The Answers to your Startup Equity Questions
Here is a note that we sent to shareholders to provide guidance on liquidity amid the novel coronavirus and uncertainty in the markets.
These are turbulent times. You and your loved ones may have been impacted by the virus. And, you might be looking to take risk off the table.
If exercising your options or selling your shares has been on your mind, we’d like to give you the tools to evaluate whether or not it makes sense for you.
What are my options for liquidity?
The secondaries market is more developed than ever. While transactions may take longer to close, there will be continued appetite for private company shares in this volatile market. There is a misconception that liquidating pre-IPO equity is only essential when a shareholder is pressed for cash. Shannon O’Neill, Director of Sales Strategy at EquityZen, says that, “We see idiosyncratic reasons as to why shareholders choose to liquidate their hard-earned equity prior to a company’s exit. The most popular reasons include taking risk off the table and realizing their salary on their own terms. This is especially apparent with COVID-19 delaying anticipated 2020 and 2021 liquidity events.”
She adds that, “Market dislocation brings sophisticated investors to the table who hope to invest opportunistically by capitalizing on discounted pricing from the last funding round’s price. Shareholders are still seeing strong multiples from their strike price on our platform.”
There will be continued activity in the private markets during this time.
How will this impact my company’s valuation?
Overall, we believe the current environment has likely pressured private company valuations.
- Revenue declines. Across sectors, there have been steep revenue declines that have resulted in layoffs and furloughs. Given the uncertainties surrounding COVID-19, there are no clear indicators of recovery in the short-term.
- IPO delays. Liquidity events like IPOs and M&A may be delayed in 2020, expanding the time horizon for shareholders to seek liquidity in the private markets. If companies do choose to IPO, the timing may be delayed and the pricing lower than expected.
- More downrounds. In this environment, there will be more downrounds. Companies may raise a Series C round at a price lower than its Series B round. They may also consider convertible notes as an alternative to traditional fundraising.
- Higher uncertainty and risk aversion among market participants. Public equities valuations have declined meaningfully in recent weeks as investors fled to safer assets (bonds, cash, etc.). The impact has been less visible for private shares; however, this is largely an artifact of less frequent trading. Much like their public counterparts, private market equities are risky assets and subject to many of the same underlying valuation forces. As such, we would expect elevated levels of risk aversion to correspond to lower valuations for private equities as well.
Not all companies will be impacted equally. As you consider selling your shares, it’s important to consider: is my company’s offering a luxury or necessity? How is my company’s offering possible in this era of social distancing? Doing so will give you a deeper understanding of your company’s potential valuation in this new normal.
How can I get started?
As a first step, check your stock option agreement for details on your options: the type of shares, number of shares, vesting requirements and strike price. You will also want to take note of how long you have to exercise your options.
Rather than solely evaluating the relationship between the share price and potential exit price, also consider the percentage growth from the strike price.
A strike price is the fixed price at which you will pay for one share of stock. You can think of the share price as the price that is used in a tender offer (i.e. on our platform) or exit event. The “spread” is the difference between the strike price and the share price when you exercise. This difference translates to your potential gain. For example, say your strike price is $1 and the share price is $10. The spread would come out to $9 (10-1= 9).
Next, review your net worth and your portfolio. Ask yourself: How much is my net worth on paper tied to my company’s equity options? Do I need to diversify my portfolio further?
Startup employees do not always take advantage of their options which are bundled into salary packages. You are allowed to ask your employer for more clarity about your options. If you have limited access to cash, you can also explore a cashless exercise.
Finally, once you have details on your shares, we encourage you to register your equity on our site. You can reach EquityZen at 877-490-6121 ext. 3 or you can contact firstname.lastname@example.org for more information about selling your shares.