ESO Monthly Start-Up

May 2024

Start-Ups Are Doing More With Less

After discussing the IPO environment last newsletter, it’s time to switch gears a bit and check in on the state of employee equity. Carta continues to release great data, and for this intro, we will be doing analysis on the state of startup compensation as of year end 2023.

Summary - What do the numbers say?

There are a few key things to point out in this article. First, employee headcount at startups decreased in 2023 across the board. The decline stems from a combination of continued elevated employee departures and layoffs, combined with new-hires being cut in half.

However, while overall headcounts have declined, equity packages have stayed flat year over year, though still notably depressed from 2021 levels.

Finally, what did all of this mean for exercise rates? After trending lower since November 2021, we saw a slight uptick in exercise rates in January 2024. That being said, startup employees are still exercising at lower rates than January 2023.

What does all this mean?

All of this ultimately goes back to the Fed and how expensive cash is right now. Higher interest rates mean that startups are going to have to work harder for capital, and in turn, they will need to find ways to “trim the fat”. With payroll typically being the highest cost for employers, it would make sense for these companies to try to become more efficient with their hiring and doing more with less.

We are operating in a market where exits and liquidity are hard to come by. Thus, employee equity is not being regarded as highly as it was a couple years ago. It is possible that new employees are not negotiating as hard on their equity compensation packages. On top of that, option holders are letting their equity expire due to drops in valuation and a difficult IPO market. As we move further into 2024, if the IPO pipeline continues to flow, we should see an uptick in both employee interest in equity compensation and exercise rates. If your friends are cashing in on IPOs in the news, you're more likely to care about your own equity package.

Why this matters: Salary is important, but for a startup, equity appreciation can end up being the most lucrative aspect of a compensation package (if the company does well). For employees looking to move jobs soon, there are two important considerations that need to be made.

1. Does it make sense to exercise my current company’s stock options, and if so, how will I pay for it?

2. If I’m moving to another startup, what percentage of my salary am I willing to negotiate in exchange for more company equity?

Becoming more knowledgeable about your compensation package is one of the easiest things you can do to ensure that you are being fully compensated for your work.

Tips of the trade

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

Negotiating and Exercising Equity at Startups

Employee equity is heating up a little with a slew of fresh IPOs and the hope of more liquidity to come. So whether you’re already an employee with options or in the process of joining a startup, it’s important to understand how to properly think about your equity.

Negotiating Option Grants

The data on “how much is a fair option grant” is all over the place. In reality, the stage and valuation of the company alongside the role and seniority of the employee both go a long way in determining how much equity makes sense.

We found some great ballpark numbers on Index Venture’s OptionPlan Calculator (highly recommend checking it out).

According to their data your option grant (number of options * strike price) as a percentage of your annual salary can range anywhere from 25% for Entry Level Sales roles to 100% for Director Level Engineers.

That means an employee making $100,000 in salary can expect somewhere between $25,000 and $100,000 in options that will vest over 4 years.

If you are reviewing a job offer from a startup you should make sure to sanity check this ratio before accepting. Of course, there will be scenarios where you may receive less than Index’s suggested range, but this can be used as a solid guideline for negotiating your package.

Exercising Stock Options

  1. You’ve left the company and your expiration is coming up.

  2. Your company allows you to Early Exercise

  3. You want to reduce your tax hit

Once you’ve decided you would like to exercise, 2 important factors remain:

  1. Do you believe in the company?

  2. How much can you afford to exercise aka risk?

If you don’t believe in the company, there is no reason to put your hard earned cash into the equity. Once you’ve decided you do have conviction in the company’s future, you must determine how much money you can reasonably risk on an illiquid asset.

After that go ahead and exercise! For more info check out ESO’s Stock Options 101 Guide and feel free to reach out to us with any questions about funding your exercise risk-free.

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"

April equity markets saw some major declines during the month, with all the three major indices ending September in the red. The S&P, Nasdaq, and Dow were down 4.1%, 4.4%, and 4.9%, respectively. The largest multiple declines across the sectors that we track were Real Estate and Cryptocurrency, which declined by 28% and 23% . Industrials saw the only multiples uptick for the month, up 11%

Why this matters: There’s a decent amount of volatility in the markets right now as we aren’t out of the woods with a recession. Additionally, sticky inflation is keeping the Fed from lowering rates, meaning that real estate is going to continue to be inordinately impacted as mortgage rates remain high. Just this past month, the 30-year mortgage rate surpassed 7% for this first time in 2024. It appears that the market continues to be in a bit of a “wait and see” cycle, and as such, expect volatility to continue into May.

April's Top Ten:

  1. The IPO train continues to roll on, with Walmart-backed tech marketing firm Ibotta hitting the public markets this past month. Ibotta raised about $577 million in the offering and priced the IPO at $88 per share, exceeding the initial $76 to $84 estimation.

  2.  Ibotta wasn’t the only company to go public last month, as data management company Rubrik began trading on the NYSE at the end of the month. Rubrik priced its IPO at $32 a share and raised $752 million, above its expected range as well.

  3. xAI, Elon Musk ‘s OpenAI rival, is close to raising $6 billion at a pre-money valuation of $18 billion. Investors such as Sequoia Capital and Future Ventures are participating in the round.

  4. TikTok, a social media company, will be banned in the U.S. in less than a year unless its owner, ByteDance, sells the company. The law was signed by President Biden this past month and could be a major hit to the creator economy if it comes to pass.

  5. Bolt had a weird buyback a couple of months ago at a 97% discount, and we are starting to get more information on why it happened. A recently filed lawsuit by an investor states that Bolt co-founder Ryan Breslow, who stepped down as CEO two years ago, masterminded the lowball offer in order to maintain control over the company. There will surely be more updates on this in the coming months.

  6.  StubHub is looking to hop on the IPO train as news reports indicate they are eyeing a summer initial public offering. The online ticketing service has been working with JPMorgan and Goldman Sachs over the past two years on the IPO, and is targeting a $16.5B valuation.

  7.  OpenAI has expanded its $86 billion tender offer to some former employees. The move suggests there is continued investor demand for stock in the ChatGPT-maker, which surpassed $1.6 billion in annualized revenue last December.

  8. Wiz was set to takeover Lacework this past month at a valuation of between $150 million to $200 million. The acquisition would have been notable, as Lacework’s was valued in 2021 at $8.3 billion. However, as of last week, the acquisition was cancelled after the deal fell through during the due diligence process.

  9.  OpenAI’s European Rival, Mistral AI, is currently seeking funding at a $5 billion valuation. The company’s current investors include Andreesen Horowitz, Lightspeed Ventures, and Microsoft.

  10.  AI cloud infrastructure startup CoreWeave announced at the end of April that it had raised $1.1 billion in fresh funding led by Coatue. The deal values the company at $19 billion.

Why this matters: We’re loving that the Top 10 continues to include IPO news. This movement is much needed after a lackluster 2023, and is encouraging to the VC ecosystem as a whole. Public markets have performed well in 2024 thus far, and late-stage companies looking to go public may not be able to blame the bad exit environment for much longer.

Startups that are still hiring!

Open positions are per the company's website.tember

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!