Inside Secfi’s 2022 stock options stock report • toptecheasy.com

About 25% of startups on the Secfi platform lowered their valuations last year

Been last year a painful one for startups and their employees. Venture capitalists scaled back investments, thousands of people lost their jobs, and corporate valuations stalled or fell amid an ongoing bear market.

According to an internal analysis, an estimated 24% of startups on the Secfi platform lowered their market valuation in 2022. For people who work at those startups, that means some (in some cases all) of their employees’ stock options have spent 2022 underwater.

Separately, a Secfi analysis of 1,502 funding rounds at late-stage startups since March 2021 shows that startups are generating more flat and down rounds than before.

A number of startups that raised money in 2022 have not disclosed their post-money valuations, suggesting that the actual number of startups that have lowered their valuations in the past 12 months could be even higher than publicly reported.

Employee stock options are an important factor in startup compensation, and underwater stock options can negatively impact hiring and retention in the startup ecosystem.

Underwater stock options

An analysis of more than 4,300 stock option grants uploaded to the Secfi platform in 2022 shows that nearly one in four startups have lowered their fair market valuation at some point during the year.

The best-known example of this phenomenon was Klarna, which raised venture capital in mid-2021 at a valuation of $45.6 billion, but was forced to raise another round of funding in mid-2022 at a valuation of $6.7 billion — down 85% . Other big companies that have lowered their valuations (without raising funding) are Instacart and Checkout.com.

Stock options are a high-risk, high-reward form of compensation and remain one of the most attractive drivers for entry and retention.

An analysis by Carta of 2018 employment data suggested that the average startup employee only works at a company for two years before jumping to their next opportunity. Underwater stock options are a problem for people who joined a startup in 2020 or 2021 as they now discover that their shares are worth less than when they were hired.

The average Silicon Valley entry-level employee received 12% to 14% of the value of his salary in the form of stock options, according to Carter. In other words, an entry-level employee earning an annual salary of $150,000 could earn an average of $21,000 in stock options as part of their total compensation package.

When a startup is successful, stock options increase in value – in some cases by many multiples. Stock options make up 86% of the average starting employee’s total wealth, according to financial data employees voluntarily shared with Secfi.

Underwater stock options can impact employee retention as employees instead look to other startups with stronger valuation growth. As a result, startup leaders looking to retain their employees may need to consider cash and retention bonuses, higher salaries, or a stock option repricing program.

The average cost to exercise stock options remains high

Despite economic headwinds, the cost of exercising stock options remains high.

In 2022, the average Secfi client would need $846,000 to exercise its stock options and pay associated taxes. As in previous years, taxes continue to be the largest portion of total exercise costs.

High costs remain a major reason why new employees do not exercise their stock options.