valuation also speaks to how difficult the public environment is right now. However, as seen with the most recent Wiz raise, good companies are still good companies and will attract VC attention. Now, it's just easier to tell which are fluff and which have substance.

Startups that are still hiring!

• Canva

• Apollo.io

• Figma

• Klaviyo

• Notion

• 1Password

• Airtable

• Zapier

• LaunchDarkly

• Grafana Labs

Open positions are per the company's website.