Following a wave of job losses, employees in Silicon Valley are scrambling to sell up holdings in tech start-ups through private share sales, further contributing to a decline in valuations.
Since the industry's erstwhile darlings like Klarna and Stripe have been driven into drastic cost-cutting measures, employees of troubled tech organizations are reportedly flooding secondary markets, where shareholders in a private company sell shares to third parties.
The 60-day vesting period for many laid-off employees' shares forces them to sell during the greatest economic crisis in ten years. Brokers report that several businesses are proposing to extend this deadline, but some sellers want to liquidate their shares because they believe the market crash will worsen next year.
Greg Martin, managing director of Rainmaker Securities, a company that helps with private securities transactions, said "We are seeing an inflow of people being laid off trying to sell their shares. These companies have built their headcounts up so much, so there are a lot of people highly motivated to get a sale done."
"In general, we are seeing a 30 to 80 per cent decline in price from a year ago," Martin continued.
Many digital start-ups are seeing their prices decline due to an increase in sellers, raising fears about an industry-wide reset in valuations of startup companies as increasing interest rates and struggling public technology stocks make their way into the private markets.
For many start-ups, it has becoming harder to determine a current pricing as a result of the rout. Few companies have raised money from venture capitalists this year because they were afraid they would have to accept a reduced valuation. As a result, there are few reliable indicators of how the general recession has affected them.
However, the informal private secondary markets handled by dealers like Rainmaker are frequently quite illiquid, making it more challenging to determine an exact "market" value.
One Silicon Valley venture capital fund manager claimed that this month has seen a tenfold increase in offers to invest in businesses through secondary share sales.
Several multibillion dollar companies, including the finance companies Klarna, Chime, and Stripe, the e-commerce giant Instacart, and the autonomous delivery company Nuro, have reduced 10 to 30% of their workforce during the previous two months. They mimicked the actions of well-known internet companies: in recent weeks, both Amazon and Facebook parent company Meta revealed intentions to cut more than 10,000 jobs.
Shares of Anduril, a $8.5 billion defense AI firm backed by Peter Thiel's Founders Fund and Andreessen Horowitz, traded on secondary markets for $16.95 per share in November, down from $31.50 in March, according to Rainmaker data.
The most recent data shows that shares of SoftBank-backed Chime Bank, which were valued at $25 billion when it last received outside capital in August 2021, have dropped by a quarter on secondary markets and are now selling at $60 a share.
According to Rainmaker's Martin, "The number of sellers is a lot more, and the number of bidders is a lot less, which is pushing price down and making it more aligned with multiples and valuations in public markets."
A huge increase in valuations during a VC fundraising boom in 2021, however, was followed by a return to, or an improvement over, pre-pandemic values in many of these businesses' trading.
However, from record high valuations, the CEO of one VC fund said that his portfolio's prices had fallen. "Valuations have got out of whack, but they got out of whack on the way up too. Yes, the stock is ugly and it was much higher, but in the context [of several years] it is not too bad," he added.
Some tech companies have had to develop structured liquidity programs for employees to sell off portions of their shares due to the collapse in fundraising for initial public offerings, which has fallen to its lowest level in twenty years. This has frequently been done in conjunction with a significant reduction in the company's own valuation.
According to Kevin Swan, an expert in private markets at Morgan Stanley's workplace financial solutions division, companies that had intended to go public this year are "scrambling to find lending options or selling shares on the secondary markets."
Swan continued by saying that start-ups were under pressure from an investor and staff base that had anticipated cashing out through sensational stock market debuts this year but had been forced to leave because there was no imminent IPO.
Other times, tech workers "re becoming concerned that their options are underwater and [the company is] not going public anytime soon," according to Glen Kernick, Silicon Valley leader at Kroll, which offers startup valuation services.
"Buyer demand increases when companies are getting close to an IPO or are correlated to when a company raises a funding round . . . but both of those have been pushed out," according to Kernick. He continued by saying that several businesses had restricted secondary share sales for current employees due to price difficulties.
Numerous private businesses have drastically reduced their internal valuations, including Instacart, Klarna, Stripe, and Europe's Checkout.com. Employees have the potential for additional gains in the event of a future transaction, such as an IPO, when the cost of a company's equity is reduced. Despite substantial employment layoffs across the computer industry, businesses have attempted to make these changes because a strong talent war for the finest engineers continues.
SpaceX, owned by Elon Musk, is attempting to set up a sale of primarily employee stock that would value the business at $150 billion. Employees and shareholders would see significant gains thanks to the offering, which would represent a 20% increase over its previous worth.
The price investors are willing to pay for a company's preferred equity and the company's internal valuation, which is normally made by the board and independent advisers during a "409a" assessment to determine a company's value for tax reasons, all affect the value of a company's common stock.
A "big tension" that needs to be resolved in the upcoming year is the need to provide employees with liquidity while maintaining exorbitant values, according to Ravi Viswanathan, the founder of California-based venture capital firm NewView Capital. "Pretty much every company is thinking about it."
By fLEXI tEAM