What Happens When Your Startup's Equity Value Goes Down

Startup employees - what happens when the value of the startup you joined goes down?

Unfortunately, this is a more common experience for startup talent than it was mere months ago. Let's dig into the two kinds of valuation that matter here and what some companies are doing to make their employees whole.

The first valuation is simply the current estimate of what the business is worth. It's the headline number on all the TechCrunch articles.

This may not have changed in the past year. Sure, valuations as a whole are significantly down, but maybe your startup didn't need to fundraise and has so far avoided being re-valued.

However the second valuation type, a 409A valuation, can still be moving.

A 409A valuation is an appraisal of the fair market value (FMV) of the common stock of a startup by an independent third party (like Carta). Startups use the findings to inform the price at which employees can purchase shares of common stock. Typically you get a new 409A at least once a year.

So if you joined in 2021 at an FMV of $1 per share, and now that same FMV is $0.60...why would you pay to exercise those shares? You wouldn't, they're underwater.

Not cool. You probably joined (at least in part) because of the upside of that equity.

But not all is lost. Some companies, as shown in the chart below, are choosing to 𝗿𝗲𝗽𝗿𝗶𝗰𝗲 employee options. This usually means the board agrees to amend current options to a new, lower exercise price.

Tens of thousands of options on Carta have been repriced in the last 6 months.

Do you know your company's current FMV? Are your shares underwater?

Good questions to ask as we trudge through this venture capital downturn.

Stay up to date with all the latest data on employee equity and more with our weekly Data Minute newsletter: https://lnkd.in/gNa_Dk-F

#cartadata #equity #repricing #compensation #409A