Startup Equity Report:

The State of
Stock Options

2020

Hello.

Welcome to Secfi’s first study of Startup Equity: The State of Stock Options. Since 2017, we’ve been working with startup employees to help them understand, maximize and unlock the value of their equity.
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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:

¹ Source: Secfi, as of Nov 20, 2020  
² Source: Pitchbook Stock Analysis, as of Nov 20, 2020 (includes initial public offerings and special purpose acquisition company)
1

Employees left $4.9B on the table by not exercising their pre-IPO stock options.³

Top unexercised stock options
1
Snowflake
$1,272,538,185
2
Airbnb
$966,683,219
3
DoorDash
$954,231,260
4
Unity
$321,753,834
5
Palantir
$250,600,109

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.

³ Source: Secfi, as of Nov 20, 2020.
2

On average, it costs nearly 2x annual household income to exercise options.

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.

⁴ Source: Secfi, as of December 11, 2020. Based on the household income (married, filing jointly) of 992 individuals from 69 late-stage unicorn companies in California (65%), New York (10%) and other U.S. states (25%).
Putting it in perspective

For most, exercising stock options ranks as one of the top lifetime expenses.

Exercising stock options may be one of the largest expenses to make - especially when considering that costs must be paid in one go.⁵
⁵Source: Cars (Statista 2020), Education based on costs of a 4 year private degree (educationdata.org), Pension based on college grad (Transamerica center for retirement studies,18th Annual Transamerica Retirement Survey), Children (USDA, Expenditures on Children by Families, 2015), House, median sales price US houses (US Census Bureau, 2020), Exercise stock options: Secfi, as of Nov 20, 2020. Based on the household income (married, filing jointly) of 992 individuals from 69 companies in California (65%), New York (10%) and other U.S. states (25%).
3

Taxes make up 85% of stock option exercise costs.

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.

⁶ Source: Secfi, as of December 11, 2020. Based on 773 individuals from 69 late-stage unicorn companies in California (65%), New York (10%) and other U.S. states (25%).
4

Exercise costs soar as company valuations increase.

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

⁷ Source: Secfi, as of December 11, 2020.
5

The good news: Those who exercised early nearly doubled their investment.

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.

⁸ Source: Secfi, as of December 11, 2020. Share sell prices based on latest preferred share price for respective company, except for those already public, for which they are based on public share prices on December 11. Tax rates are based on long-term capital gains rates. Definition of return on investment is ([profit if taxed at long-term capital gains rates] - [profit if taxed at ordinary income rates]) / [exercise costs].

Case in point: Snowflake, Airbnb & DoorDash

Let’s look at these three IPOs for illustration
Options left unexercised
72M

Estimated money left on the table
$1.2B
Options left unexercised
34.5M

Estimated money left on the table
$954M
Options left unexercised
47M

Estimated money left on the table
$967M

Meet Jake

Engineering at Snowflake, joined 2019
Anonymized profile

Profit

Based on a Snowflake share price of $250 (which was the price on the first day of trading after the IPO), a $8.88 strike price and California tax rates.

The lock-up period is the period after the IPO during which employees are restricted from selling their shares.

Without exercising pre-IPO, Jake may make a profit of $1,778,044 if he sells shares when the employee lock-up period ends.

Based on an estimated Snowflake share price of $250, a $8.88 strike price and California tax rates.

Exercise costs

Based on a household income of $140,000, a strike price of $8.88 and California tax rates.

Right before the IPO, Jake's costs are $507,846 to exercise his stock options.

That’s 3.6x his annual household income. Taxes make up 74% of the exercise costs, causing exercising to be 3.8x as expensive as it would’ve been without taxes. For most startup employees, this comes as a total surprise.
Unaffordability factor
3.6x
Exercise costs /
annual income
Surprise factor
3.8x
Exercise costs incl taxes /
Exercise costs excl taxes
Based on a household income of $140,000, a strike price of $8.88 and California tax rates.

The benefits of exercising

Based on a household income of $140,000, a strike price of $8.88 and California tax rates.

ROI, or return on investment, is defined as ([profit if taxed at long-term capital gains rates] - [profit if taxed at ordinary income rates]) / [exercise costs].

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.

Based on a household income of $140,000, a strike price of $8.88 and California tax rates.

The urgency of exercising

Based on a household income of $140,000, a strike price of $8.88 and California tax rates.

Jake’s exercise costs increased by 240% over time.

This is due to Snowflake’s growing 409A valuation, which increased Jake’s tax liability from $16,202 to $374,646.
Based on a household income of $140,000, a strike price of $8.88 and California tax rates.

Compare Jake’s case to these DoorDash and Airbnb employees

Jake
Engineering, joined 2019
Jennifer
Engineering, joined 2017
Jill
Marketing Lead, joined 2011
Profit if not exercised
$1.71m
$4.68m
$10.42m
Profit if exercised pre-IPO

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)

$2.27m
$6.24m
$13.44m
Exercise costs

Based on California tax rates

$508k
$770k
$1.82m
Unaffordability factor

Exercise costs / annual income

3.8x
5.1x
8.3x
Surprise factor

Exercise cost multiplier due to taxes

3.6x
9.3x
17.3x
Benefit of exercising

Extra profit if taxed as long-term capital gains

$562k
$1.57m
$3.02m
Increase in profit
+33%
+34%
+29%
Return on investment

Difference in return / exercise costs

2.1x
3.0x
2.6x
Urgency of exercising

How exercise costs change over time

+240%
$149k
Sep ’19
$507k
Before IPO
+118%
$353k
Feb ’19
$770k
Before IPO
–27%
$2.49m
Apr ’20
$1.82m
Before IPO
Often, exercise costs only grow over time. Airbnb is an exception: due to the pandemic, it could justify a company devaluation. This enabled employees to exercise at a discount due to a lower tax liability.
Conclusion

Secfi analyzed trends with employees from late-stage unicorn companies who own stock options.

1
Employees left $4.9B on the table by not exercising their pre-IPO stock options.
2
On average, exercise costs are 2x annual household income and ranks up there with some of the largest expenses in life (ie, house, children, education).
3
85% of exercise costs are taxes, making exercising options 6.6x as expensive.
4
As companies grow, so do the costs to exercise. For 10B+ companies, costs increased to 5.5x annual household income.
5
Those who exercise pre-IPO may stand to get much more value from their shares due to tax savings. Many have doubled their investment at the time of IPO.

Our story.

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.

Wait. What?

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.

Secfi helps startup employees get more out of their equity

Visit secfi.com to learn more about your current stock option situation.
Exercise Tax Calculator
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Profit Simulator
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Liquidity
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Exercise Financing
Finance the cost of your exercise so you don't have to pay out of pocket.
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Thank you.

We believe that stock options are still widely misunderstood and underutilized and are committed to bringing more awareness and planning to the startup community.

If you have any questions or suggestions for improvements to future reports, please visit secfi.com and let us know.
Please note, all graphs, charts, case studies and illustrations are for educational and illustrative purposes only and are not necessarily indicative of future results. They are based on the best available information at any given time but subject to change without notice. Holding or investing in privately held company shares and their options is highly speculative in nature. As with all equity investments, there is the potential for their value to fall to zero. Moreover, they are illiquid in nature relative to publicly traded shares and options, and there is no assurance that a private company will conduct an Initial Public Offering (“IPO”) or be sold. Market and other economic conditions may also affect the timing or probability of an exit/liquidity event as well as the value of the underlying assets at such time.
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SecFi Advisory Limited (the "Adviser"), a wholly owned subsidiary of SecFi, Inc. ("SecFi"), is regulated by the Securities and Exchange Commission as an exempt reporting adviser, providing non-discretionary investment advice to private funds. Specifically, the Adviser serves as a non-discretionary sub-adviser to certain pooled investment vehicles (each, a "Fund") managed by a third-party manager (the "Fund Manager"). Each Fund has been or will be formed by the Fund Manager for various purposes, including but not limited to, acquiring exposure to the stock ("Shares") of late-stage and growth-stage private technology companies ("Companies") held by the employees of such Companies who are seeking liquidity ("Shareholders"). The Adviser provides investment management services to the Funds on a non-discretionary basis solely with respect to the recommendation of certain Private Financing Contracts in order to facilitate each Fund’s desired exposure to the relevant Companies. Such advisory services performed by the Adviser are limited exclusively to recommending, arranging and negotiating Private Financing Contracts on behalf of each Fund. The Adviser does not have discretion to make investments on behalf of a Fund save for recommending and negotiating Private Financing Contracts consistent with the general strategy and investment guidelines of a particular Fund. Accordingly, the Funds are the Adviser’s clients; Shareholders are not customers or clients of the Adviser, and the Adviser does not provide any type of investment, securities, tax, or brokerage advice or services to the Shareholders in any capacity. Always consult with one’s own investment, tax and legal advisors before making important financial decisions.

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