It was reported that after a wave of layoffs and the valuation of start-up companies has shrunk sharply, Silicon Valley “workers” have sold shares of technology start-up companies through the private market.
Brokerages and investors say tech workers are flooding the secondary market, a channel through which employees of private companies can pay third parties, as former darlings of the industry such as Klarna and Stripe are forced into aggressive cost-cutting measures. selling stock in the company).
Many workers who lost their jobs had 60 days to cash out their stock holdings, forcing them to sell amid the worst economic downturn in nearly a decade. Brokerage companies said that some companies allow employees to postpone the sale of stocks, but some sellers still hope to sell as soon as possible because they are worried that the market will deteriorate further next year.
“We’ve seen a huge influx of laid-off employees coming in and selling,” said Greg Martin, managing director of private stock exchange Rainmaker Securities. own stock.”
Martin added: “Overall, we’re seeing a 30% to 80% decline in stock prices from a year ago.”
The rise in sellers has put downward pressure on the shares of many tech startups. With rising U.S. interest rates and anemic conditions for public tech stocks seeping through to private markets, fears are growing that valuations for startups across the industry will be restructured.
The sharp drop means it is increasingly difficult to assess the current valuations of many startups. Many startups have avoided funding through venture capital firms this year for fear they might be forced to lower their valuations, making it difficult for the outside world to assess the specific impact of the macro environment on them through tangible data.
At the same time, informal private secondary markets set up by companies like Rainmaker are often illiquid, complicating the process of accurately assessing the “market capitalization” of these companies.
The head of a technology venture capital fund in Silicon Valley said that he has received a large number of invitations to invest in companies through secondary stock sales this month, reaching 10 times the normal number.
Fintech firms Klarna, Chime and Stripe, as well as multibillion-dollar startups such as e-commerce firm Instacart and automated delivery company Nuro, have all laid off 10% to 30% of their workforces in recent months. Their move mirrors that of publicly traded tech giants: Facebook parent Meta and Amazon have both announced in recent weeks that they would cut more than 10,000 jobs.
Anduril, an artificial intelligence defense company, has received investments from Peter Thiel’s Founders Fund and Andreessen Horowitz at a valuation of $8.5 billion. But the company was selling for $16.95 a share on the secondary market in November, nearly halved from $31.50 in March, according to Rainmaker data.
SoftBank-backed Chime was valued at $25 billion in its latest round of outside funding in August 2021, but since then the company has lost a quarter of its value on the secondary market and is now trading at $1.99 per share. $60.
“The number of sellers has increased significantly and the number of buyers has decreased significantly, which has resulted in lower prices that are more in line with valuations in the open market,” Rainmaker’s Martin said.
However, private market stock trading shows that after the venture capital financing boom in 2021 drove valuations to climb sharply, many private company stocks, although not small, are still at the same price as before the epidemic, or even improved from before the epidemic.
The head of a venture capital fund said that the valuations of the companies he invests in have plummeted, but only relative to their all-time highs. “Valuations are really miserable, but they’re also crazy when they go up. Yes, the stock price is really terrible. It used to be much higher than this before, but in the context of the past few years, it’s not too bad.” He said.
The U.S. IPO (initial public offering) market has shrunk to its lowest level in 20 years, a dismal situation that has also forced some technology companies to create structured liquidity plans that have employees dump large amounts of stock. But at the same time, the valuation of the company itself often shrinks significantly.
Kevin Swan, the private markets specialist at Morgan Stanley’s Workplace Financial Solutions business, said companies preparing to go public this year are “scrambling to find access to loans or to sell shares in the secondary market.”
Startup employees and investors who had hoped to cash in on blockbuster new stock listings this year, but the prospect of an IPO are forcing them to act, Swan added.
Glen Kernick, head of Kroll Silicon Valley, a startup valuation service provider, said that in addition, some employees of technology companies are increasingly worried that their options will become “diving options”. The company cannot be listed in the short term. The so-called “diving option” refers to an option whose strike price is higher than the market price, making the option meaningless.
“When a company is about to IPO or it’s about to raise money, there’s increased demand from the buy side … but both of these are ruled out,” Konico said. Because of the impact these issues could have on the company’s share price, some companies are even restricting current employees from selling shares in the secondary market, he added.
Private companies such as Klarna, Stripe and Checkout.com in Europe, as well as Instacart, have all lowered their internal valuations. After lowering the stock price, employees will get higher benefits should the company conduct an IPO in the future. While layoffs in the tech industry are spreading more widely, the competition for top-notch engineers remains fierce.
Elon Musk’s SpaceX is trying to arrange a round of mostly employee-owned stock sales that would value it at $150 billion. This valuation represents a 20% increase from the previous round and should help generate strong returns for employees and shareholders.
The value of a company’s common stock is determined by trading volume, how investors price preferred shares, and the company’s own internal valuation. Internal valuations are typically determined by the board of directors and independent advisors during the “409a” assessment process for tax purposes.
How to create liquidity for employees while maintaining sky-high valuations? This is something businesses “must address over the next 12 months”. “Almost every company is thinking about it,” said Ravi Viswanathan, founder of California-based venture capital fund NewView Capital.