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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Working for a start-up can be a nerve-racking endeavour. Equity remuneration helps employees keep the faith. Restricted stock units and stock options are key sources of pay for newly formed tech companies. Handily, they keep cash payouts low too.
But a dearth of initial public offerings this year has meant a lack of exits for workers and early investors.
Despite recent IPOs from the likes of Arm and Birkenstock, the number of listings in 2023 is only about a tenth of 2021’s record. The longer a company waits, the greater the risk that it will be pushed to list at a time not of its choosing. Online grocery delivery company Instacart went public in September valued at a quarter the size of its last private valuation of $39bn. The impetus, said chief executive Fidji Simo, was giving employees liquidity.
The result was a chunky $2.6bn of stock-based remuneration expense reported in the first set of quarterly earnings. That led the previously profitable San Francisco-based company to record a $2bn net loss.
Employees usually have to wait three months before they can sell shares — a standard lock-up. If Instacart shares had jumped by more than 20 per cent, however, they could sell early. Yet, thanks to heavy losses and slowing top-line growth, the stock trades 16 per cent below its listing price.
This pattern may be repeated by the companies that next opt to go public. Instacart was founded 11 years ago. Databricks, Stripe and Reddit are all considered prime IPO candidates. They are 10, 13 and 18 years old, respectively, making it more likely that their restricted share offers are close to expiration.
There are other choices. Stripe has already opted to raise funds at a lower valuation to provide liquidity and cover tax obligations for employees without listing. The alternative is to allow employees to go unrewarded. That risks damaging the company’s future hiring abilities. Otherwise, a start up must accept an inopportune time to list.
Listen to Lex deputy editor Elaine Moore talk to creators, companies and critics about the next era of social media in the FT’s new Tech Tonic podcast series.
