ESO's Monthly Start-Up

December 2022

Bring on the "down-rounds"?

In Venture Capital, a "down-round" is when a company raises money at a lower valuation than the post-money valuation of their previous fundraise. After a frothy 2021, full of massive up-rounds and hefty revenue multiples, the upcoming set of fundraises is due for correction.

This may mean "flat" is the new "up", and down-rounds will be more commonplace going forward as companies are forced to raise capital in this new environment. Don't be surprised if we start seeing unicorns raising capital at lower valuations.

Why this matters: Unfortunately this means that many private company shares are worth less than they were a year ago, and will take longer to reach liquid than initially planned. This also likely means drops in 409A Fair Market Value for companies that have not already adjusted their 409A. This could present attractive windows to exercise stock options with lower tax burdens, but employees must be prudent about doing their homework on the health of their company before making a decision to exercise.

Tips of the trade

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

How to reduce ISO AMT at the end of the year

If you are a holder of ISOs at a private company, you will owe Alternative Minimum Tax when you exercise your options. One trick to avoid (or at the very least reduce) AMT is to exercise just enough ISOs each year to avoid AMT.

The link above discusses in depth how to determine the number of ISOs you can exercise in a given year without owing AMT.

The gist of it is that each calendar year everyone gets an AMT exemption amount (ex: $75,900 for single filers in 2022). This means you can exercise ISOs with a taxable gain (current 409A Fair Market Value of the shares minus the cost to exercise) of around $75,900 and not trigger any AMT (not quite this simple, but you get the point). Thus you would be paying just the cost of your shares (strike price) and not owe any additional taxes because of the exercise.

If you have recently left your startup or plan to leave in 2023, it will definitely make sense to consider splitting the ISO exercise between December and January. In theory you would exercise just enough ISOs in December so that you do not owe any AMT. You would then exercise the remainder of the options in January 2023, meaning you would not be on the hook for AMT until April of 2024.

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.

November marks new high in tech employee layoffs

November was marked by another round of fresh layoffs from tech companies. We have laid out the largest layoffs for U.S.-based private companies for November, as well as aggregate info on layoffs to date.

Why this matters: When employees of private companies are let go, they typically have 90 days to exercise their stock options. In a precarious economic environment like this, that can be a daunting task. The answer to the question "to exercise or not to exercise?" is not quite as obvious as it was in 2021. If you were recently let go by a private company feel free to set up an intro call with our experts at ESO Fund.

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.

The above graph on Secondary Market Sentiment shows a flip from positive to negative sentiment between April and May of 2021. Interestingly enough, the NASDAQ (public market) did not turn negative until early 2022.

After 19 straight months of negative sentiment (more sellers than buyers), it appears that there may have been a local maximum with almost 6 sellers for every 1 buyer in July of 2022. We will continue to monitor this ratio going forward into the new year.

Why this matters: We went from an all time seller's market to a completely barren IPO/Secondary market over the course of the last year-plus. In 2021 shares were fairly liquid even pre-IPO given the robust secondary market. For the time being, any private stock is truly illiquid and will likely remain that way for longer than initially expected.

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

Cryptocurrency multiples have continued to get walloped in the face of the FTX explosion and crypto winter. Tech multiples in general continue to trail last years record valuations, as well as real estate marking a notable decline as interest rates continue to threaten this sectors affordability.

Why this matters: Coming full circle here, as companies last funded in 2021 are forced to raise capital, they will be facing much harsher conditions. For example, imagine an Enterprise SaaS company raised in 2021 at 5.7x their forward revenue of $100M - $570M valuation. In 2022 if the same company based on double the forward revenues ($200M), they could only expect a 2.4x multiple - $480M valuation. The reality is most companies are struggling to grow revenues at the same rate as previous years and facing shrinking revenue multiples. It is easy to see why so many companies will be forced to raise "down-rounds" or at best "flat-rounds" in the upcoming months.

November's Top Ten:

  1. The FTX collapse has sent shockwaves through the crypto ecosystem, potentially threating new crypto-startup's abilities to raise cash in an already constrained fundraising environment. Crypto public multiples are down 74% as of November 30 from this time last year.

  2. On the heels of the FTX collapse, BlockFi filed for bankruptcy. The company is another casualty in a tumultuous year for crypto that already took out both Celsius Networks and Voyager Digital in July. Bitcoin is down 70% from over the last twelve months to November 30, 2022.

  3. Despite a challenging environment for cryptocurrencies, there are still some that are bucking the trends. Fmytex Global, a cryptocurrency exchange that now serves over 30 countries with over 500,000 users, secured $497M in funding lead by A16Z, Union Square, and Ribbit Capital. This raise marked the second largest for the month of November.

  4. The largest raise of November 2022 was secured by Bill Gate’s TerraPower. The leading nuclear innovation company concluded its 6th equity raise round securing $830M.

  5. Exit activity continues to be light as multiple compression and recession worries plague the venture environment. Electriq Power’s $495M SPAC exit was the biggest VC backed M&A event of November.

  6. Adore Me acquired by Victoria’s Secret for $400M to improve their digital fluency and reach to Gen Z buyers. Investors included Upfront Ventures, Mousse Partners, and Redhill Ventures.

  7. A verdict's been reached on Elizabeth Holmes. The Theranos founder was sentenced to 11 years in prison for defrauding investors. Holmes marks the first CEO of a major tech firm to be criminally prosecuted and sentenced to prison.

  8. Black Friday ecommerce sales broke $9 billion for the first time ever this past holiday. The uptick in sales proved fruitful for both ecommerce and BNPL companies as well, with the latter increasing sales figures by 81% compared to the same day a week prior.

  9. Adobe's $20 billion deal for Figma has attracted regulators, with the Department of Justice initiating an antitrust probe. If the deal goes through, it will be the largest price tag for a private software maker ever.

  10. ServiceTitan, a software startup, has abandoned plans to raise $900 million in the form of a debt-like funding and instead is in talks with investors including TPG to raise $600 million at a valuation about 20% lower than the $9.5 billion valuation it previously raised.

Why this matters: Not all is bleak in the startup world. Even with extreme cases like FTX and BlockFi there were still numerous positive stories in November. We will keep an eye on the M&A and IPO markets for any signs of a turnaround ahead, but in the short term expect more and more "flat" or "down" rounds of funding as companies look to extend runways by raising cash.

Startups that are still hiring!

Open positions are per the company's website.