About 25% of the startups on the Secfi platform have reduced their value in the past year
It was last year. Painful for beginners and their employees. Venture capitalists scaled back their investments, thousands lost their jobs and company valuations stagnated or fell in an extended bear market.
Approximately 24% of startups on SecFi’s platform will see their fair market value decrease by 2022, according to an internal analysis. For people working at those startups, that means some (in some cases, all) of their employee stock options have spent 2022 underwater.
Separately, Secfi’s analysis of 1,502 funding rounds since March 2021 shows that startups are raising more flat rounds than ever before.
In the year Several startups that raised funds in 2022 did not disclose their post-fund valuations, suggesting that the number of startups that have undervalued in the past 12 months may be higher than publicly reported.
Employee stock options are a meaningful factor in startup compensation, and underwater stock options can negatively impact hiring and retention in the startup ecosystem.
Looking ahead, data suggests that 2023 will continue to be challenging for late-stage startups.
Options for underwater storage
In the year An analysis of more than 4,300 stock option grants posted on SecFi’s platform in 2022 found that nearly one in four startups had their fair market value reduced at some point during the year.
The most high-profile of this phenomenon is Klarna, which raised venture capital at a valuation of $45.6 billion in mid-2021, but was forced to raise a new round of funding in mid-2022 at a valuation of $6.7 billion — an 85 percent drop. Other big companies that are lowering their valuations (without raising money) include Instacart and Checkout.com.
Stock options are a high-risk, high-reward form of compensation and remain one of the most compelling options for startups and retention.
A 2018 analysis of employment data by Mapper suggests that the average entry-level employee only works at one company for two years before jumping on to their next opportunity. Underwater stock options are a problem for early adopters in 2020 or 2021, because they are now finding that their shares are worth less than when they were hired.
The average entry-level employee in Silicon Valley received 12% to 14% of the value of their salary in stock options, he said. In other words, an entry-level employee earning an annual salary of $150,000 may receive an average of $21,000 worth of stock options as part of their total compensation package.
When a startup succeeds, stock options increase in value — in some cases, by multiples. Stock options account for 86% of the average entry-level employee’s net worth, according to financial information employees voluntarily share with SecFi.
Underwater stock options can affect employee retention, as employees look at other startups with strong valuation growth. As a result, startup leaders who want to retain their employees should consider cash and retention bonuses, higher salaries, or a stock option buyback program.
The average cost of exercising stock options is high.
Despite the economic headwinds, the cost of exercising stock options is still high.
In the year In 2022, the average Secfi client needed $846,000 to exercise their stock options and pay the associated taxes. As in previous years, taxes cover most of the total cost of exercise.
The main reason startup employees fail to exercise their stock options is the high cost.
