Startups that have missed their moment risk alienating their employees

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Working for a start-up can be a nerve-wracking endeavor. Equity compensation helps employees maintain faith. Restricted stock units and stock options are important sources of pay for start-up technology companies. Conveniently, they also keep cash payouts low.

But a lack of IPOs this year meant workers and early investors couldn’t get out.

Despite the recent IPOs of companies like Arm and Birkenstock, the number of IPOs in 2023 is only about a tenth of the record set in 2021. The longer a company waits, the greater the risk that it will go public at a time of its own choosing Stock market is pushed. Online grocery delivery service Instacart went public in September at a value a quarter of its last private valuation of $39 billion. The impetus, said CEO Fidji Simo, is to provide employees with liquidity.

The result was a massive $2.6 billion in stock-based compensation expense reported in its first quarter earnings. This caused the previously profitable San Francisco-based company to post a net loss of $2 billion.

Normally, employees have to wait three months before they can sell shares – a common lock-up period. However, if Instacart shares were up more than 20 percent, they could be sold early. But thanks to high losses and slowing sales growth, the share is trading 16 percent below its stock market price.

This pattern could be repeated by the companies that decide to go public next. Instacart was founded 11 years ago. Databricks, Stripe and Reddit are all considered prime IPO candidates. They are 10, 13, and 18 years old, respectively, increasing the likelihood that their restricted stock offers are about to expire.

There are other options. Stripe has already chosen to raise funds at a lower valuation to provide liquidity and cover tax obligations for employees without a public listing. The alternative is to allow employees to remain unrewarded. This poses a risk that the company’s future hiring opportunities will be impaired. Otherwise, a start-up has to accept an unfavorable time for listing.

Listen to Lex deputy editor Elaine Moore talk to creators, companies and critics about the next era of social media in the FT’s new Tech Tonic podcast series.