Hello. Welcome to Secfi’s first study of Startup Equity: The State of Stock Options. Since 2017, we’ve been working with startup employees to help them understand, maximize and unlock the value of their equity.
We now work with employees from 75% of all U.S. unicorns. Secfi has over $8.2B worth of startup stock options on the platform.¹
2020 set a new IPO record with 402 companies going public. That’s 81% more than 2019 and higher than the 2000 dot-com boom, which boasted 397 IPOs.²
This is good news for founders and investors – but what about the employees who also had equity?
Our team dove into the Secfi data set to uncover defining trends for employees from late-stage unicorns during this unprecedented year.
Here’s a snapshot of we what we found:
Employees left $4.9B on the table by not exercising their pre-IPO stock options.³
While there are a number of reasons why employees may or may not exercise their options (length of employment, company growth trajectory, views on company exit potential, etc.), we found that surprisingly high costs are a main reason so many options are left on the table.
Top unexercised stock options:
- Snowflake: $1,272,538,185
- Airbnb: $966,683,219
- DoorDash: $954,231,260
- Unity: $321,753,834
- Palantir: $250,600,109
On average, it costs nearly 2x annual household income to exercise options.⁴
We call this the unaffordability factor. It means that for many who work for high-growth companies on the path to an IPO or exit, exercising options can be cost-prohibitive and financially out of reach.
Taxes make up 85% of stock option exercise costs.
There are two costs associated with exercising options: (1) The cost to acquire vested shares (the strike price x number of shares) and (2) the associated tax costs.
The tax costs are often what make options so expensive. In some cases, the tax liability is zero. But for the average late-stage unicorn employee, taxes drive up exercise costs to 6.6x the initial price.⁶
That’s because you are taxed on the difference between strike price and fair market value (aka 409A valuation) which can be extreme for high-growth startups.
As most are unaware of their tax liability, we call this the surprise factor.
Exercise costs soar as company valuations increase.
As companies grow, the more expensive it becomes to exercise stock options. This is because the tax bill from exercising grows with the 409A valuation of the company.
For companies of $10B+ in valuation, exercise costs are 5.5x their annual household income on average.⁷
The good news: Those who exercised early nearly doubled their investment.⁸
Those who exercised stock options pre-IPO were able to enjoy tax savings (thanks to capital gains treatment) resulting in higher gains at the time of IPO.