Tech layoffs at private companies are putting employee equity in limbo
It was just about three weeks ago that the layoffs started to feel constant. Every day, more and more people are losing their jobs—from crypto companies like Coinbase or real estate groups like Compass or retail platforms like Stitch Fix.
More than 8,000 startup employees have been cut this month, per Layoffs.fyi data. Let that sink in: In 15 days—in 11 working days—more than 8,000 people have lost their source of income: that they will have to find another way to fund their rent or mortgage, their doctor’s appointments, their children’s braces or softball registration fees. This is already touching people I know and care about, and it’s likely only the beginning.
To make matters worse, there’s a whole pool of capital that’s inaccessible right now: all the money tied up in private stock options.
“A lot of employees… Are now learning how things can go in a bit of a rougher patch,” says Jeremy Wright, co-head of global private markets for Morgan Stanley at Work, the division that helps venture-backed tech companies manage their cap tables and stock plans.
Equity has become a key means of attracting talent—what Wright refers to as “tablestakes.” Now that companies are staying private longer than they ever have before, and equity plans have become so popular, employees have racked up numbers of shares. But what those shares are now worth is an open question.
Due to soaring valuations in private companies pre-IPO, “some of this is uncharted territory for private company employees,” says Kevin Swan, who, co-heads the Morgan Stanley global private markets business with Wright. The National Center for Employee Ownership estimates that 32 million employees participate in an employee ownership plan (that includes public companies).
So far, only some private companies have voluntarily reset their own valuations—the public example of that being Instacart, which cut its valation to $24 billion—down from $39 billion earlier this year. But Wright says we should expect to see much more of this as the year goes on and companies are required to update their 409A valuations—meaning the value of common stock as determined by a third-party appraiser.
Formal secondary stock offerings have been few and far between in recent weeks, according to Wright.
“There’s quite a divide right now—what investors or even a company buying back shares would expect versus what a shareholder or employee expects to sell for,” Wright says. “So there’s been a holding pattern there.”
Morgan Stanley’s stock plan business, which works with private tech companies from their Series A to IPO, says that some companies are still moving forward with liquidity events—things like a tender offer. But most of them are waiting to see how share prices settle out.
“Basically there’s a big gap between the bids and the offers,” Wright says.
For some who have taken big bets on the company they work for with their personal wealth, this could be very financially challenging. You may recall that fintech startup Bolt Financial released what it described as a “revolutionary” employee stock plan earlier this year, where its approximately 900 employees at the time could take out loans to exercise their options. As my colleague Shawn Tully described in February, the offering was eerily similar to the 2000s Conseco insurance disaster, where employees were left owing hundreds of millions of dollars. Business Insider recently reported that a Bolt Financial engineer had taken out a $100,000 loan from the company to purchase stock options. After being laid off, they’ll need to pay back the loan within 90 days.
Most employees won’t find themselves in such drastic circumstances—particularly as taking out these kinds of loans have become less popular after previous downturns. What may be more frequent is employees losing vested options they have built up in recent years. Typically, employees have about 30 to 60 days to exercise options once they part ways with the company, according to Wright. That could mean either forking over a sizable chunk of change after losing your job, or forfeiting the shares.
“We’re gonna see a lot of things be flipped on their head, in terms of where they want to go work and how they value that equity, because the pops that we saw in the last couple of years, we may not see again for a couple of years,” Wright says.
See you in Aspen… If you’re like me, it’s hard to keep up with everything happening in tech and the private markets these days. Let’s talk about it together at Fortune’s Brainstorm Tech July 11-13. Fortune will be hosting conversations about when the IPO market will re-open and where the opportunities lie in free-falling markets, and you can plan to hear from the likes of Isabelle Freidheim, CEO and Chairman of Athena SPACs; Sriram Krishnan, GP of a16z crypto; Lynn Martin, president of the NYSE Group; and Jonathan Kanter, Assistant Attorney General of the U.S. Department of Justice’s Antitrust Division, among many others. This is an invite-only conference, but Term Sheet readers get special consideration. You can register here.
See you tomorrow,
Jackson Fordyce curated the deals section of today’s newsletter.
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- Metropolis, a Los Angeles-based payment infrastructure company for parking facilities, raised $167 million in Series B funding. 3L Capital and Assembly Ventures co-led the round and were joined by investors including Dragoneer, Eldridge Industries, Silver Lake Waterman, UP Partners, and former deputy mayor of New York Dan Doctoroff.
- DataStax, a Santa Clara, Calif.-based data company, raised $115 million in funding. The Growth Equity business within Goldman Sachs Asset Management led the round and was joined by investors including RCM Private Markets fund, EDB Investments, Crosslink Capital, Meritech Capital Partners, OnePrime Capital, and others.
- Fountain, a San Francisco-based applicant tracking system for high volume hiring, raised $100 million in Series C extension funding. B Capital Group led the round and was joined by investors including SoftBank, Mirae Asset Venture Investment, DCM, Origin Ventures, Commerce Ventures, SemperVirens Venture Capital, Uncork Capital, and others.
- DealHub, an Austin-based sales engagement platform, raised $60 million in funding led by Alpha Wave Ventures.
- Sana, an Austin-based health benefits company for small businesses, raised $60 million in Series B funding. Trust Ventures and Gigafund led the round and were joined by investors including American Family Ventures, mark vc, Breyer Capital, JAM Fund, and Liquid 2.
- Elevate K-12, a Chicago-based live-streaming instruction company for K-12 classrooms, raised $40 million in Series C funding led by General Catalyst.
- Narmi, a New York-based open digital banking technologies provider, raised $35 million in Series B funding. Greycroft, NEA, and Picus Capital co-led the round.
- Cube, a New York-based financial planning and analysis platform, raised $30 million in Series B funding. Battery Ventures led the round and was joined by investors including Mayfield Fund, Bonfire Ventures, Operator Collective, and GTMfund.
- Fellow, a San Francisco-based coffee gear company, raised $30 million in Series B funding. NextWorld Evergreen led the round and was joined by investors including Benchmark’s Peter Fenton and other angels.
- NFTPort, a Tallinn, Estonia-based NFT infrastructure company for developers, raised $26 million in Series A funding. Taavet+Sten and Atomico led the round.
- VersusGame, a San Mateo, Calif.-based mobile gaming platform, raised $25 million in Series A funding. APEX Capital, Brightstone Capital Partners, Feld Ventures, Gaingels, Kombo Ventures, Lifeline Ventures, Moonshots Capital, NewView Capital, Republic Capital, TribeJoint Amenti, YouTuber David Dobrik, and other angels invested in the round.
- General Radar, a Belmont, Calif.-based 3D radar systems manufacturer and developer, raised $22 million in Series A funding. Octave Ventures and Disruptive Technology Advisors led the round and were joined by Kleiner Perkins.
- Finout, a New York and Tel Aviv-based cloud cost management company, raised $18.5 million in funding. Team8 Capital, Pitango First, R Squared Ventures, Jibe Ventures, toDay Ventures, Ariel Maislos, and other angels invested in the round.
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- XENDEE, a San Diego-based software company specializing in the planning and operation of distributed energy resources, raised $12 million in Series A funding. Anzu Partners led the round and was joined by investors including TravelCenters of America, Evergy Ventures, and Surlamer Investments.
- Collaborative Robotics, a Santa Clara, Calif.-based robotics company, raised $10 million in funding. Neo led the round and was joined by investors including Khosla Ventures, Calibrate Ventures, and 1984 Ventures.
- DermaSensor, a Miami-based skin cancer evaluation device company, raised an additional $10 million in funding led by Ceros Capital Markets.
- Plobal Apps, a New York-based mobile app platform for e-commerce stores, raised $8.5 million in funding. Elevation Capital and Bessemer Venture Partners led the round.
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- Kaleidoco, a New York-based Web3 entertainment technology company, raised $7 million in seed funding. Animoca Brands, GameFi Ventures, Gemini, and others invested in the round.
- Altrio, a Toronto-based proptech startup, raised CAD $8 million ($6.19 million) in Series A funding. Whitecap Venture Partners led the round and was joined by investors including Mantella Venture Partners, Alate Partners, and Colliers.
- Nue, a San Francisco-based revenue lifecycle platform for SaaS businesses, raised $6 million in seed funding. Information Venture Partners led the round and was joined by investors including NextWorld Capital, SVTech, Bluefish, and other angels.
- Xip, a San Francisco-based video learning platform from creators, raised $5 million in seed funding. Reach Capital’s Jomayra Herrera led the round and was joined by investors including LinkedIn executive chairman and Next Play Ventures founding partner Jeff Weiner, MasterClass COO Mark Williamson, Next 10 Ventures Benjamin Grubbs, and Bertelsmann Digital Media Investments invested in the round.
- Mewt, a Bangalore, India-based banking app, raised $4.8 million in seed funding. Quona Capital led the round and was joined by investors including BEENEXT, DG Daiwa Ventures, Goodwater Capital, Allin Capital, and other angels.
- Destaxa, a São Paulo, Brazil-based payments platform for offline retailers to access payment networks, raised $3.1 million in seed funding. Quona Capital led the round and was joined by investors including Caravela, Norte Ventures, Olist co-founder Tiago Dalvi, and Pipefy co-founder Alessio Alionço.
- Travertine Technologies, a Boulder, Colo.-based carbon dioxide removal and industrial chemical production company, raised $3 million in seed funding. Grantham Environmental Trust and Clean Energy Ventures led the round.
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- AssetMark Financial Holdings agreed to acquire Adhesion Wealth, a Charlotte-based wealth management technology solutions provider, from Vestmark. Financial terms were not disclosed.
FUNDS + FUNDS OF FUNDS
- Third Rock Ventures, a Boston-based venture capital firm, raised $1.1 billion for a fund focused on science, medicine, business, and strategy companies within the health care industry.
- MidOcean Partners, a New York-based alternative asset manager, hired Marshall Phelps as a managing director and partner and Jim Henderson as a managing director on the investor relations team. Formerly, Phelps was with Lazard and Henderson was with Stone Point Capital.