We now work with employees from 75% of all U.S. unicorns. Secfi has over $8.2B worth of startup stock options on the platform.¹
2020 has set a new IPO record with 402 companies going public. That’s 81% more than 2019 and higher than the 2000 dot-com boom which boasted 397 IPOs.²
This is good news for founders and investors – but what about the employees who also had equity?
Our team dove into the Secfi data set to uncover defining trends for employees from late-stage unicorns during this unprecedented year.
Here’s a snapshot of we what we found:
While there are a number of reasons why employees may or may not exercise their options (length of employment, company growth trajectory, views on company exit potential, etc.), we found that surprisingly high costs are a main reason so many options are left on the table.
We call this the unaffordability factor. It means that for many who work for high-growth companies on the path to an IPO or exit, exercising options can be cost-prohibitive and financially out of reach.
There are two costs associated with exercising options: (1). The cost to acquire vested shares (the strike price x number of shares) and (2). The associated tax costs.
The tax costs are often what make options so expensive. In some cases, the tax liability is zero. But for the average late-stage unicorn employee, taxes drive up exercise costs to 6.6x the initial price.⁶
That’s because you are taxed on the difference between strike price and fair market value (aka 409A valuation) which can be extreme for high-growth startups.
As most are unaware of their tax liability, we call this the surprise factor.
As companies grow, the more expensive it becomes to exercise stock options. This is because the tax bill from exercising grows with the 409A valuation of the company.
For companies of $10B+ in valuation, exercise costs are 5.5x their annual household income on average.⁷
Those who exercised stock options pre-IPO were able to enjoy tax savings (thanks to capital gains treatment) resulting in higher gains at the time of IPO.
Without exercising pre-IPO, Jake may make a profit of $1,778,044 if he sells shares when the employee lock-up period ends.
Right before the IPO, Jake's costs are $507,846 to exercise his stock options.
Jake may make an additional $562,412 if he exercised pre-IPO and qualified for tax savings. That’s an ROI of 2.1x on his exercise costs.
Jake’s exercise costs increased by 240% over time.
Assuming share sell prices as they were on the first day of trading after IPO, taxed as ordinary income (if not exercised) versus long-term capital gains (if exercised pre-IPO)
Based on California tax rates
Exercise costs / annual income
Exercise cost multiplier due to taxes
Extra profit if taxed as long-term capital gains
Difference in return / exercise costs
How exercise costs change over time
A few years ago, Secfi’s founder left his company only to find that he would need to pay $1.8M in taxes to exercise $50K worth of his options.
First, how does that make any sense?
Second, how on earth could anyone afford that?
Third, why didn’t he know this before?
And last, it stinks that he had to walk away from owning a piece of the company he poured his heart and soul into helping to build. No doubt there are others who experience this stressful and frustrating situation.
Enter Secfi - a company formed in 2017 that is 100% focused on making sure that this experience doesn’t happen to other startup employees.
Over the past few years, we’ve been heads down building the tools, resources and financing solutions to help startup employees understand, maximize and unlock the value of their equity and are proud to work with employees from 75% of U.S. unicorns.