ESO's Monthly Start-Up

November 2023

The Shrinking Employee Equity Packages

Carta has been releasing some really interesting data lately, and one of their more recent publications, the State of Startup Compensation - H1 2023, provides some eye opening metrics, specifically around declines in startup equity packages.

In H1 2023, startup compensation reflects the challenges stemming from reduced fundraising. Startups raised less than half the funds compared to the last quarter of 2021, leading to job losses, stagnant salaries, and a surprising contraction in equity packages. The data drawn from Carta’s data set highlights a substantial decline in hiring and reveals a 0.3% salary drop from November 2022 to May 2023. However, of particular note is the 26% reduction in average equity grants, as see in the graph below.

The impact of this decline in equity packages being offered to new employees may not be fully realized until further down the road, but it is an important trend to acknowledge as these packages have historically been large draws for attracting talented candidates.

So what’s behind this decline? First off, and as mentioned above, startups are forced to operate on leaner budgets as cash has become more expensive, and markets are beginning to place move value on profitability rather than strictly growth at all costs. As such, there are now fewer spots in these top startups for the talent pool, and the negotiating power has shifted back to the companies.

Additionally, companies typically replenish option pools when they raise new fundraising rounds. Because the time between rounds is growing further apart due to a less advantageous macro environment, companies are being more conservative with their remaining available options.

Why this matters: The declines in employee equity packages are coming on the heels of record low employee exercise rates as well, with employees at private companies on Carta opting to exercise just 24% of their vested stock options in Q3. With both low exercise rates and smaller equity packages, better education on both what your equity package is worth and financial options for exercising have become more and more critical. As the startup ecosystem grapples with reduced funding, stagnant salaries, and shrinking equity packages, ESO Fund's risk-free financing for exercising stock options becomes increasingly valuable. By partnering with ESO Fund, individuals can navigate the financial hurdles and seize the opportunities embedded in their equity, even in a climate where cash efficiency and leaner operations are a priority.

Tips of the trade

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

ISO vs NSO: what’s the difference?

ISOs or Incentive Stock Options are given to full-time employees only. They are required to be exercised within 90 days of termination from the company and are taxed at exercise via AMT.

NSOs or Non-Qualified Stock Options can be awarded to anyone including contractors, investors, and full-time employees. NSOs typically also expire 90 days after termination form the company, but can be extended to at most 10 years from their grant date. NSOs are taxed as regular income when exercised.

Simple as that: ISOs have favorable tax treatment but are restricted in who they can be awarded to and how long they are exercisable for non-employees. NSOs offer more flexibility, but come with a higher tax rate at exercise.

Many companies offer NSO extensions to departing employees: this allows the employee to extend their expiration deadline BUT they will pay the price in exercise taxes. Check out of NSO Extension Guide to decide if an NSO extension makes sense for your situation!

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.

Secondary Market Sentiment

From Hiive October 2023 Private Market Data

Both the median bid and median ask have been relatively stable near 60% and 40%, respectively, for the past five months after a steep decline early in the year.

Buyers remained in short supply in October as the bid/ask ratio on Hiive fell to an all-time low of 0.34, with listings outnumbering bids by nearly 3-to-1. The average transaction price was steady at 53.9% of the last round valuation (translating to an average discount of 46.1%), reflecting limited change in the market overall. 

The bid/ask spread tightened slightly month over month, as seller expectations continued their year-long downward trend. Though bids remain relatively scarce, Hive notes one caveat is that they often involve larger blocks filled by several sell orders at once. What remains true however is that buyers face little competition in the market in all but the most sought after of securities, entrenching the market in their favor.

Why this matters: Overall, while it would not be completely unrealistic to anticipate some recovery in enthusiasm on the buy-side as central banks begin to signal pause in their rate-hiking cycles, the possibility of a short term market rebound remains remote. One final note is that the average transaction price trends towards the median ask rather than the median bid: we assume this means there are still many “low-ball” bids that are not yet garnering attention from the sellers. This shows some potential optimism on the sell side, as they seem to be sticking to their pricing (as opposed to late 2022)

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

All major Wall Street indices ended October down, with the S&P down 2.2% and the Nasdaq Composite down 2.8%. This comes on the heels of a down month for September as well. As such, all sectors that we track saw their forward multiples in September decline relative to those in the prior month, and all except Crytocurrency are down from the prior year.

Why this matters: November is typically a strong month for the market, and so far this month, its looking promising. Behind the current rally is the sentiment among investors that the Fed is done raising interest rates this year, leaving the benchmark lending rate at its highest level in more than 22 years. Markets see a roughly 80% expectation that the Fed will hold rates steady in December, though we will have to wait and see the ultimate decision and impact here.

October's Top Ten:

  1. Databricks acquired data startup Arcion for $100 million. Arcion, an enterprise data company, is Databricks’ first acquisition since acquiring MosaicML, an AI infrastructure startup specializing in training large language models.

  2. Simpplr, a Redwood City, CA-based employee experience platform, is to acquire Socrates.ai, a generative AI-powered virtual employee assistant. The acquisition will enable Simpplr to expand its strategic presence. Socrates.ai will become an integral part of Simpplr’s portfolio of top-tier digital workplace solutions. The amount of the deal was not disclosed

  3. The FTX scandal is coming to a close, with SBF being found guilty on all seven counts of fraud and conspiracy.

  4.  AI has made it to the White House, with Biden issuing the US’s first AI executive order, requiring safety assessments, civil rights guidance, and research on labor market impact. It’s the U.S. government’s first action of its kind, requiring new safety assessments, equity and civil rights guidance and research on AI’s impact on the labor market.

  5. Google has committed to invest $2 billion in Anthropic, an OpenAI competitor. Anthropic was valued earlier this year at $4.1 billion.

  6.  Speaking of OpenAI, CEO Sam Altman recently announced that the company is generating revenue at a pace of $1.3 billion a year. Altman’s remark implies the company is generating more than $100 million per month, up 30% from this summer

  7. Freight firm Convoy has shut down after laying off about 20% of their workforce a week prior. The company had raised $260 million at a $3.8 billion valuation just 18 months ago.

  8.  ShieldAI raised $200M at a $2.7B valuation to scale military autonomous flying technology. The round was co-led by the U.S. Innovation Technology Fund (USIT) and Riot Ventures, both previous investors in ShieldAI.

  9. ByteDance, the TikTok parent company, held a tender offer for employees during October. The company was buying shares at $160 per share, implying a $223.5 billion overall valuation. This is down 26% from a similar buyback offer a year ago.

  10. Chip design startup SiFive has laid off roughly 20% of its workforce, or about 130 people. It’s a sign of strain within the semiconductor sector even as intense demand for artificial intelligence chips buoys Nvidia and others.

Why this matters: M&A activity is still high, and deals are happening as we move into the last 2 months of the year. However, as seen by the recent news of Convoy shutdowns, as well as the shutdown of healthtech company Olive AI, startup companies are still contending with difficulties with fundraising and money being more expensive.

Hot startups that are 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 financing 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!