The Rise and Fall of Startup IPOs

In the last few years, the world witnessed an unprecedented surge in the number of private companies going public through IPOs. In fact, 2021 was the busiest year for IPOs ever, with 1,035  startups going public and raising close to $150B in proceeds. This boom created a private market frenzy, with investors scrambling to invest and startups eager to take these funds. In the same vein, startup employees were determined to accumulate stock options and become shareholders in these successful companies that were promised to be on the brink of an IPO.

Within the startup world, the mantra became growth at all cost, with companies over spending for the sake of growth. Startups were in the business of convincing shareholders to sacrifice current returns in exchange for aggressive expansion that they promised would bring huge profits in the future. In 2021, it was perfectly normal for unprofitable companies to IPO based on their future earnings.

Unfortunately - though, perhaps inevitably - growth did not follow this negative unit economics and the IPO boom came to a sharp end in 2022. The companies that did manage to go public that year only raised 5% of the proceeds from the year before. And now, with the economic downturn and market instability, IPOs have basically dried up. Startups that had been on the verge of an IPO were forced to either cancel their initial offerings or accept much lower valuations, resulting in huge losses for shareholders.

Looking back, there’s no doubt that 2021’s IPO boom simply is not sustainable in the current market.

The tragedy here is that not only the investors lost out, but this sharp decline also had negatively impacted the startup employees.

Employees were motivated to join these startups, starryeyed with the potential of a lucrative IPO in the not so distant future. Some even took a lower salary in exchange for a higher percentage of equity, with the hope of a significant IPO payout. Unfortunately, the decline that followed ultimately resulted in the devaluation of their employee stock options, leaving these employees with a much lower net worth than they had expected. This was a significant loss not only in terms of their missed financial gain, but also in missed cash had they chosen a higher salary over equity for their compensations.

This had a particularly devastating impact on employees who had already exercised their stock options. Because of the market sentiment and its positive trajectory, many employees paid high exercise costs to become shareholders. It didn’t matter how high the price was, because they were under the impression that their equity’s value would greatly increase upon an IPO. When the value of these shares ultimately decreased - sometimes even well below the strike price - many were left with huge losses. Those who had taken out loans to exercise their options now faced difficulties repaying the debt due, with no exit in sight to help cover the costs.

Moving forward, I think the lesson here is clear: in order to mitigate risk, you need to make educated decisions. It is important that startup employees have accurate information regarding their equity’s value and its current market worth. Only a clear understanding of the current value of your equity can help you make informed decisions about your options, taking on debt to exercise, or negotiating your compensation packages. This crucial information was very much lacking during the IPO boom and ultimately played a part in the major losses incurred. 

One way to achieve this is with an equity value calculator.  These types of calculators can  provide employees with an estimate of the current market value of their equity and help them make more informed decisions about their financial future.

In addition to these types of calculator tools, companies themselves can take steps to improve transparency by offering training or resources to help employees understand their equity and how it fits into their overall compensation package. That said, employees should be able to easily access this type of information and not be at the mercy of their companies to determine what their equity is worth in the current market.

Ultimately, the ramifications of this IPO rise and fall emphasize the importance of transparency and education when it comes to equity. As the startup world continues to evolve, it's essential that companies and employees work together to ensure that equity compensation is fair, transparent, truly reflecting the value that employees bring to the table.