Hello and welcome to Pipeline! This week: Instacart’s effort to turn bad into good, Justin Kan’s new venture, and how to raise a first fundraiser.
It’s not often you see companies bragging about being less valuable. And it’s not exactly what you think of as a morale booster. But that’s more or less what Instacart meant when it told employees it had lowered its valuation. The grocery delivery company said it was lowering the company’s 409A valuation – an internal measure – from $39 billion to $24 billion, and adjusting its restricted stock unit awards accordingly. .
This seemingly minor accounting change is actually quite significant in the startup world, and shows how private equity compensation at highly rated startups is increasingly similar to what employees get at public companies.
Don’t call it a ride down. Employees may worry if the price of a 409A drops, but that doesn’t necessarily affect their equity the way raising new money at a lower valuation would.
- The 409A price is an internal accounting measure used to price employee equity that is typically updated at least once a year. This is different from the price investors pay for preferred stocks, which is usually referred to as “valuation” in news reports.
- One issue that wasn’t clear in some of this’s coverage: For tax reasons, 409A prices are updated at least once a year, and more often if there’s a material change. And like a public stock price, 409A prices can go up and down. After a long bull market, many startup employees were stunned to see that stocks could crash. “409A valuations change all the time,” said Vieje Piauwasdy, senior director of equity strategy at Secfi, which provides funding to startup employees for exercising options and other needs. “So when COVID hit in 2020, we saw [all] those 409As go down.
- A similar thing has happened since the November tech downdraft. So Instacart’s 409A was down no matter what the company wanted to do. Instacart’s business is a mix of delivery, ads, and software; some reasonable public comparisons include DoorDash, Meta, and Shopify, whose stocks are down.
Instacart is trying to get ahead of a falling market. Since he can’t do anything about his 409A price and his IPO seems to be delayed, he’s doing the right thing.
- Tying its RSU price to the 409A price going forward was a proactive move, as Instacart was preparing to release annual refresh RSUs for existing employees.
- These RSUs are granted annually to existing employees and will now be granted at the new price of $24 billion. (The new price will also be used for RSUs for new employees.) Employees will essentially now get shares closer to their estimated value on the public markets.
- The company tells employees it’s a benefit for them since they actually get more shares at a lower price, according to a person familiar with the company’s internal messaging.
- Unlike high-priced options that can become worthless if the stock price drops, the old PSUs awarded at the $39 billion valuation still have some value. But the new RSUs offer more advantages.
New employees like a lower price. It is an important recruiting tool in an extremely competitive job market.
- It also helps explain why Instacart went public with the price change. One of the reasons companies started distributing RSUs was the perception that their stock was too high to see big gains on options, whose strike prices are set by the 409A valuation.
- Instacart has been issuing RSUs for some time now, but the lower valuation could help early employees who hold stock options – especially as it now looks like they will have to wait longer for an IPO. “It has become much cheaper for employees to exercise their options and acquire long shares,” Piauwasdy said. Exercising options costs money upfront, but means gains can be taxed at the lower rate over the long term.
Ups and downs are part of the financial life of a startup. When a company needs to raise a round to the downside, it can be a negative signal and ordinary shareholders can find themselves diluted. Companies are often wary of the effect this can have on recruitment. But that hasn’t happened with Instacart: the company says its business is still going strong despite the stock market. With thousands of employees, it was inevitable that 409A’s lower valuation would leak, so Instacart made the right call in trying to turn a negative number into a positive.
Seed assessments have not change a lot despite recent macroeconomic uncertainty, according to Semil Shah: “Perhaps obvious in retrospect: with the end of the first quarter, from my @pre/seed perspective, I saw *zero* change in the investment climate and the market from January 1 to today. today. In fact, the quality of tech founders launching new things seems to be improving on its own.
On the other hand, the valuations of series A to E have all been touched, said Sheel Mohnot. “We are seeing an impact across the portfolio, Series AE. Our starting cos raising Series A in Q1 cost
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