For years, the dream for most employees at a promising startup was the IPO - the initial public offering. This event, where the company listed its shares on a stock exchange, was often seen as the ultimate liquidity event, allowing employees to finally cash in on their hard-earned stock options and restricted stock units (RSUs). However the allure of remaining private is growing stronger, and that has real implications for you.
The Old Paradigm: The IPO Dream
Traditionally, the IPO was the primary path to both capital and liquidity for fast-growing companies. Here's why it was so coveted:
Access to Public Capital: IPOs allowed companies to raise significant funds from the broader public market, fueling further growth.
Liquidity for Investors & Employees: Publicly traded shares are easily bought and sold, providing a clear path for investors and employees to realize the value of their holdings.ยง
Prestige and Validation: Going public was often viewed as a mark of success and validation for a company.
The New Paradigm: The Rise of Private Capital and Liquidity
Private Capital at Scale: Today, companies can raise massive amounts of capital privately through venture capital firms, private equity funds, and other institutional investors. Examples like Stripe raising $6.5 billion in private funding demonstrate this new reality. Companies no longer need to go public to fuel their growth.
Private Market Liquidity: Secondary markets have emerged, enabling employees and early investors in private companies to sell their shares to other private investors without the company going public. This allows early backers to see a return and allows employees to have some liquidity before an exit event (IPO or acquisition).
Why Companies Are Choosing to Stay Private Longer
Several factors drive this trend:
Avoidance of Public Scrutiny and Reporting: Public companies face rigorous regulatory requirements and reporting obligations (think quarterly earnings reports, Sarbanes-Oxley compliance, etc.). This can be demanding and can force companies to focus on short-term gains rather than long-term strategic goals.
Maintaining Control: Private companies can often exercise more control over their strategic direction, free from the immediate pressures of public shareholders. This can be particularly appealing to founders and management teams.
Focus on Long-Term Growth: Without the pressure of quarterly performance, private companies can focus on long-term growth strategies and innovative projects. This can lead to sustained value creation, even if it takes longer to reach fruition.
Access to Sophisticated Investors: Private investors, often with deep expertise in specific industries, can provide more than just capital; they offer strategic guidance and connections.
What This Means for You: The Employee with Equity Compensation
This shift in the financial landscape has significant implications for you as an employee holding equity:
Delayed Liquidity (potentially): The traditional path to liquidity, the IPO, is becoming less guaranteed. Your company might choose to remain private for much longer than originally anticipated. This means the potential for cashing in on your equity may be delayed.
Greater Reliance on Secondary Markets: The secondary market is becoming your most likely path to liquidity before a liquidity event (IPO or acquisition). This isn't a guaranteed path. Demand for shares on the secondary market can fluctuate based on the perceived value of your company.
Example: Imagine you have stock options in a late-stage private tech company that has been valued at billions of dollars, but a secondary market for these shares only appears during times of positive press and high perceived value. If the company then encounters setbacks, the demand for those shares on the secondary market could decline.
Potential for Increased Value: Staying private for longer can also mean that your equity may have a much greater potential for long-term appreciation as the company matures and expands, as it's not facing the pressure of public market scrutiny.
Example: A software startup that goes public too early might be pressured to show consistent growth each quarter to satisfy investors and that short-term focus could actually limit long-term value. But a private company can focus on long-term strategy and the development of valuable products that increase valuation.
Understanding Valuation is Key: In a public company, the daily share price is easily accessible. For private companies, valuations are often determined in funding rounds and can be less transparent. Understanding how your company is valued is critical. Consider these factors:
409A Valuation: Your company will conduct periodic 409A valuations, used for tax purposes. This will provide a sense of the company's share price.
Secondary Market Activity: Pay attention to what share prices are being offered in secondary market transactions (although this is not always public). These prices can give you an indication of how your equity is being perceived by the market.
Company Performance: A strong company can always justify a high valuation. Stay informed about the company's performance, growth prospects, and competitive positioning.
Ask Questions: As Solomon highlighted the need to question the difference in standards between private and public markets, employees too should ask questions.
How often are company valuations performed?
What is the process for secondary sales of employee shares?
What are the long-term plans for the company, and how might they impact equity value?
Navigating the New Landscape: Practical Advice for Employees
Stay Informed: Stay up-to-date with your company's performance, funding rounds, and any changes in the overall economic landscape.
Understand Your Equity Package: Know the details of your stock options or RSUs, including vesting schedules, exercise prices, and expiration dates.
Don't Be Afraid to Ask Questions: Engage with your company's finance team or HR to get clarity on your equity and potential liquidity options.
Plan for the Long-Term: Recognize that liquidity for your private company stock may not be immediate and factor this into your financial planning.
Consider Secondary Market Options Cautiously: If the opportunity to sell shares in a secondary market presents itself, evaluate it carefully. Research the buyers and consider seeking independent financial advice before making any decisions.
Diversify Your Holdings: Don't put all your financial eggs in one basket. If your company's stock is a significant part of your net worth, consult with a financial advisor about diversifying your portfolio.
The shift marks a significant change in the landscape of private companies and how they operate. While the IPO was traditionally the ultimate goal, companies increasingly are choosing to stay private longer to raise capital and continue to expand while maintaining autonomy and focus. As an employee with equity, understanding this shift is crucial. By staying informed, asking questions, and planning for the long-term, you can navigate this new era and make the most of your equity compensation package. The "new normal" might mean delayed liquidity, but it may also mean greater long-term value creation for those who stay in it for the long haul.