Stock Options: The Long Game of Startup Success

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Inviting employees to share in a company’s long-term success, rather than just handing out monthly paychecks, makes sense on many levels. It boosts motivation, engagement and accountability among staff and helps foster an attitude that everyone is working together towards a shared reward.

Startups are almost always unpredictable, stressful and often not-so-well-paid jobs. Stock options are supposed to incentivise the best tech professionals to join despite these issues. It’s a promise that when the company is much more successful and worth much more money, the employees will get to share in that success for the value they helped create. 

And in reality, they are a necessity. Young startups need to attract the best talent they can but are usually hamstrung by lower salaries, limited perks/benefits (if any) and a more disorderly, less defined work environment. For anyone used to the corporate world, and the bells and whistles that often come with it, working at a startup might be a bit too chaotic for them. That being said, if you’re fortunate enough to find the right company on the right trajectory, it could be incredibly rewarding.

The risk profile of any private company is constantly in flux but generally moves down the scale from ‘extremely risky’ as time goes on and the company continues to grow and (hopefully) do well. Obviously, the earlier an employee joins the more valuable their stock options will be should the company survive the journey to exit. Regardless, even if the employees did want to realise some of their gains, it's near impossible to provide a transparent exit route.
The reality is, there’s unlikely to be an exit before at least Series B. And if an employee were to ask about selling their options early in a startup’s life, it might raise eyebrows about their commitment and belief in the company’s long term vision. But with companies staying private for longer and avoiding IPO, employees are forced to wait to access their liquidity. This will be frustrating for some of the longer term employees! Especially if you have a big expensive life event on the horizon like buying a house or starting a family.

So, what can you do? Well, the truth is, there aren't many options. The likelihood is you’ll have to wait for your company to exit. However, if you’re lucky, you might be able to sell some shares on a secondary marketplace! A secondary marketplace is a marketplace that enables employees and shareholders to sell pre-IPO stock. There are several platforms out there that facilitate this but as with all good things, there are limitations. To sell your shares, there has to be an interested buyer. For that to happen the company's stock has to be in high demand. And that's likely only going to happen if your company is late-stage and very successful. But even at that, and more importantly, your company likely won't allow it!

Most companies (82%, according to Stanford) don’t allow the selling of pre-IPO shares on secondary markets at all. Since it’s not always in a company’s best interest to let their private shares be sold, many of them refuse secondary market sales outright. And almost every company that does allow it will require you to get approval from the board of directors first.

Our advice would be to check your stock option plan, company charter, or other company documents to see whether you can sell secondary stock. If your company has a general counsel, you can also ask them about the details of what you can or cannot do. Alternatively, some later-stage companies might have a person on the finance team dedicated to secondary transactions.

If your company does allow it, there are several secondary marketplace platforms available but as usual in private markets, they have their limitations. The most typical barrier we see for retail investors accessing private markets is accreditation rules. So, like many other platforms in the private market space, you need to be an accredited investor to take part. Meaning a huge portion of people will be ruled out. Boo!

Most employees will be astute enough to know that the goal is to wait until an IPO or acquisition and will be happy to wait it out. That being said, if a company is taking its time and staying private for longer than you would expect; or they want to incentivise their employees by providing some liquidity back to their staff, they might provide them with an opportunity to sell some of their stock along the way.

How and why might this happen? Well, if the company in question is raising fresh funding and the round is really ‘hot’ and oversubscribed, i.e. there's more money committed than the company plans to raise, the company might allow the employees to sell some of their shares to new investors. This means the company doesn’t have to turn down some of the interested investors and also doesn’t have to issue new shares as the investors will simply be buying shares that have already been issued to employees. 

Stripe and Revolut are both planning an employee stock sale this summer. Stripe already did this earlier in the year and is now planning another. Our understanding is that some of Stripe's employee stock options were about to expire which would not have gone down well with their employees. So, they allowed the employees to sell some stock and get some liquidity. The employees are left happy and Stripe gets a bump in valuation! This might also be the same reason for their second stock sale and Revolut could be in a similar position. 

The Stripe IPO has been eagerly awaited for some time now and this might also be a way to sure up the cap table before it happens. If too many holders of Stripe stock want to sell when they IPO it could cause a lot of selling pressure in the market and have an adverse effect when their stock opens to public trading. By allowing people to liquidate now they can better position themselves for a successful IPO. With companies staying private for longer and avoiding an IPO, it makes sense that they might provide some liquidity back to their employees. It could also be a way for early investors to get some liquidity as the stock will be highly sought after in the secondary market.

Maybe you’re reading this and thinking, “Well, I don't work for Stripe or Revolut and my company doesn’t allow the selling of secondary shares”. And if that's the case, I'm sorry we couldn’t provide you with more options. However, we might start seeing a change in behaviour and a change in company policy in private companies. The so-called ‘golden handcuffs’ i.e. illiquid stock options, might not be doing a good enough job of attracting top talent away from some of the bigger public companies. The Founder and CEO of a secondary marketplace posted this week about a conversation they had with a hot pre-IPO AI company who are struggling to compete for talent with larger companies. They’ve decided to change their policy to drop most restrictions and allow current and former employees to trade vested stock options relatively freely. Now that's a big move!

And we wouldn’t be surprised to see more companies following suit. Let’s hope that includes yours!

What we’ve been working on at PitchedIt

Fundraising is still centre stage but alongside that, we’ve been…

• Working on deal flow for our launch 🤝

• Finalising platform terms with our solicitors 📄

• Ideating on some marketing collateral 👨‍🎨

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of PitchedIt. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. PitchedIt’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
PitchedIt Co-Founders