High costs remain a major reason why startup employees fail to exercise their stock options.
In 2022, startup employees abandoned 36- to 54 percent of their vested, in-the-money stock options, forfeiting them back to their employer’s equity pool. In doing so, the average employee walked away from $10,000 to $96,000 worth of assumed gains at the time of exercise, depending on their seniority level.3
The silver lining to a year of flat, and declining, company valuations is that a lower company valuation typically means that employees can exercise their stock options in a more tax-efficient manner.
For startup employees earning the most common type of stock options — incentive stock options — lower valuations mean that they can exercise a greater number of shares without triggering the alternative minimum tax.
2021 represented a high water mark for startups, with U.S.-based venture capitalists investing an estimated $343.6 billion in startups, across 17,867 separate deals.4 That’s roughly $28.63 billion invested each month.
One estimate suggests that 586 new unicorns were created in 2021 alone — or roughly 11 new unicorns every week.7
Startups experienced a pullback in investments in 2022, raising $194.9 billion from U.S.-based venture capital firms in the first 3 quarters of the year — or roughly $21.65 billion per month.4
It’s estimated that there were 280 new unicorns created in the first 3 quarters of 2022 — roughly 7 new unicorns every week.8
A Secfi analysis of 1,502 venture rounds completed by late-stage companies (valued at $500 million or more) between March 2021 and September 2022 finds that valuation step-ups fell month-over-month in 2022.2
Since the market frenzy of 2021, an estimated 60 percent of late-stage companies that raised capital in 2021 raised additional capital in 2022, with the average valuation step-up in the third quarter being close to flat, at around 1.1x, according to a Secfi analysis of publicly available data.2
The data suggests one important driver of flat valuations has been the highly structured concessions that founders made with their venture investors in 2022.
In order to maintain high valuations, some startups are promising high returns to investors — conceding up to 2x in liquidation preference rights, meaning that new investors would be entitled to a return of twice their investment before common shareholders (and in some cases, previous investors) receive any money if the company exits through an acquisition.
One recent example is the fitness equipment manufacturer Tonal, which offered investors 2x liquidation preference rights during its latest fundraising efforts, according to The Wall Street Journal.
Meanwhile, U.S. venture debt activity saw fewer deals per quarter in 2022, but larger amounts of debt per deal, according to one analysis.4
In 2022, startups completed an average of 641 deals per quarter that involved venture debt, with the average deal representing $11.8 million in debt.
That compares to 2021, when venture capitalists completed 922 deals per quarter that included venture debt, with the average deal representing $8.85 million in debt.
The markets started 2022 by setting new all-time records. But rising inflation, rate hikes, the war in Ukraine, and other global economic pressures sent the major indexes into a bear market by the summer.
That pullback meant there were an average of 6 IPOs per month in 2022 — the lowest rate of IPO activity since 1990. In 2021, that rate was a little over 25 new IPOs per month.4
Meanwhile, 2022’s biggest IPOs were largely in the pharmaceutical industry, with notable listings from companies like Prime Medicine, Amylyx, and Third Harmonic Bio. Compare that to 2021 and 2022, which saw major household brands go public — Airbnb, Coinbase, Robinhood, Doordash, Snowflake, and others.
One big factor contributing to the pullback in new IPOs was the collapse of SPACs, which faced fresh headwinds in 2022. SPAC offerings have plunged deeply from their all-time high in early 2021 (when there were a little over 3 new SPAC offerings per day), to today, where there is fewer than one new SPAC offering per week.10
Nearly 800 of the 1,288 SPACs raised since 2020 have failed to find a suitable target company to merge with, and the majority of those will need to complete a merger in 2023 or face expiration.
Looking ahead, the data suggests that 2023 will continue to be challenging for late-stage startups, squeezed by unfavorable public market conditions for an IPO, dwindling cash runways, and investors who may aggressively negotiate down rounds and structured deals, to reduce their risk.
Historically, during economic downturns, the IPO closes and largely remains shut for 18 to 24 months, according to a Secfi analysis.11
For startup employees who are bullish on their company’s future prospects, opportunities will exist to earn more stock options during down rounds, and to strategically exercise their existing stock options in a tax-efficient manner.
1) Secfi analysis of more than 4,300 stock option grants uploaded to the Secfi platform from Jan. 1, 2022 to December 2022
2) Secfi analysis of 1,502 late-stage startups that raised venture capital between January 2021 and September 2022
3) Carta, 2022 Annual Equity Report
4) PitchBook, Q3 2022 PitchBook-NVCA Venture Monitor
5) TechCrunch, July 11, 2022 article, "Klarna confirms $800M raise as valuation drops 85% to $6.7B"
6) Carta analysis, March 7, 2018, "Employment tenure at startups"
7) Crunchbase analysis, Jan. 5, 2022, "Global Venture Funding And Unicorn Creation In 2021 Shattered All Records"
8) Crunchbase analysis, Oct. 6, 2022, "Global VC Pullback Is Dramatic In Q3 2022"
9) Secfi analysis of personal financial data shared by startup employees on the Secfi platform, as of December 2022
10) S&P Global Market Intelligence, Nov. 14, 2022, "SPAC offerings, deals fall to pre-surge levels"
11) Secfi analysis of public market data, December 2022
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